14 October, 2014
Business owners should think about what they want to happen to the shares of a shareholder who might die. They then need to check that their plan doesn't conflict with the company's constitution, the terms of a Shareholder's Agreement or even the shareholder's will. Furthermore, if they want the shares to be acquired by the other shareholders, is insurance in place to meet that cost?
The risks can be troublesome if the plan hasn't been well thought out. Firstly, there will be an element of delay whilst parties establish the position which will also incur costs. The worst case scenario would be that the shares cannot be transferred in accordance with the shareholder's plan.
To do this the shareholders could place restrictions on the shares to avoid transfers to non-family members and these restrictions could be detailed within the company's articles of association or the terms of a shareholders agreement. This then needs to be reflected in the shareholder's will. Cross option agreements are also used in these scenarios. Provisions in either a cross option agreement or within the company's articles of association can provide that if a shareholder dies, then those shares are automatically offered to one or more of the shareholders. Those shareholders then have the first option to buy to retain common ownership. The deceased shareholder's beneficiaries would receive value for those shares. Tax advice should be sought with these type of provisions. One matter generally forgotten is how the purchase by the remaining shareholders will be funded? The most favourable approach is to take out insurance. Another point to consider is who pays the premium and whether there are any accounting consequences.
Shareholders may also want to consider whether or not they wish all of the above to apply in the case of critical illness, mental illness or even bankruptcy of a shareholder. It might not be necessary to transfer shares in these cases but you may wish to keep control of the shares by way of power of attorney.