What happens on the death of a shareholder – where there’s a business will, there’s a way
Shareholders enter into new ventures thinking of the exciting possibilities and future growth ahead but sometimes life, or sadly, death, can get in the way. What happens to the shares of a deceased shareholder?
A new co-shareholder?
Shares, like any other property, will form part of the deceased’s estate. This means that ownership of those shares will pass under the terms of the will, or under the rules of intestacy.
Suddenly, existing shareholders can find themselves with a new co-shareholder… someone new who could even hold a significant amount of equity.
This can have a huge impact on the remaining founders and management team, especially if the new person has a seat on the board, veto rights and other forms of control.
Buy-sell agreements
To try and prevent issues like this arising, founders and shareholders should consider having a ‘buy-sell’ agreement in place.
This kind of agreement, often called a ‘business will’, allows shareholders to specify how their shares will be dealt with upon a specified trigger event. These trigger events typically include death and disability.
A buy-sell agreement will include:
- a mechanism to allow the shares in question to be sold to the existing shareholders, rather than passing to someone new, typically by way of the grant of put and call options.
- a mechanism to determine the price for the shares. The agreement would not stipulate a set price, as the value of the company will change over time.
- provisions dealing with the funding of the purchase price.
Chaz Dheer, Scope Legal Principal, says…
“A buy-sell agreement is something every company should consider as part of prudent risk management. The death of a shareholder would be a destabilising event in any case but having uncertainty over the future ownership and management of the company only adds to the difficulty. A good buy-sell agreement will give all parties a much-needed degree of certainty.”
For more information about buy-sell agreements contact our team today.
