Shareholder Agreement Death Clause

A shareholders’ agreement is an agreement entered into between all or some of the shareholders in a company. It regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders. It will also govern the way in which the company is run. It may be usual to combine the use of a shareholders’ agreement with a specifically drafted set of articles of association for your company. Consideration should be given to what happens when a shareholder dies and in this article, shareholder agreement death clause, we consider the process and mechanism involved.

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For a free initial discussion on how we can help you assess a shareholder agreement death clause, get in touch with us today. We will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help stop matters escalating, saving you money and also avoiding the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or complete our online enquiry form and a member of the team will get back to you.

What happens when a shareholder dies?

If specific provisions have not been included in the articles of association of a company or in a shareholder or partnership agreement, the shares of a deceased business owner will pass in accordance with the deceased’s Will or under the intestacy rules.

This may mean family members with no knowledge of the business being required to become involved in unfamiliar business decision-making at a time when they are least likely to cope. They will be faced with having to apply for a Grant of Representation and completing inheritance tax forms which will involve them needing to insist on a valuation of the business, all of which takes time and expense. This is rarely the best way to deal with this sensitive matter.

Can a clause be inserted into the shareholders’ agreement?

These issues can be alleviated by incorporating specific provisions into the shareholder’s agreement (or the articles of association or partnership agreement if one exists). The provisions could set out the procedure to be followed if a shareholder dies. This may involve compulsory transfer provisions, rights of pre-emption (deceased’s shares must be offered to the remaining shareholders or the company before they can be offered to anyone else) and also introducing a method of valuing a business share to be sold.

What happens if a sole shareholder dies?

If a company uses the standard articles and has a sole director and shareholder, then while the shares will pass to their personal representatives, there will be no surviving officer who can manage the company.

Cross option agreements

An additional or alternative protective mechanism is to put in place what is known as a cross option agreement. Under this sort of agreement, business owners grant each other options which will come into effect on death. Both parties may then exercise the cross option agreement which means that:

• The deceased business owner’s personal representatives can ‘force’ the surviving co-owners to buy the deceased’s interest in the business and/or
• The surviving business owners can ‘force’ the personal representatives to sell the deceased’s interest to them.

Cross option agreements are often supported by a life policy for each owner that is held in trust for the benefit of the others. The policy pays out on death and enables the surviving business owner (or the business itself, assuming that there are distributable reserves) to buy the deceased’s interest in the business without causing a financial crisis for the business and at the same time releasing immediate cash to the deceased’s family. The agreement will set out how the value price of the interest is to be ascertained which is often agreed to be the amount of the insurance cover. Consequently, the policy needs to be reviewed on a regular basis

How we can help

We have a proven track-record of dealing with the intricacies of shareholder agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact our Corporate Solicitors

It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of reducing risk, saving you money and ensuring you achieve a positive outcome.

To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Corporate, News Tagged as