The Forgotten Estate Planning Tool

Is there a Shareholders’ Agreement in place? Did you know that it is a critical component of a small business owner’s estate and succession plan?

This is particularly so where there are multiple shareholders (even minority shareholders). This is because the rights and obligations of the other shareholders must be taken into consideration, too.

Typically, the terms of a Shareholders’ Agreement would address issues such as corporate governance and distribution of profits.

In the estate-planning context, however, the Shareholders’ Agreement should go further – it should address what will happen to a shareholder’s shares upon death, including:

• Compulsory repurchase: will there be a mandatory buyback by the company in the event of death, which allows the estate/family of the deceased shareholder to receive cash for the shares
• Funding the buyback: if there will be a mandatory buyback, how will the company raise the capital to pay for the shares? Life insurance can be a tool here – the company could purchase life insurance policies on the lives of the shareholders, to fund this purchase.
• Restrictions on who can receive the shares: either by, restricting the transfer of the deceased’s shares so they can only be transferred to the other existing shareholders (and not to the family of the deceased) OR restricting the class of recipients (i.e. shares can only be transferred to a spouse, not children, or only to certain children).
• Binding future shareholders to existing Shareholders’ Agreements: this is an important term of any good Shareholders’ Agreement.

Conclusion

A Shareholders’ Agreement is a critical part of a small business owner’s succession plan. It should be set up taking into account both the company and shareholders’ long term interests, and address succession and estate planning issues.