When a shareholder of a private company passes, their children may become the new shareholder(s), in their place.
This is an important issue regarding the future success of a business and one that warrants proactive planning. To address this issue, most multigenerational companies use a Shareholders’ Agreement. When certain situations arise such as the death of a shareholder, a Shareholders’ Agreement is a legally-binding agreement that governs both existing shareholders and incoming shareholders, and directs how the company should be operated as a going concern.
For example, when it comes time for your children to become the new shareholders of the company, a Shareholders’ Agreement can deal with matters such as:
Directors:
Set out the number of directors, and who may be appointed as director. Because directors carry out the day to day operations of the company, these terms are important.
Distribution of Profits:
When the company brings in profits, a Shareholders’ Agreement can determine how the company distributes the profits amongst your surviving children, as shareholders.
Borrowing Powers:
When the company is looking for financial assistance, the Shareholders’ Agreement will instruct if the company may borrow from the bank, or if the shareholders must contribute the funds themselves.
Future share transfers:
To prevent your children from selling their shares to a third-party outsider, a Shareholders’ Agreement can restrict this action, even requiring their fellow sibling shareholders’ permission.
Death/Disability Buy-outs:
If one of your children passes away or develops a disability where they can no longer be involved in the business, the Shareholders’ Agreement can direct the company to purchase their shares; this is called a buyout right. The funds from the buyout can go to your child’s estate.
-
- If the Shareholders’ Agreement does not create a buyout right, your deceased child’s estate would take the place as the new shareholder of the company. This means the surviving shareholders (your other surviving children) could be doing business with their overbearing brother-in-law or uninformed nieces and nephews.
Divorce Buyouts:
Similar to the buyout rights upon death, buyout rights can apply if one of your children separates from their partner, to allow existing shareholders to buy the other shareholder’s stake in the company and prevent the ex-spouse from becoming an unwanted.
Shotgun Clause:
If a shareholder, during their lifetime, asks the company or the other shareholders to buy them out, a Shareholders’ Agreement can instruct how to value this buyout while granting an organized option to exit the company.
If your children are not shareholders in the company right now, you can sign a Shareholders’ Agreement which would then be binding on any future shareholders of the company. You can implement a Shareholders’ Agreement in advance, intending it to apply to future generations after your death.
If you would like to incorporate a Shareholders’ Agreement into your estate plan, our team can help you consider your options, and create a strategy that is right for you. Contact our Wills & Estate Team – we’re here to help.