Shareholder Agreements – Part I

“Does a business have to close if a shareholder dies?”

 

Very few small companies LLPs and Partnerships are well placed to deal with the death of one of the stakeholders. Only a small minority of owners have considered what might happen in that situation. However, despite a potentially insurable event having occurred few are utilising this option to ensure that the problems that they might face are dealt with in a way that limits the need to close the business.

The primary challenge for the remaining stakeholders is how to buy out the deceased person’s estate. Where does this money come from? In some cases, the obligations in a standard shareholder agreement are poorly thought through with the risks appearing to be some time in the future. The future can be tomorrow and many situations that arise are exactly this. “Great, we have a shareholders agreement, but we must buy out the deceased’s family now or face a shareholder coming in who we don’t know”.

In situations like the above one of the potential outcomes is to close the business. This can be very damaging to the other stakeholders as a result of the unplanned death of another stakeholder.

There is a solution that uses life policies to structure a payment plan for the family. This means that the policy will pay either all or a significant amount of the value of the business owned by the Stakeholder to their family. This means that the business must find whatever sum remains and with such sum being a small amount the remaining stakeholders may be better placed to deal with the payment from personal sources or retained earnings.

Once the life policy has paid out then the family of the deceased is likely to place less pressure on the other stakeholders allowing them to remain focused on the success of the business.

The structure of a cross option agreement being the elements of a shareholder agreement that deals with death, life policies and post death payments can be complicated, but you should find a solicitor who deals with these regularly. There are issues in relation to structure of the agreement and how that might interact with a shareholder’s agreement together with issues in relation to treatment of taxation. While this is a useful solution for such circumstances it should not be treated lightly as it could have profound affects if it fails.

Brendan O’Brien is a specialist in Cross Option Agreements and is a Solicitor in our Corporate Team focusing on Corporate law and business restructures. He can be contacted at bobrien@twclaw.co.uk and on 01223 578070.

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