Dealing With Shareholder Death: What You Need To Know

By Anita Jaynes on 16 June, 2021

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Losing someone is always a difficult period in people’s lives. Aside from trying to go back to normal without the person there anymore, there is also the unspoken side of death, which is handling all the paperwork, from bills, pensions and, if they are a shareholder, their shares.

Understandably, the conversation around the death of a business owner is never going to be an easy topic to address. However, when a shareholder does sadly pass away, naturally it does raise certain questions regarding what will happen with their assets, as well as how they will be passed onto their beneficiaries.

Having to deal with complex matters, during a time of grief is undoubtedly a distressing and difficult time to try and navigate through. As such, it is important to plan for these events to ensure that the correct procedures are in place to help make the job of those dealing with the impact of the loss a little easier.

To help make this process a little easier, here is a guide on how to deal with the death of a shareholder, as well as some tips on how to prepare for the event of such an unfortunate loss.

Review The Will

The executors reviewing the deceased’s will are going to check the terms listed in the will to identify who is, or are, the beneficiaries of any shares. The deceased’s wish is subject to any contracts made before their death. Regarding what the executors will look for in terms of the business side of things, they will check to see if there is a shareholders’ agreement, which will be relevant if there were multiple shareholders for a company. It is an agreement created between the shareholders to determine what would happen with the business and how it would be run if one of them were to pass away.

Consider Putting Coverage In Place

If you haven’t already got coverage, you should certainly consider investing in it. For example, you can invest in shareholder protection insurance. If want to find out more about shareholder protection insurance, then firms such as Drewberry Insurance can help you to understand how these policies work and how they could benefit your company. 

Shareholder protection insurance pays a lump sum if a shareholder dies or is indisposed due to a critical illness. This money can be used to buy back their shares to ensure that ownership of the company remains with professionals who are able to contribute to the successful running of the business. 

Whilst it might be less tangible, having financial support in place could help to mitigate a loss or decline in working relationships due to a decline in business contacts, which will also be an additional benefit to your business.

Ages Of The Beneficiaries

Following the passing of a shareholder, their shares are then inherited by those who have been named as beneficiaries in their will. However, the ages of those who have been named as the beneficiaries are to be taken into consideration. This is because, depending on the will, if any of the beneficiaries are under the age of 18 then trust will be created to look after the property left to those beneficiaries. Alternatively, the property could also be given to the guardians of the young beneficiaries in the expectation that it will be used for the benefit of the beneficiary.

Provisions In The Agreements

To help with minimising the distress and further disruption of the passing of a shareholder, various provisions are specific to each company. These can include the articles of association and also the shareholders’ agreement, which features any permitted transfers, compulsory transfers, as well as any other cross-option agreements.

Compulsory Transfers – These require the shareholder to sell their shares during a certain situation. This could be retirement, bankruptcy, incarceration, termination of employment with a company, or even death. A compulsory transfer provision will allow a company to buy the shares back, which they then can sell to other existing members, third parties or even use to help protect the interest of the company.

Permitted Transfers – The provision of any permitted transfers of shares is a tax-efficient strategy. It is a strategy that allows the deceased’s shares to be transferred to a restricted group of individuals. This usually tends to be their family members, family trusts, and so on. It also can be done without the need to enforce the requirements of pre-emption rights.

Cross-Option Agreements – Ensuring that control of the business remains with the surviving members following the passing of a company shareholder, the cross-option agreement entitles shareholders to grant options that will help each other in the event of one of their deaths. With this type of agreement, any of the current shareholders will have two options. The first is to influence the personal representatives of the former shareholder to sell the available shares to them. Whereas the second option is that the personal relatives of the former shareholder can ask for the existing shareholders to purchase the available shares.

If this is the agreement that goes forward, then it is important that each shareholder arranges a life assurance policy that best reflects the value of their shares, that can is then held in trust for the other shareholders. In doing so, it will help to support this type of agreement and avoid potentially causing any financial difficulties to any of the surviving members.

In the event of unfortunate death, then the policy will have to pay out, providing sufficient funds to the remaining members, to facilitate them with purchasing the available shares. Following this, any of the proceeds from the sales made are then transferred to the beneficiaries of the deceased shareholder.

Have A Plan In Place

In a shareholders agreement, exit is towards the top of the priorities list of things that need to be taken into consideration. Planning for something that could potentially happen if one of the owners were to sadly pass away, is an important step to be taken. If you do not have a shareholders agreement currently in place, then it should be something that you consider having.

Fortunately, there are shareholder agreement templates available that can be used to suit different business types. However, it is better to tailor them accordingly to best reflect your business and how you want it to be run, should anything happen. The final step should be knowing who exactly will be inheriting the business when you pass away. If you have not named anyone you want to take over, then you run the risk of someone not capable of managing the business to its fullest potential.

Whilst preparing for the possibility of your passing might seem like a daunting task, it one of the best ways to ensure the legacy of your business continues long after you have gone.