We have had a steady stream of enquiries from shareholders wondering what would happen to their company if one of them were to be incapacitated or, worse, to die.
If some shareholders continue to be involved in day-to-day operations whilst one is unable to work, will their drawings remain equal? If so, for how long?
If a shareholder passes away, who will ultimately be entitled to their shares? Who receives the value of those shares, and how is the value agreed upon?
A well-drafted Shareholders’ Agreement (SHA) can provide certainty and fairness in these circumstances.
Typically, an SHA will contain a mechanism for the continuing shareholders to purchase a deceased business partner’s shares at an agreed price. Without this, the deceased’s shares would pass to their beneficiaries, with whom the continuing shareholders would then be in business. Sometimes this can lead to huge successes. Frequently it does not.
Where shareholders have life policies, it is important that the insurance proceeds and the shares end up with those intended. Often there is nothing to compel the deceased’s beneficiaries to transfer shares to the continuing shareholders in exchange for the insurance proceeds. An SHA can ensure this happens.
An SHA will usually specify if, and for how long, a shareholder is entitled to continue to receive income from the company, if he or she is incapacitated. It will also usually expand on the provisions of the company’s Articles of Association regarding decision-making, to ensure that business does not grind to a halt if one shareholder is temporarily out of action.
Of course the real value of an SHA is to deal with these sorts of issues in a way that is fair and has been agreed upon by all concerned at the outset. That is much better than having to find compromise and consensus once the unthinkable has happened.