Who is really going to run the business if one of your shareholders dies?

Without any express agreement to deal with what happens to a shareholder’s shares on death, then a family member of the deceased may acquire those shares and have the ability to have a say in the future direction of the business.

A potentially daunting prospect but more daunting still, those shares could be left to someone other than a shareholder’s immediate family who you know, a distant relative or charity.

You may consider that you have already dealt with this as part of any written shareholders agreement you have entered into. However, this frequently only gives surviving shareholder(s) a right to acquire the deceased’s shares but does not give your estate the right to force the remaining shareholders to purchase those shares on death.

Your family may have no way of realising the value you have built in the business if the surviving shareholders do not have the funds to purchase your shares on death. Alternatively, the surviving shareholders or the company itself may simply not have the appetite to use their funds to purchase the deceased’s shares.

Have you considered a cross-options agreement?

A cross-options agreement, supported by life insurance arrangements on your and your fellow shareholder’s lives, can ensure that, should you or another shareholder in your business pass away:

1. the surviving shareholder(s) can ensure they have both the available cash together with a legal right to purchase the deceased shareholders’ shares for the full market value; and
2. the deceased’s estate can be sure they have an ability to compel the other shareholders to purchase the deceased’s shares from the estate, allowing them to realise the value of the investment, to avoid being left with shares in a business they potentially do not understand, and may not be able to control.