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. 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.

If the surviving shareholders do not have the cash to fund the purchase of your shares on death, or they do not have the appetite to spend theirs, or the company’s money in purchasing the deceased’s shares, then your family may have no way of realising the value you have built in the business.

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, the surviving shareholder(s) can ensure they have the available cash to purchase the deceased shareholders’ shares for the full market value.

This prevents a deceased’s family having a right to become shareholders and potentially a right to have a day to day say in the future operation of the company, whilst protecting the deceased’s estate from being left with shares in a business they potentially do not understand, and otherwise, have no way of securing that they get a full market value for the shares which their family have been left with.