Death or Disability
Buy/Sell Agreement
The death of a shareholder in a private company can pose unforeseen problems for the remaining parties.
For the estate left holding a position in a private company the perceived value may not be able to be released.
For the remaining shareholders, they have another party involved who has rights, but may not be able to contribute to the ongoing business.
Objectives
- To preserve ownership of a private company by the surviving shareholders on death or disablement of one of the shareholders.
- Ensure an agreed price for the shares for the estate of the deceased shareholder.
To fully achieve the objectives above, the agreement should be an obligation to purchase the shares.
Advantages
- To the surviving shareholders, cash will be available to purchase the deceased shareholder’s shares ensuring partial control will not pass to outsiders.
- To the life insured, confidence that the beneficiaries will receive an agreed price for the shareholding promptly, and in cash.
The purpose of the agreement is to provide a predictable and certain outcome.
Current Accounts
As a debt owed by the company to the shareholder, this is a related issue to the Buy/Sell Agreement.
The death of a shareholder may trigger the requirement for this debt to be paid unless specific arrangements have been made.
Appropriate insurance along with specific written agreement on how the debt is to be handled in the event of the death or disablement of a shareholder should be established.
Personal Guarantees
Most debt instruments allow the lender to enforce personal guarantees, which effectively put at risk the value of the owner’s assets.
It is increasingly common that the debt incurred by a business is subject to joint and several liability by the owners and that debt is personally guaranteed by default by them or by their estates.
Financiers are able to require any of the business owners to settle the full outstanding amount of the debt on demand.
If a business incurs a debt or liability for which the owners may be responsible, the business should quarantine or protect the owners from that obligation.
