I have a lot of corporate clients. Some have small businesses, perhaps spouses who are 50/50 shareholders, while others own shares in much larger businesses with multiple shareholders.
One issue that is often overlooked is what happens to those shares when one of the shareholders dies.
Who has the right to inherit the shares? If the shareholder has a Will, will the shares be administered by the Executor and pass through the shareholder’s estate? What if there is a shareholders’ agreement in place that dictates what happens to those shares when the shareholder dies?
These are questions that are much easier to resolve ahead of time than after a shareholder has passed away.
What Happens to Shares When a Shareholder Dies?
What happens to shares in a private company after a shareholder dies will depend on the arrangements already in place.
The shares may form part of the deceased shareholder’s estate and be administered by the Executor. However, a shareholders’ agreement may contain provisions dealing specifically with what happens to the shares on death.
This is why a business owner’s corporate and estate planning need to work together.
What If There Is a Shareholders’ Agreement?
A shareholders’ agreement can establish in advance what will happen if one of the shareholders dies.
For example, it may give the remaining shareholders the right to purchase the deceased shareholder’s shares, with the proceeds paid to the estate. The agreement may also establish how those shares will be valued and other terms governing the purchase.
A shareholders’ agreement will not be the right solution in every situation. For some businesses, it may add a layer of complexity that is unnecessary. The appropriate arrangement will depend on the ownership structure, the shareholders and their intentions for the business.
Why Planning for the Death of a Shareholder Matters
Any business owner, small or large, should make sure they have advance planning in place to determine what will happen to their shares in a private company if they die.
It is in the best interests of company directors, owners and their family members to resolve this ahead of time and have their intentions properly documented.
It is not something that grieving relatives and remaining directors should have to deal with after a death.
As a surviving business owner, do you really want to suddenly own a business with your deceased partner’s soon-to-be ex-wife?
Not only awkward, but potentially catastrophic for any business.
There are several different arrangements that can be made by business owners ahead of time to avoid these issues.
Your Estate Plan and Business Planning Should Work Together
If you own shares in a private company, your Will and estate plan should be considered alongside any shareholders’ agreement and other arrangements governing the company.
The goal is to make sure the documents reflect what you actually want to happen to your shares and that you understand how those arrangements will work together.
This can be particularly important for family businesses, companies with only a few shareholders, and situations where the shareholders have specific expectations about who should own or operate the business in the future.
Needless to say, if you own a business, it is crucial to obtain both legal and accounting advice on these issues.
Frequently Asked Questions About What Happens When a Shareholder Dies
Do Shares Automatically Pass to a Spouse When a Shareholder Dies?
Not necessarily. What happens to the shares will depend on the shareholder’s estate planning and any agreements or restrictions governing the shares. A shareholders’ agreement, for example, may require or permit the shares to be purchased by the remaining shareholders or the company rather than ultimately passing to a beneficiary.
What Happens If There Is No Shareholders’ Agreement?
If there is no shareholders’ agreement addressing death, the deceased shareholder’s estate may have to deal with the shares through the estate administration process, subject to the company’s governing documents and applicable law. This can leave questions about ownership, valuation and the future of the business to be resolved after the shareholder has died.
Can the Remaining Shareholders Buy the Deceased Shareholder’s Shares?
Yes, this can be provided for in a shareholders’ agreement. Depending on how the agreement is structured, the remaining shareholders or the company may have rights or obligations to purchase the deceased shareholder’s interest. The agreement can also address how the shares will be valued and how the purchase will be funded.
Does a Shareholders’ Agreement Override a Will?
A Will and shareholders’ agreement need to be considered together. A shareholders’ agreement can create binding obligations concerning what happens to shares on death, which may prevent a gift of those shares under a Will from being carried out as expected.
How Is the Value of a Deceased Shareholder’s Shares Determined?
That will depend on the arrangements in place. A shareholders’ agreement can establish a valuation method or process for determining the purchase price when a shareholder dies. This is one of the issues business owners should consider when planning for the death of a shareholder.
Planning Ahead
The best time to determine what should happen to your shares is while you and your fellow shareholders are able to make those decisions together.
If you own shares in a private company, consider whether your Will, estate plan and any shareholders’ agreement properly reflect what you want to happen to your interest in the business when you die.
This article is provided for information only and should not be construed as legal advice. You should consult with a lawyer for advice specific to your circumstances.
For more information on estate planning and to discuss your specific circumstances, contact Vanessa DeDominicis at 250-869-1140 or dedominicis@pushormitchell.com. Vanessa practices in the areas of Real Estate, Intellectual Property and Wills & Estates at Pushor Mitchell LLP in Kelowna.
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