As a business owner, having a properly drafted shareholders’ agreement as part of your estate planning while not compulsory is a helpful document to assist you in succession planning when it comes to your business.
What is a shareholders’ agreement?
If there is more than one owner or founder of the business, shares determine what proportion of the business each person owns. A shareholders’ agreement is a contract between the shareholders of a business setting out rights and obligations in relation to the business.
We recommend that when you draft the agreement you give careful thought to what happens if you or another partner dies or cannot carry on the business.
Many shareholders’ agreements state that any shareholder wishing to sell their shares must first offer them to the company and/or other shareholders. But what happens if one of the company’s owners wants to leave their shares to a relative in their will? Can the owner dispose of the assets as they want or are they bound by the shareholders’ agreement?
How can a shareholders’ agreement help with your succession plan?
To avoid costly issues that might arise around succession, you need to ensure that your shareholders’ agreement takes trust and estate law principles into consideration.
Shareholder agreements should also set out:
- What constitutes a ‘terminating event’ – typically death, retirement or incapacity.
- Insurance arrangements for directors, shareholders and ‘key persons’, including the amount and timing of any payment. This helps if one person dies or becomes incapacitated, and the others need to raise funds to buy their share.
- Share valuation procedures so that you know how much the deceased person’s share is worth. You may choose to do a valuation when you take out insurance, but the valuation will need to be kept up to date.
- First right of refusal to acquire shares if one person wants to sell. Without a buy/sell option like this, the deceased person’s family may be able to obtain the shares and become involved in the business. This can cause serious conflict, especially if they are inexperienced or have a different vision for the company.
- ‘Drag along’ and ‘tag along’ rights, which deal with the rights of minority shareholders if the majority shareholder wants to sell to a third party.
If you do currently have a shareholders’ agreement or your agreement does not allow for succession planning, please contact us on (03) 9592 3356 or via email at firstname.lastname@example.org so we can assist your business with this important aspect of succession planning.