What happens if a partner/shareholder of your company dies?
It is one of those topics that you’d prefer not to think about, but it is important to plan for the future of your company should something unforeseen happen to you or one of your partners. When a partner unexpectedly dies, suffers a long-term disability, retires, or goes bankrupt, there are a number of things that you can have in place that will allow you and your business to move forward smoothly.
Typically partners, directors, or shareholders within a business or company will enter in to a partnership and/or shareholders agreement which governs the day-to-day relationships of the parties. While the agreement covers the rights and obligations of the parties as well as rules for the operation of the business, it does not set out a contingency plan for a sudden event such as the death of a partner.
A buy/sell option agreement is designed for this very purpose; it allows for one of the remaining parties to buy out the other party’s interest should they choose to. Without such an agreement, the deceased/incapacitated party’s family may have the right to become involved in the business, regardless of any prior experience or involvement in the company.
A business may be transferred on the death of an owner either by:
- gifting the business via a will; or
- selling the business via a buy/sell agreement
The buy/sell agreement will take precedence over the will because the business will be transferred pursuant to the contract.
Funding the agreement
The buy/sell agreement is normally funded through an insurance policy. Note that there may be an issue if the insurance policy is not honoured by the insurance company, or is cancelled for a reason outside the control of the parties.
Important consideration should be given to the value that is placed on the person’s interest in the business. Usually parties either agree on a figure or arrange for a valuation to be undertaken of the business. The advantage of this approach is that it allows for the insurance policy to be upgraded without the need for the parties to amend the option contract.
How we can help
At Streten Masons Lawyers our solicitors have extensive experience in advising parties of the rights and obligations regarding buy/sell option agreements and assisting parties to draft the contract in a proper and binding manner. Contact us to arrange for a consultation in relation to drafting a buy/sell option agreement today.