The death of a shareholder can create significant problems for a company. Our experience suggests that this is particularly so where there are only two shareholders who each own 50% of the shares.
It is common for joint shareholders to put life insurance policies in place so that if one shareholder dies, the other can use the proceeds to buy the deceased shareholder’s shares from his or her personal representatives. This enables the surviving shareholder to retain control of the company.
Provisions to this effect should be included within the shareholders’ agreement. However, to avoid the situation where the deceased shareholder’s personal representatives refuse to sell the shares for the value of the policy (perhaps because the company has grown considerably in the years since the agreement was signed); the agreement should force a sale of the deceased shareholder’s shares to the other shareholder.
The value of the insurance policy should be reviewed regularly to ensure it keeps up with the growth of the business so that the deceased shareholder’s estate benefits from the full value of the shares. However, there is then the risk that the premiums become prohibitively expensive.
Another option is for the company, rather than the surviving shareholder, to buy the shares from the personal representatives. Company law sets out a number of hoops to be jumped through to do this, but as long as the company has the profits to buy back the shares (or is able to borrow it) this can work quite well.
Other, more drastic alternatives include putting the company into liquidation on the death of a shareholder or selling it.