What happens when the shareholder of a private corporation dies?
In the absence of a Unanimous Shareholders Agreement (USA), it can be a costly mess. When you own shares in a publicly-traded company, you can simply go online or phone your broker and sell the shares. Shareholders of privately held corporations require the cooperation and consent of the other shareholders to sell the shares.
We have recently dealt with at least three estates where the deceased, a shareholder in a small privately held corporation, died without a USA. Sure, they had a Will that distributed their property. However, this does nothing to liquidate the shares in the corporation.
In the first two cases, the protracted, difficult and expensive negotiations finally resulted in a satisfactory buyout. In the third case, the company was eventually liquidated at a rock bottom price. In all cases, the accounting and legal fees were substantial – and needlessly so.
In one instance, they even had life insurance to cover the buyout of the deceased shareholder. With no USA providing a formula for the buyout, there were still extensive negotiations and costs before the payout was finalized.
A USA would have made a world of difference. A standard USA details exactly what happens when a shareholder dies. It can include an exact formula for determining the buyout price. It can be tailored to your specific business. The buyout-on-death provisions typically include timelines for payment and security to ensure payment.
A USA typically includes many other features to deal with the sale of shares to a third party, buyout offers, payment of dividends, and ongoing management.
Operating a privately-held corporation without a USA is playing with fire. While we all hope to live well into our retirement years; tragic and premature deaths do occur. When that happens, the absence of a USA compounds the tragedy for your family and other beneficiaries with unnecessary delays, expenses and potential acrimony.
Here at Galbraith Law, we have extensive experience in drafting customized USAs. Or, you could avoid doing this and have your estate and beneficiaries pay a lot more in legal and accounting fees should you or one of your partners meet with an untimely demise.