For individuals, no estate plan is complete without a Will.  Similarly, no business plan is complete without a shareholder’s agreement.

What Is a Shareholder’s Agreement?

A shareholder’s agreement sets out the rights and obligations of both the shareholder(s) and the corporation. It is a contract that relates specifically to the relationship between some or all of the shareholders and the corporation.

And an important component of a good shareholders agreement is the buy sell agreement provisions allowing for the orderly transfer of shares upon retirement, disability, death, bankruptcy or matrimonial breakdown.

A shareholder’s agreement is a way to capture the intention of the shareholders as to the nature of their relationship with one another and the corporation. A well-drafted shareholder’s agreement can address a variety of topics and in doing so prevent potential future misunderstanding or issues between the shareholders.

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about Buy Sell Agreements

Sample Buy Sell Agreement – Buying Out a Shareholder

Should a shareholder death or disability occur, the most widely accepted means for funding buy sell agreements is with life insurance, which can either be a:

  • Corporate owned life insurance policy
  • Or privately owned life insurance policy

The following outlines possible concerns or questions to consider when choosing what policy would be more appropriate for your situation.

The Structure of Buy Sell Agreement Life Insurance

When life insurance is utilized for funding a buy sell agreement following the death of a shareholder, the insurance policy must have a death benefit that is equal in value to the number of shares held by the deceased shareholder.

There are two buy sell agreement considerations that may determine how the agreement is structured:

  1. The shares of the deceased shareholder can be purchased by the surviving shareholders
    In this situation, the buy sell agreement may be funded either by using;
    a. Criss-Cross Purchase – using shareholder-owned insurance
    b. Promissory Note – using corporation-owned insurance
  2. The shares of the deceased shareholder can be redeemed and purchased by the corporation;
    c. Corporate Redemption – funded by corporation-owned insurance

It is also possible to use a combination of the “Promissory Note” and the “Corporate Redemption” methods (often called the “Hybrid Method“) for buy sell agreement structuring.

In this case, the shareholders agreement contemplates that:

  1. The corporation will purchase some or all of the deceased’s shares
  2. The surviving shareholders will purchase some or all of the deceased’s shares

In this situation, the obligation is funded with insurance owned by the corporation.

Benefit Strategies can help you with buy sell agreement discussion items and how to properly structure your agreement.

To learn more, or for answers to your buy sell agreement questions, please contact our Benefit Strategies experts.

Or call us at 780-437-5070

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*information courtesy of Manulife’s Tax & Estate Planning Group