Skip to main content

Avoid litigation: review your shareholder agreement

By February 13, 2020December 18th, 2020articles

Your shareholder agreement is an important legal document that should reflect the evolution of your business and describe in detail the continuation plans for your company if a shareholder dies, becomes incapacitated, retires or decides to leave.

If it’s been several years since you last reviewed your agreement, I suggest that you do it soon. Some clauses and dispositions may have become out of date in light of your company’s present situation and changes in corporate legislations. An inadequate or poorly worded agreement can lead to disputes and threaten the future of your business. The timely review of your agreement can prevent costly financial and legal consequences in the future.

The judicious use of life insurance is often crucial for the financing of the buy/sell portion of an agreement when a shareholder dies. My role as an advisor is to work in collaboration with my clients accounting and legal experts in order to propose the right insurance solutions for the financial security of shareholders and their families.

Here is an example of inadequate provisions I found during the review of an agreement.

My client and his partners had a shareholder agreement made when they started their company many years ago. While reviewing the agreement and the life insurance contracts with my client, we where surprised to discover that the section pertaining to the death of a shareholder, simply stated that the estate of the deceased would be paid the life insurance proceeds held by the company. There was no mention concerning the evaluation of the market value of the shares of the deceased or the transfer mechanism to be used. Normally it’s the evaluation of the value of a company that determines the amount of insurance needed to properly fund a buy/sell agreement, not the other way around. The company was now worth much more than the life insurance coverage destined to fund the buy/sell agreement.

The partners had not reviewed their life insurance policies in a long time and they also falsely believed the agreement contained a clause that stipulated a fair evaluation of company shares in the event of the death of a shareholder.

The partners all agreed to make the necessary changes. In collaboration with their accountant a new shareholder agreement was made that rectified the mistakes and shortcomings of the old one.

Among the changes was an increase in the life insurance coverage to better reflect the value of the business and precise instructions concerning: the use of the capital dividend account, scheduled evaluations of the company shares and the consent of shareholders to purchase additional life insurance coverage when necessary. The new agreement also clearly identified the life insurance policies destined to be used in financing the shareholder agreement from others needed for other purposes.

An up-to-date agreement and adequate life insurance protection can prevent a lot of problems. Contact me for an appointment and benefit from my expert advice to insure your financial security.

Steve Koncevich, B.A.
Financial Security Advisor, Registered Life Insurance Underwriter
Accès Conseils Options Financières