Firstly, if you pushed him or her in front of said bus, you’re probably off to jail. If not, then after mourning appropriately, you’d probably be wondering, ‘what happens now?’
Unfortunately, many co-owners of a business will often not turn their minds to a roadmap for the business (and the partners left behind) until such an unexpected event actually occurs. The importance of such a roadmap is not limited to circumstances of death. It can be equally important if for example a co-owner suddenly becomes critically ill and is no longer able to discharge their duties or make important decisions.
A sad reality in many such circumstances is that those left behind in a business become unwitting partners with a surviving spouse (or children) of their now deceased co-owner, creating tension and disharmony which can often damage a business over time.
The most straightforward way to plan for this eventuality is putting in place an appropriately drafted:
- Shareholders’ Agreement; and/or
- Buy-Sell Agreement.
A Shareholders Agreement is basically a contract as between the shareholders of a company which acts as a rule book of sorts, and can address a variety of matters including:
- how management decisions are made;
- when shareholder approval is required;
- how profits are reinvested or dividends paid;
- how to deal with shareholder loans;
- restraints of trade (should a key shareholder employee leave);
- treatment of confidential information and intellectual property;
- how do deal with offers to purchase the business (i.e. tag along/drag along); and
- of course, what happens if someone dies or is totally and permanently disabled (TPD).
A shareholder agreement can work alongside the Constitution of a company and, in many instances, can overrule provisions of a Constitution which have become outdated or not appropriate given the present nature or structure of the business.
A Buy-Sell Agreement is, simply speaking, an agreement between co-owners which provides for:
- An option for an outgoing co-owner to sell his/her share in a business to those co-owners remaining in the business; and
- An option for co-owners remaining in a business to purchase an outgoing co-owner’s share in a business upon the happening of certain trigger events (such as death and TPD).
Either agreements can also incorporate provisions requiring insurance to be taken out by each co-owner (for the benefit of other co-owners) so that, upon their death, their shares are bought at a pre-determined or market value.
There’s no fixed rule in relation to the contents of such agreements and often they can be combined into one all-encompassing document.
Such provisions help to ensure business continuity and help co-owners left behind to retain control. They also provide important comfort to families of business owners, knowing that they will not be left with an unmarketable asset (such as shares in a private company they know little about) should their loved one die unexpectedly.
If you would like more information about how you can effectively protect and plan for your business, get in touch with our team for practical, commercial guidance.
Joseph Carneli, Senior Associate