A well written shareholders agreement is an integral part of any business.
And a carefully chosen insurance policy remains a vital part of any well written shareholders agreement.
That said, many owners fail to review their shareholders agreements or their insurance funding for the buyout on a regular basis, with potentially devastating results.
A poorly drafted or vague shareholders agreement, or an out of date insurance plan, can cause as many problems as it solves.
For these reasons, it’s usually a good idea to review your shareholders agreement and buy-sell policy every few years, to ensure they take into account current business conditions, fairly reflect the goals and aspirations of all shareholders as well as the tax impact of how the buyout is structured and funded.
With that in mind, here are four key areas to focus on when it comes time to review your shareholders agreement and insurance plan.
Death of a
shareholder
One of the central purposes of a shareholders agreement is to outline the procedure for dealing with the premature death of a shareholder. Usually, this involves the purchase of the deceased owner’s shares by surviving shareholders, but it can also be structured as a redemption of shares by the corporation.
Because the tax implications of each method depend on a variety of factors, professional tax advice is a must.
Valuation
A good shareholders agreement will provide for a regular valuation of a business, either through an independent business valuator or through a pre-determined formula.
These valuations should be documented and attached as a separate schedule to the agreement itself. In addition to helping owners avoid disputes over what the business is really worth, regular valuations make it easier for owners to determine whether their current buy-sell policy is still adequate.
Ownership of
Insurance
The shareholders agreement should include a separate schedule outlining information about the insurance policy.
This schedule should include the following information:
(a) policy owner, plan beneficiary, premium payor;
(b) a prohibition preventing owners from taking out loans against the policy without the consent of all other owners;
(c) provision for medical examinations of the shareholders;
(d) provision allowing departing shareholders the right to purchase corporate-owned policies on their lives.
Disability
Surprisingly, many shareholders agreements lack references to a disability buyout.
This is unfortunate, particularly because the chances of an owner becoming temporarily or permanently disabled are, in many cases, higher than the chance of a premature death.
Those agreements that do provide for a disability buyout are often vague about what a “disability” really is.
Other agreements may force non-disabled owners into purchasing shares of the disabled owner, regardless of financing difficulties.
Review your agreement to see if these issues are properly dealt with and adequately funded with disability and/or critical illness insurance.
For more information or for specific advice related to this topic please feel free to call or email.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member CIPF. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. For more information feel free to call Jim at 250-594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.