As the heading suggests, this clause considers what happens in a company on the death or critical illness of one of the shareholders. There are potentially some undesirable outcomes for more than the unfortunate victim:
- the surviving shareholder may wish to purchase the shares of the deceased shareholder but the Personal Representatives of that person may not wish to sell them;
- the widow/er of the deceased shareholder may wish to have involvement in the running of the business, which the survivor may not appreciate;
- the next of kin of the deceased shareholder may be left with shares that are not capable of sale and no way of turning those shares into cash.
So what is the solution? A clause in the Shareholder Agreement that gives the surviving shareholder an option to buy the shares of the unwell/deceased shareholder, and a corresponding clause that gives the next of kin an option to force the surviving shareholder to purchase the shares and thus turn paper shares into real money.
A secondary problem in this scenario is that the surviving shareholder may not have access to sufficient funds to purchase the shares. This can be planned for by each shareholder taking out insurance on the life of the other, or the company taking out insurance on the lives of the shareholders. This would usually be arranged by an Independent Financial Adviser.