Usually it is in the best interest of a small Corporation and of Shareholders to make provisions for the future disposition of the shares of Corporation, and to provide that such shares shall be transferable only upon compliance with decided terms. Shareholders often desire to set forth their respective rights concerning Corporations stock with regard to death, disability, retirement and other future disposition of the stock by any Shareholder by imposing certain restrictions and obligations on themselves, on Corporation and on their shares of stock of Corporation. Your Shareholders Agreement can include the following language to provide for transfers of stock upon death.
Upon the death of a Shareholder, the Corporation shall have an option to purchase all of the shares of stock then owned by such deceased Shareholder. The option granted Corporation hereunder shall be exercised by written notice from Corporation to the personal representative of such deceased Shareholder within thirty (30) days after the qualification of such representative, or sixty (60) days after death, whichever is later. Upon the exercise of such option, the personal representative of such deceased Shareholder shall be required to sell all of the shares of stock of Corporation subject of the exercise of the option by Corporation at the price and in accordance with the terms herein set forth. If the qualification of such representative or sixty (60) days after death, whichever is later, the option granted Corporation hereunder shall lapse.
If there are any such shares of stock outstanding which Corporation desires to purchase but cannot because of legal limitations imposed on it, the remaining Shareholders agree to take all actions necessary (including, without limitation, transfer to Corporation of outstanding shares of its stock, contribution to its capital or arranging for a valid reappraisal of its assets) in order that Corporation can legally acquire the shares of stock. After giving effect to the foregoing, if there are any shares of stock of Corporation which cannot legally be purchased by Corporation (or which Corporation determines not to purchase pursuant to the option herein granted), the remaining Shareholders shall be required to purchase, and the personal representative of such deceased Shareholder shall be required to sell, said remaining shares of stock at the price and in accordance with the terms set forth herein.
It is expressly understood and agreed that this agreement shall apply to and govern the personal representative or representatives of any deceased Shareholder.
For the purpose of this Agreement, if the parties can agree upon a price to be paid, then the parties having the right to purchase may take the interest at such price so agreed upon. But in case the parties cannot agree upon a fair price or book value thereof, then each of the parties shall have the right to appoint one experienced business man as arbitrator, who, if they can agree, shall fix a price, whereupon the parties to this contract remaining in the business shall have the right to purchase the said interest of the said party going out at such figure, if they so desire, but they shall have the option to refuse or to take the interest at that price.
In the event that the two arbitrators so appointed cannot agree, then they shall choose a third party as umpire, and the decision of the majority thereof shall fix a price, in which case the parties remaining in the business shall have the right to take or to refuse the interest at the price so determined.
TIME FOR PAYMENT AND SECURITY:
In the event the purchase price is payable because of the death of a Shareholder, it shall be paid as follows:
In the event that Corporation or the surviving Shareholders have received insurance proceeds on the death of the deceased Shareholder and such proceeds equal or exceed One Hundred (100%) percent of the purchase price, the amount of such proceeds shall be paid in cash up to the total amount of the purchase price within five (5) days after their receipt by Corporation or the surviving Shareholders, or within twenty-five (25) days after the qualification of the decedents personal representative, whichever date is later.
In the event that Corporation or the surviving Shareholders have received insurance proceeds on the death of the deceased Shareholder, and such proceeds total less than One Hundred (100%) percent of the total amount of the purchase price, the amount of such proceeds shall be paid in cash within five (5) days after their receipt by Corporation or the surviving Shareholders or within twenty-five (25) days after the qualification of the decedents personal representative, whichever date is later. The balance, if any, of the purchase price, whether due from Corporation or from the surviving Shareholders, shall be payable in sixty (60) equal monthly installments, the first of which installments shall be due on the first day of the next fiscal year of the estate of the deceased Shareholder immediately following the date of initial payment, and shall bear interest at the rate of nine (9%) percent per annum on the unpaid balance thereof, which interest shall also be payable monthly commencing with the payment of the first installment of principal. Installment payments shall be applied first to accrued interest and the balance in reduction of principal. Corporation and the surviving Shareholders shall have the right to prepay the unpaid balance in whole or in part at any time without penalty.
The unpaid balance of the purchase price, whether due from Corporation or from the surviving Shareholders, or both, shall be evidenced by a judgment note, or notes, which shall contain a fifteen (15) day grace period, after notice, within which to cure any default and which shall provide that no judgment may be entered thereon unless a default continues after the expiration of the grace period. Such unpaid balance shall be secured by the shares of stock being purchased hereunder.
The best time to negotiate and sign a shareholders agreement is while the small business shareholders are healthy and the business is profitable.