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By: Patrick B. Mathis 

Most buy-sell agreements also contain provisions addressing the death of a shareholder.

This provision may initially acknowledge that transfers to certain qualifying individuals such as a spouse, descendants, or a trust for the benefit of a spouse or descendants, are qualifying transferees at the death of a shareholder and will not trigger the right or obligation of the corporation to purchase the shares at the death of a shareholder. (As noted in II.A. above, consideration should be given to the definition of these qualifying recipients.)

These provisions may either require the company to purchase the shares of a deceased shareholder; give the company an option for a period of time following the death of a shareholder to redeem his or her shares; and/or provide the estate or other successor in interest to the deceased shareholder the right to have his or her shares redeemed by the company for a period of time following the shareholder’s death.

The purchase price, as discussed below, may be set by agreement among the parties, by an annual agreed value in effect at the date of death of a shareholder, by appraisal, or by formula.

Once the price is determined the agreement may provide for payment in full at closing with the corporation responsible for funding through available cash or borrowing, or payment terms.

If the purchase price is to be paid on a deferred basis the agreement may provide for a specified amount of down payment, a term for payment, interest rates, collateral pledges, personal guarantees of the remaining shareholder, as well as acceleration of the balance due upon certain triggering events such as a sale of the business or accelerated payments based upon annual earnings, cash availability, etc.

The agreement may further provide that the corporation will maintain life insurance policies upon shareholders and that the death benefits will be applied to the redemption price at the time of closing with the balance to then be paid in a lump sum at closing or over time as noted above.

Following the shareholder’s death the agreement may also provide that during the interim between his or her death and the closing on the stock purchase another shareholder or shareholders are given the proxy to vote his or her shares.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.