What Happens When A Shareholder Dies?
The death of a stockholder is always a shock. The impact of the shock upon you, personally, depends upon whether you are a MAJORITY or a MINORITY STOCKHOLDER, and are THE-FIRST-TO-DIE or a SURVIVING STOCKHOLDER.
If you are a surviving majority stockholder, the stability of your business is threatened by the deceased stockholder's heirs, whose excessive demands for payouts in cash, plus other harassments, disrupt operations.
A surviving minority stockholder faces even greater threats to his security. The death of the majority stockholder has jeopardized the survival of the business and his income.
The heirs of a deceased majority stockholder will have legal control, but their lack of business skills may wreck the business. Inexperience, coupled with insufficient liquidity, could destroy the business value, thus wiping out income to both your family and theirs.
The heirs of a deceased minority stockholder may be virtually frozen out of management. The majority stockholders could withhold dividends depriving the heirs of income or all but dictate terms if the heirs wish to sell out.
If your heirs retain their interest, they will have to
1. Enter the business as active stockholders, or
2. Be inactive stockholders.
If the heirs retain their interest and enter the business as active stockholders, will the surviving stockholders find them more of a hindrance than a help?
Will the heirs have the experience and ability necessary, even to protect their own interests?
If the heirs retain their interest and remain in the business as inactive stockholders, will the surviving stockholders have to carry the full load of responsibility for running the business but share the profits?
Will the heirs have a dependable source of income or will no dividends be declared by the surviving stockholder ¬management leaving them with nothing but asset value?
Or they could sell their interest,
3. To an outside purchaser
4. To the surviving stockholders or to the corporation.
If the heirs decided to sell to an outsider, where will a new associate be found?
Will he be willing and able to pay a fair price-in cash?
Will he be an able, compatible associate or will he disrupt profitable operations?
If the heirs decide to sell to the surviving stockholders (or the corporation itself), can an agreement be reached on a fair price at fair terms?
Can payment be made in cash without depleting working capital or will notes and installment payments bleed future business profits?
Will the heirs be forced to accept notes and thus gamble on the future profits of a reorganized business?
Will their livelihood depend on uncertain and unknown future profits?
The death of a stockholder transforms a LIVING interest into an ESTATE interest.
So, deal with it now on a business basis. Put together a buy-out Agreement that defines exactly what should happen when a Shareholder dies.
Either:
- The company buys his stock back from the family, giving the living stockholders complete control and the family much needed cash or
- The other stockholders can buy out the family with the same results.
It is best to buy life insurance to fund this obligation.