ShareholdersOctober 1, 2020by Business Valuation TeamTriggering Events – Shareholders Agreement

A common shareholder agreement has specific terms and conditions regarding the selling of the company’s shares, which is a likely outcome following a shift in shareholder’s interest in the company. Hence it is crucial for shareholders to identify and address possible ‘triggering events’ that would influence their interests in the company.

The following lists some of these ‘triggering events’ and the necessary considerations to note:

  • Termination of employment of a shareholder-employee

The valuation clause for this situation should be sensitive enough to tackle an unhappy shareholder who may threaten the interests of the remaining shareholders and/or the company’s future.

  • Retirement of a shareholder-employee

This will consider mandatory retirement as well as any fine for early retirement.

  • Permanent injury of a shareholder-employee

This will consider the verification procedures and the premiums for any treatment processes. There should also be a mutually agreed clause that determines the fate of the inflicted shareholder’s shares – should they stay with the inflicted shareholder’s or be transferred to the remaining shareholders; should the decision to sell and transfer the shares lie with the inflicted shareholder or in the other shareholders; and can the other shareholders buy the shares.

  • Divorce between married shareholders

This will consider the arrangements and allowances required of the relevant government rules and regulations (i.e. the Family Law Act).

  • Declaration of bankruptcy or insolvency of a shareholder

The valuation clause here should be meticulous in aligning with the legalities pertaining to bankruptcy, which expect a fair valuation (usually marked against the market value) of the inflicted shareholder’s ownership of the company.

  • Death of a shareholder

This will consider the financing of the transactions involved in the acquisition or transfer of the late shareholder’s equity interest in the company, which will then affect the life insurance adequacy.

In each of the above ‘triggering events’, the shareholder agreement must also detail the procedures of buying, selling and transferring of the leaving shareholder’s equity interest in the company; specify the way to setting the worth of the said equity interest; and define the terms of settlement.

An adequately composed shareholder agreement will continue to protect the interest of an exiting shareholder, giving the person fair returns while helping the remaining shareholders to keep external forces from taking control of the company.

Now let us review the next common issue of determining the worth of equity interest in the next article.