Introduction to this document

Company’s option to buy/sell shares clause

In the event of the untimely death of one of the major shareholders, the surviving shareholders probably won’t want the shares to go to the deceased’s beneficiaries unless they are already involved in running the company. The shareholders can include a preemption clause in a shareholders’ agreement requiring that they are given the option to acquire a shareholder’s shares following their death. 

Shareholders’ agreement

If there is already a shareholders’ agreement, you can insert standard clauses which say that, in the event of a director shareholder dying, their personal representatives are obliged to sell and the other shareholders are obliged to buy, the deceased’s shares. The price will be fixed by a specified formula, presided over by the company’s auditor in case of a dispute and the funds for the purchase are often provided by appropriate life insurance policies.

HMRC’s prevailing view of this is that it represents a binding contract for the sale of the property (shares) in question at the time of the transferor’s death. This means that 100% business property relief (BPR) from inheritance tax is not available on the deceased’s shares. This interpretation of the legislation has not yet been ratified by the courts (no case has been brought) so you could challenge this view. However, it’s not worth incurring the costs because there’s a much simpler solution. Grant buy and sell options instead. Because an option for tax purposes doesn’t exist when it is granted but when it is exercised, it can’t be held to be an existing binding contract.

Make sure you have an up-to-date shareholders’ agreement in place with an Company’s Option to Buy/Sell Shares Clause. This should: (1) grant the personal representatives of the deceased shareholder an “option to sell” shares; and (2) grant the surviving shareholders an “option to buy” shares. This “option” argument would also work for partnership interests.

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Company's option to buy/sell shares clause

14 Mar 2009
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