The financial wealth of many individuals is represented by the shares of a privately-held corporation, and, as such, a shareholder agreement is an invaluable legal instrument when the corporation is being continued by other shareholders or family.

The purpose of a shareholder agreement is to establish the parties’ rights and obligations when a shareholder terminates his/her association with the corporation.  It outlines what is to occur upon the death, disability, and retirement of a shareholder as well as addressing disagreement.  It is the blueprint of a carefully, thought-out succession plan.

A Unanimous Shareholder Agreement (USA) binds existing and new shareholders to the terms of the agreement and protects all parties. A shareholder agreement is not only relevant in cases where there are multiple shareholders but also in cases where all of the shares are owned by one individual who wishes to leave the shares to multiple shareholders or family members.

The shareholder will want to formalize the relationship between the corporation and the ultimate shareholders with a USA.  The agreement would be between the corporation, the single shareholder, and either the multiple shareholders or family members (In the case of family members, a discretionary family trust would be utilized if one exists.)

A shareholder agreement is often not constructed in a tax-focused manner, though, and many have become outdated with changing tax laws.  This is particularly true where life insurance is intended to fund the purchase of shares upon the death of a shareholder.

A few key features in shareholder agreements that you should be aware of are:

• Shares owned by an individual which qualify for the $750,000 Enhanced Capital Gains Exemption (ECGE) should be purchased by other shareholders as they are not tax efficient when shareholders are related. The ECGE can be doubled to $1,500,000 upon the death of a shareholder with the use of life insurance.

• A shareholder agreement should specify out of which dividend pool a dividend is to be elected to be paid from when there is a repurchase (redemption) of shares either during one’s lifetime or upon death.
• Dividends payable on corporate earnings below $500,000    27.70%
• Dividends payable on corporate earnings above $500,000   19.29%
• Life insurance purchased to fund the agreement should be owned on the life-insured’s own life with the corporation as beneficiary.

Shareholder agreements should be reviewed regularly to take advantage of changing tax laws as well as changes in the relationships of the shareholders.  Current intentions may be different from what was written in the agreement.

A shareholder agreement can often prevent shareholder disputes and provide a sense of certainty for all shareholders under changing circumstances, especially a shareholder agreement that is kept up-to-date.

Do you think your shareholder agreement is up-to-date?  Call KWB today at 780-466-6204 or email info@kwbllp.com to arrange for us to take a look.

Thanks to Gary Clark of Clark Insurance for providing much of this content.