Most business partners spend months negotiating with customers, funders and landlords. Very few spend an afternoon agreeing what happens if one of them dies, becomes seriously ill, gets divorced or simply wants out.
Without that agreement, the consequences can be severe. Your late partner’s shares could pass to a spouse or children who have no interest in the business, or who want to be bought out at a price the company cannot afford. A divorcing partner’s shares could become part of a settlement. A departing co-founder could keep a large stake in a business they no longer contribute to.
What happens without an agreement
When a shareholder dies, their shares form part of their deceased estate. The executor deals with them in terms of the will, or the rules of intestate succession if there is no will. The remaining shareholders generally have no automatic right to buy those shares, unless the memorandum of incorporation (MOI) or a shareholders’ agreement gives them one.
In practice, this can mean:
- new co-owners you did not choose, sometimes with a blocking stake;
- a dispute over value, with no agreed valuation method;
- no funds to buy the shares, even if both sides want a sale;
- delays while the estate is administered, during which decisions requiring shareholder approval may stall; and
- pressure on the family, who may need cash to pay estate duty, debts and living expenses.
Similar problems arise when a shareholder becomes permanently disabled, is sequestrated, divorces or simply stops participating.
The solution: a shareholders’ agreement with clear exit provisions
A well-drafted shareholders’ agreement should deal with these “trigger events”, including:
- death;
- permanent disability or incapacity;
- sequestration or liquidation of a shareholder;
- divorce, where shares may be claimed as part of the accrual or community of property;
- resignation or termination of employment of a shareholder-employee, often with “good leaver” and “bad leaver” pricing; and
- material breach of the agreement.
For each trigger, the agreement should state whether the remaining shareholders or the company must or may buy the shares, how the price is determined, and when and how it is paid. Pre-emptive rights, drag-along and tag-along rights, and deadlock mechanisms are equally important.
Funding it: the buy-and-sell agreement
An obligation to buy shares is only useful if the money is there. A buy-and-sell agreement is a contract between the shareholders, usually funded by life and disability insurance, under which:
- each shareholder takes out a policy on the life of each other shareholder, or a trust holds the policies;
- on the death or disability of a shareholder, the insurance proceeds are paid to the surviving shareholders; and
- the survivors use the proceeds to buy the shares from the estate, at the agreed value.
The family receives cash at a fair value, and the surviving shareholders keep control of the business.
Getting the details right
Valuation. The agreement should set out a clear valuation method, such as a formula, an annually agreed value or an independent valuer, and require regular updates. Many disputes arise because the insured amount and the business’s real value have drifted apart.
Policy ownership and premiums. Who owns the policies and who pays the premiums affects the tax treatment. Life policy proceeds are generally deemed property in a deceased’s estate for estate duty, but there is an exclusion for policies taken out in terms of a buy-and-sell arrangement that meets specific requirements, including that the deceased did not pay the premiums. The structure must be designed carefully with your tax adviser.
Alignment with other documents. The buy-and-sell agreement, the shareholders’ agreement, the MOI, each shareholder’s will and any antenuptial contracts must all be consistent. A will that leaves shares to a spouse can conflict with an obligation to sell them. See our article on antenuptial contracts.
Trusts and holding companies. Where shares are held through a trust or holding company, the agreement must cater for this, for example by treating a change of control of the holding entity as a trigger event.
Review. Shareholdings, values and personal circumstances change. The arrangements should be reviewed at least every two to three years, and after any major event such as a capital raise or a new shareholder.
Questions every business owner should be able to answer
- If a co-owner died tomorrow, who would inherit their shares?
- Do we have the right, and the money, to buy them?
- How would the price be calculated?
- What happens if a co-owner gets divorced, or wants to leave?
- When did we last review our shareholders’ agreement and insurance?
If you cannot answer these questions with confidence, your business is exposed.
How O’Reilly Law can help
We draft and review shareholders’ agreements, buy-and-sell agreements and MOIs, and coordinate with financial advisers and estate planners so that your business, your partners and your family are protected. Through O’Reilly Fiduciary, we also assist with wills and estate planning for business owners. Contact us to review your arrangements.
Related reading: Shareholder and director disputes · Business owners and divorce
This article is general information and not legal, tax or financial advice. Correct as at October 2026.