A recent case in Alberta highlights the importance for owners to have a specialist review their Shareholder’s Agreement specific to a buy-out surrounding a loss of health or death.

The Denille Industries Case; Denille Industries Ltd. v. Island Enterprises Inc. (May 2012 Alberta Court of Appeal) dealt with three shareholders regarding their Unanimous Shareholders Agreement (USA).

One of the shareholders died and a dispute arose regarding the interpretation of a “put and call” option that was in the Agreement. Based on the wording of the USA, the estate exercised the put option on 1 of the 40 shares it held. Then one of the surviving shareholders attempted to exercise the call option to purchase 27 of the remaining 39 shares held by the Estate.

The Issue: The Estate wanted to remain a shareholder, but the survivors wanted to buy the Estate out.

In Court: The Estate succeeded at trial and remained a shareholder in the corporation. This is due to the fact that there was no clause in the USA that either

1. required the survivors to buy the shares of the deceased, or
2. created an automatic deemed transfer from the deceased to the survivors.

Takeaways:

1. Alternative buy-sell strategies need to be carefully contemplated at drafting and possibly incorporated into the USA.
2. A mandatory sale (preferable in most cases) at death creates certainty, especially when funded with life insurance.
3. A sale on death should usually involve all of the deceased’s shares.

As a final note a “put and call” option can be very effective and an important component of an USA. If correctly executed it can allow the deceased spouse and estate a full tax free buy-out when using insurance proceeds.