EXIT STRATEGIES FOR SHAREHOLDERS PT. 5: INVOLUNTARY TRANSFER EVENTS

What you need to know to avoid having to work with your business partner's ex or creditors.

By Delzad Kutky

What is an Involuntary Transfer Event?

Involuntary transfer events are essentially a list of business or personal milestones that occur in your business partner’s life that can trigger an option to buy the shares of your business partner or to have your corporation redeem your business partner’s shares.

Divorce, death, incapacity, and insolvency are amongst the most common involuntary transfer events. These events are defined in a Shareholders Agreement to give clarity and guidance as to what happens when any of the events happens. While these situations can be difficult milestones for you or a business partner to manage, they also present a large risk to the operations of your business.

Why Do I Need to Know About Transfer Events?

In the case of each of the involuntary transfer events mentioned above (divorce, death, incapacity, and insolvency), there is a risk that your business partner’s shares could fall into the hands of a third party that you could be forced to work with. Whether it’s a disgruntled ex-spouse, children fighting over shares of the business, creditors who are only interested in collecting on their debt, or a guardian who isn’t prepared to fill your business partner’s shoes, these events introduce the risk of someone new coming in and disrupting your company’s business.

Without proper planning, shares of your business could fall into the hands of someone entirely uninterested in its operations, or worse, someone who would prefer to see the business liquidated to address a debt or fail entirely out of spite.

What to Look for in Transfer Event Provisions

Transfer event provisions in a Shareholders Agreement are varied and highly customizable. Not every group of shareholders wants to trigger an involuntary transfer of shares when one of the aforementioned events occurs, and not every shareholder has the same plan in mind for how an involuntary transfer should take place. A “short and sweet” contract provision to address transfer events could cost you and your business far more than a comprehensive clause because ambiguity in procedure almost invariably results in disputes.

A well-drafted Shareholders Agreement will clearly define when a situation officially qualifies as an involuntary transfer event, how the purchase price is decided, who will be buying shares, and what timelines are involved for each step from notice of the event through to closing of the transaction.

Beyond those key terms, financing a purchase of shares where an involuntary transfer event occurs is a key concern. While you may have the best of intentions with planning out what happens in these scenarios, if you or the corporation doesn’t have the money to carry out a buyout, those plans won’t be much help in trying to avoid having third parties interfering in your corporation. To that end, your Shareholders Agreement may also require policies of insurance that assist with financing such transactions.

How to Properly Plan for Life’s Curveballs in Your Business

Legal advice culminating in a thoughtful and comprehensively drafted Shareholders Agreement is key to protecting your business from former spouses, creditors, or other third parties. A candid and thorough conversation with a corporate lawyer (whether in our Markham office, or via video conference) is the first step to safeguarding the company you’ve worked hard to grow.  

The experienced corporate lawyers at SorbaraLAW are ready to assist with deciding what exit strategy works best for you, as well as the negotiation, drafting, and carrying out of exit strategy plans.