An often-overlooked component of a business owner’s estate plan is a Unanimous Shareholders’ Agreement (“USA”). A USA can be an extremely useful tool for estate planning purposes, especially in the context of the succession of a family farming corporation.
Generally, a USA is an agreement that governs the conduct of a corporation and its shareholders. USAs can be custom tailored to suit the needs of any particular corporation. With that in mind, there are specific provisions that are often useful for succession planning.
Consider a situation where parents operate a family farming corporation and desire to transfer the farming business to one or more of their children (the “farming children”), but not all of their children (the “non-farming children”). Further, assume that the parents want to provide an inheritance to the non-farming children (in an amount the parents view to be fair), but the parents have insufficient non-farming assets to fund the intended gift to the non-farming children.
This presents a problem. On the one hand, the parents wish to pass an inheritance to each of their children, but on the other, they wish to keep all of the farming assets intact in order to ensure a successful succession of the farming business. In such circumstances, the parents may feel as though the only way they could fairly treat their non-farming children is to gift them shares in the farming corporation.
If shares in a corporation are gifted to children that are not actively involved in the business, the parents need to be careful in how this is planned and implemented. The holders of shares in a corporation are granted inherent rights in the corporation by virtue of their shareholdings. Among other things, shares can grant the holders:
- an entitlement to the accruing value of the corporation,
- voting rights in the corporation, and/or
- retraction rights.
Common shares allow the holder to benefit from the ongoing profits and growth of the corporation. This is the case even if the shareholder has no involvement in the operations of the business, which may not seem fair to the shareholders actively involved in the operations of the corporation.
Voting shares provide the holder with an ability to participate in the management of the business. Therefore, the voting shares should typically be given to the farming children to ensure the decisions made are in the best interests of the farm.
To avoid the above two situations, non-voting, fixed value, preferred shares could be used. However, these types of shares are typically “retractable” by the holder. This gives the holder the right to require the corporation to repurchase the shares at a fixed predetermined price. This could create serious cash flow issues within the corporation because the non-farming children could demand repayment for their shares at any time.
A USA can be used to manage this cash flow risk. The USA can set out a payment schedule for the preferred shares. This can balance the non-farming children’s desire to be paid with the corporation’s need to maintain an adequate cash flow for the operation of the farming business. For example, the USA could set a limit on the amount to be paid to the non-farming children in any given year. It can also have provisions to allow more to be paid to the non-farming children if both the non-farming children and the farming children agree. This sets a base annual payment, but also provides the ability for larger amounts to be paid in years where cashflow is sufficient to do so.
In addition, if there will be more than one farming child, the parents can include in the USA any other governance rules that they want to apply to their farming children.
This USA can be created while the parents are alive as part of their estate planning. The parents would sign the USA as the current shareholders of the corporation. However, the USA would be binding on all future shareholders. Therefore, it would apply to their children when the children receive their inheritance.
If the USA is drafted properly, the shares can maintain eligibility to be transferred to the non-farming children on a tax free basis pursuant to the “tax rollover” rules in the Income Tax Act (Canada) (provided certain other criteria are met). This is necessary to defer the capital gains tax that would otherwise be payable on the disposition of the shares (when both parents have passed away).
This is just a basic overview of some of the many benefits that can arise from putting in place a USA. If you believe that a USA could be valuable to your estate planning needs, our team of lawyers would be happy to assist.
Co-Authors:
Garrett Leedahl
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: gleedahl@shtb-law.com
Michael J. Deobald
STEVENSON HOOD THORNTON BEAUBIER LLP
500 – 123 2nd Avenue South, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: mdeobald@shtb-law.com
The information in this guide is not legal advice. We encourage you
to consult with your legal advisor for specific advice.