No Shareholders' Agreement, No Plan for What Happens if One Dies

The situation

Iryna and Andriy built their business over twenty-five years, growing from a single franchise location into a holding company that owned several outlets across the region. Iryna had stepped back from day-to-day operations and was, by her own description, semi-retired; Andriy still ran the business as a multi-unit franchise owner, overseeing site managers and signing the contracts that kept the outlets stocked and staffed. A third shareholder, Xia, had joined years earlier as the operations manager and had eventually bought a minority stake as a reward for the work she put in growing the company. Combined, the outlets generated revenue in the tens of millions of dollars a year.

Like a lot of businesses that grow organically rather than through a formal capital raise, the company had never had a shareholders' agreement drafted. Iryna, Andriy and Xia held their shares under nothing more than the standard articles of incorporation their accountant's office had filed at the outset. Nobody had revisited the question since. The business ran well, the three of them got along, and there had never seemed to be an urgent reason to pay a lawyer to write down what everyone already understood informally.

What a friend's estate dispute exposed

The prompt for change came from outside the business. A close friend of Iryna's had co-owned a separate, unrelated company with a business partner who died suddenly. That company also had no shareholders' agreement, and the surviving partner spent close to a year in a difficult standoff with the deceased partner's estate. Iryna heard the details over several conversations and recognized her own company in almost every one of them.

Under Ontario law, shares in a private corporation are property. When a shareholder dies, their shares do not disappear or automatically pass to the surviving co-owners — they form part of the deceased's estate and pass to whoever the will names, or to the people entitled to inherit if there is no will. The estate trustee then steps into the deceased shareholder's position, at least in name, with the same voting rights and entitlement to information the shareholder had. If the surviving shareholders and the estate trustee do not see the future of the business the same way, the corporation can end up frozen: no clear price for the shares, no timeline for buying them out, and often no cash on hand to fund a buyout even if everyone privately agrees it should happen.

Iryna's friend's dispute followed exactly that pattern. The deceased partner's estate wanted to be bought out promptly and near what it considered the highest defensible value. The surviving partner wanted to pay a lower, more conservative figure spread over several years, because the company did not have the liquidity to write a large cheque without disrupting operations. With no formula agreed in advance and no life insurance funding a buyout, the two sides spent months negotiating a value neither had chosen, while the business itself absorbed the distraction. It eventually settled, but at real cost in legal fees, management time and strained relationships between people who had trusted each other for years.

Iryna brought the story to Andriy and Xia, and the three of them asked Treadstone Law to review their own corporate structure. The review confirmed what Iryna had already suspected: the company's articles of incorporation said nothing about what happens to a shareholder's shares on death, there was no agreed method for valuing the company, and no insurance or other funding mechanism existed to pay out an estate if one of them died. Every one of the problems that had played out in her friend's dispute was equally possible in their own company.

What we did

1. Reviewed the corporate structure and existing documents. We examined the articles of incorporation, the company's minute book, and each shareholder's percentage holding — Iryna held the majority stake, with Andriy and Xia holding smaller stakes reflecting their roles. None of the existing paperwork addressed a shareholder's death, disability, retirement, or desire to sell to an outsider.
2. Drafted a shareholders' agreement with a mandatory buy-sell provision. The agreement requires the company or the surviving shareholders to purchase a deceased shareholder's shares from their estate, and requires the estate to sell, at a price set by the agreed method. This removes the negotiation entirely — the terms are fixed before anyone needs them, when everyone still has an equal interest in getting them right.
3. Built in a workable valuation formula. Rather than leaving the company's value to be argued about after a death, the agreement sets a valuation method tied to the business's financial statements, reviewed and updated annually by the company's accountant. This gives both the surviving shareholders and any future estate a number they can rely on without hiring competing experts.
4. Coordinated life insurance to fund the buyout. We worked with the shareholders' insurance advisor to structure life insurance policies on each shareholder, owned in a way that keeps the payout outside each shareholder's own estate and available specifically to fund a buyout. The coverage was sized to roughly match each shareholder's proportional value in the company — enough to buy out Iryna's majority stake, Andriy's stake, or Xia's smaller stake without forcing the company to borrow or sell assets under pressure.
5. Added transfer restrictions and a right of first refusal. The agreement also restricts any shareholder from selling or pledging their shares to an outsider without first offering them to the other shareholders on the same terms, closing off a separate risk — an unwanted third party ending up as a co-owner through a sale, a divorce settlement, or a creditor claim.
6. Aligned the agreement with each shareholder's will. We flagged to each of Iryna, Andriy and Xia that their personal wills needed to acknowledge the shareholders' agreement's buy-sell terms, so their own estate planning would not accidentally promise the shares to someone else or create a conflict with the corporation's obligations. Each shareholder took that back to their own estate planning lawyer to confirm consistency.

The outcome

The company now has a signed shareholders' agreement, funded by life insurance, that answers every question Iryna's friend's business had to fight over in the middle of a grief-stricken year. If Iryna, Andriy, or Xia dies, their estate will be paid a set, formula-based price for the shares, the company will have the insurance proceeds on hand to fund the payment, and the surviving shareholders will keep clean control of the business without negotiating terms under pressure. Nothing about the company's operations changed — the outlets kept running exactly as before — but the agreement means a future death would be handled as an administrative process rather than a dispute.

No shareholder has died since the agreement was signed, and the point of the work was that none of them ever needs to find out the hard way what would have happened without it. Iryna described the review as the most useful money the business had spent in years precisely because nothing dramatic came of it — the entire value was in a problem that never had the chance to occur.

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