Corporate, Estates & Wills & Trusts

Properly worded shareholders agreement is a must: Horst

By Paul Russell, Contributor

When someone dies with a life insurance policy listing a clear beneficiary, anyone with a dispute should have solid evidence to support their argument, Toronto corporate lawyer Marlin Horst tells

Horst, partner with Shibley Righton LLP, cites a recent Ontario Court of Appeal case to illustrate his point.

Court documents show that in 2014, two men opened a jewelry store in London, Ont. As part of their business arrangement, they took out a life insurance policy on each other, with the company paying the premium. One of them died 16 months later, leaving the partner named as the sole beneficiary of a $250,000 policy.

The estate of the deceased partner, with the wife acting as trustee, disputed that payment. The judgment notes that she claimed that her husband verbally told her she would receive the life insurance money if he died. She also pointed to a handwritten note made by the insurance agent and attached to the policy, concerning a discussion between the two business partners about having a buy/sell agreement.

Horst explains that a buy/sell agreement stipulates that if one of the partners dies, the other one must use the insurance money to buy out the shares of the deceased shareholder. In this case, however, he says the buy/sell provision was not a formal part of the shareholder agreement.”

Instead, the policy simply named the partner as the beneficiary, without stipulating that he had to use the insurance money to buy out the shares from his former partner.

“The estate did not have any real evidence to back up its arguments that the insurance was being unjustly awarded,” says Horst. “What this case clearly shows is that when one side has really clear documentary evidence about an insurance award, the other side also needs very strong evidence to overthrow that.”

He says it is common for companies to buy life insurance for their principal shareholders, and to specify that it be used to purchase the shares of the deceased partner.

“In this instance, though, the shareholder agreement did not spell that out, and the courts can’t rely on hearsay evidence from the wife to deny that payment," Horst explains.

The handwritten notation from the insurance agent about the buy/sell agreement is of little value, he says, since the estate failed to obtain an affidavit or testimony from the agent about it.

“The fact the life insurance agent was not asked to give evidence may indicate that he wasn’t the person who could to step in and solve this issue,” Horst says.

This case shows the importance of having a properly worded shareholders’ agreement, Horst notes.

“If the idea is to have life insurance to buy out a deceased shareholder’s shares, which is very common, you better be sure you have all the agreements and language in place to show that,” he says.

While the appeal court sided with the living partner about the insurance, he says “the estate still has shares in the company, and someone has to buy those out, so it is not a complete loss for the wife.”

The final paragraph of the judgment refers to an alleged promissory note between the two partners, and an upcoming trial about it.

“We would encourage both counsel and the motions Bench to consider faster and cheaper alternatives for conducting a final adjudication on the merits of the claim,” the judgment reads.

Horst says it is evident that the appeal court judges “do not think this should be coming back to them."

"They want the two sides to reach a settlement on this issue, which will likely happen if the parties get together and reach some sort of arrangement on buying the shares,” he explains.

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