BC Corporations: Do a shareholder’s rights of first refusal apply to the distribution of insurance proceeds upon the death of an insured shareholder?

In British Columbia, a shareholder’s agreement can include a right of first refusal (ROFR), but whether it applies to an insurance-funded buyout of a deceased shareholder's shares depends on how the agreement is structured. Typically, companies will address the death of an insured shareholder through buy-sell agreements funded by life insurance policies. These agreements outline the process for purchasing the deceased shareholder's shares, often using the insurance proceeds to facilitate the buyout. The specifics, such as valuation methods and payment terms, are detailed within the agreement itself.

Key Considerations:

1. Right of First Refusal (ROFR): Typically, an ROFR gives existing shareholders the first opportunity to buy shares that another shareholder intends to sell. This may not always apply to a transfer triggered by death, especially if the agreement includes a buy-sell clause funded by insurance.
2. Insurance-Funded Buy-Sell Agreement: Many shareholder agreements in BC include buy-sell provisions stating that if a shareholder dies, their shares are     automatically sold to the surviving shareholders or the corporation, often using life insurance proceeds. If this provision is in place, it usually takes precedence over an ROFR.
3. Specific Language in the Agreement: If the agreement explicitly states that an ROFR applies before any buyout by insurance proceeds, then surviving     shareholders might have the option to refuse or purchase the shares before the insurance-funded transaction occurs. However, most well-drafted agreements ensure a smooth transfer of shares upon death without an ROFR delaying the process. Changing the standard wording in a shareholder agreement—especially around these areas—can make it harder to smoothly transfer shares after a shareholder passes away.
4. BC Business Corporations Act (BCBCA): BC corporate law generally allows flexibility in structuring shareholder agreements, meaning the terms of the agreement will govern unless they contradict statutory rules.

Next Steps:

• Review the Articles and the Shareholder Agreement: Look for clauses related to ROFR, insurance-funded buyouts, and the mechanics of share transfers upon death.
• Check for Conflicts: Ensure that the buy-sell provision and the ROFR terms are not contradicting each other. Make sure there is nothing in the articles of the corporation in reference to these transfer mechanisms. Often, shareholder’s agreements will contain clauses requiring amendment to the articles, when the articles and shareholder’s agreements are in conflict, but not always.
• Seek Legal Advice: A corporate lawyer can confirm how these clauses interact and whether the ROFR applies in your specific situation. Contact Andrew Reed @ Johnston Franklin Bishop lawyers today: 250-756-3823 or ar@jfblaw.ca.

‍