What is the purpose of an automatic accrual agreement?

An automatic accrual agreement serves as a mechanism for the smooth transition of share ownership upon a shareholder's death. Its primary purpose is to facilitate the transfer of shares from the deceased shareholder to the surviving shareholders. This helps to ensure stability within the company and maintains continuity in the business operations by preventing shares from falling into the hands of outsiders or potentially disruptive heirs.

The agreement typically works by providing that the shares of the deceased shareholder are automatically sold or transferred to the remaining shareholders at a predetermined price, which is often agreed upon in advance. This process minimizes conflicts and confusion regarding ownership and the value of shares after a shareholder passes away. Overall, the functional goal of this agreement is to enhance the seamless continuation of the business by clearly delineating the flow of share ownership and eliminating uncertainties related to succession.