Shareholder Protection

What happens if an owner or part-owner of a company dies unexpectedly? There are plenty of disruptive events that can hit a business, but the loss of a shareholder can be one of the most serious.

Regardless of the industry you operate in, it’s critical to ensure that you protect your business with a safety net. This is a key element of Business Continuity Planning – after all, it represents not only the livelihood of you and your family, but also that of your employees and fellow stakeholders. That’s why every business needs Shareholder Protection Insurance.

How does Shareholder Protection work?

Suppose you run a small business with your business partner – you both work hard for the business and contribute equally to its success. The business has grown over the years, it employs five staff and has some modest borrowing from the bank.

Now, what happens if your business partner dies? 50% of the ownership of the business would pass to his widow. You previously each received dividends, but without your business partner your profits fall (although fixed costs – such as rent, wages and loan repayments – remain level) and there are less profits available to distribute as dividends.

Your business partner’s widow doesn’t want to work in the business and is willing to sell the shares. Unfortunately the business cannot afford to borrow enough to buy the shares and the offer you can make is not enough for the widow to consider selling. The widow might want to sell to a third party, and this could mean you end up with a business partner that you haven’t chosen.

It’s a very challenging situation for the business. Also, if you were the person who had died, would you want to put your spouse and your family in this difficult financial position?

If Shareholder Protection Insurance had been set up, the business would have received a lump sum equal to the value of the deceased partner’s share in the business. The widow would have the ability to sell the shares to the business and the business could afford to buy the shares from the widow. The result of this is that the family receive a fair price for their shares and the business can continue with the least amount of financial disruption.


What is Shareholder Protection?

Shareholder Protection Insurance provides a robust contingency plan for shareholders and directors of companies to remain in control in the event of a business owner passing away.

It’s basically an insurance strategy that ensures a business can afford to buy shares from the estate of a deceased shareholder, which is vital to ensuring an efficient and fair way of dealing with business ownership.

Why is it important?

The death or incapacity of a business owner can disrupt a company, but by having shareholder protection in place the interruptions to a business will be minimised by enabling:

  • Business continuity
  • Funds made available to the individuals who wish to buy the shares
  • An improved tax position on the death of a shareholder
  • The deceased’s estate receives funds in a timely manner.

It also creates a ‘market’ for private company shares, which otherwise can be very difficult to sell.

How is it facilitated?

A Shareholder Protection arrangement is facilitated through:

  • Life assurance
  • Double Option Agreement
  • Business trust
  • Critical illness cover

The value of the business is determined – an accountant is needed to value the company appropriately. The life assurance sum is based on the value of the company. A cross-option agreement is then put in place to ensure that the company and the estate of the owner are both empowered to implement the agreement. Trusts are used to preserve the tax efficiency of the estate of the business owner. A key element of ensuring this works properly is to have a current will that deals with both personal assets and business assets.


To discuss Shareholder Protection or another element of Business Continuity Planning with Harry Morgan, call 01444 847269.


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