Shareholder Protection is effectively an agreement between shareholders which is backed up by a series of Life Assurance policies and trusts. In this agreement, the conditions are set out regarding what should happen to the shares in the event of death. For example, will they go the deceased’s family, will they be evenly split with the remaining shareholders or will they be sold on the Open Market. The Life Assurance Policies would provide the finance in this instance. As we saw in ‘Example 2’, a Cross Option can be embedded into this agreement, which means that the surviving shareholders have an option to also buy the shares from the deceased party’s family.
In terms of ensuring that your business will continue to thrive in the event of your death, this is, in our opinion, the best Protection product to look into. Shareholder Protection Insurance guarantees that in the event of the death of a shareholder, the surviving owners will be given sufficient funds in order to buy the deceased’s stake in the business. By doing this, the surviving shareholders will remain in control of the company and the beneficiaries of the deceased’s estate (i.e. your family) will receive any interest accumulated from the shares, or indeed the profit of the sale of them. Shareholder Protection Insurance will enable your business to continue to be operational and your family to receive a financial gain.
Colin and Ravi are equal directors and shareholders of a catering company, which they set up 4 years ago. Both of them are involved in the day to day operations of the business, even though they employ over 40 members of staff. The two men both have wives and children, but none of the family members have the skills to run a business and the children have no urge to follow in their father’s footsteps.
Colin and Ravi decide to set up two Keyman Insurance policies in order to protect each other’s lives if the worst were to happen. This would mean that in the event of sickness, incapacity or death, the two families would be looked after and the business could still continue to operate.
In this instance, Shareholder Protection policies are set up under a business trust with a cross option agreement. This means that if one of them should die, the payment received goes straight into the company and the shares that the deceased owned go to the respective family. Of course, the family have no interest in the business so do not want the shares, they want the money. Conversely, the surviving business owner wants the shares, not the cash. This is where the Cross-Option Agreement comes in to play. This agreement means that if one party is dissatisfied with the outcome and wishes to contest it, the other party must oblige. In this case, both parties are eager to do this, so that the family get the cash and the remaining business owner receives the shares. The family are financially comfortable and the surviving business owner has full control of the company. Everyone is happy.
There are two perspectives to consider when looking at the benefits of Shareholder Protection Insurance. Firstly, if you have a business partner, or rather fellow shareholder, you will benefit if this type of insurance is in place. Imagine that your co-owner falls ill or even dies. By having Shareholder Protection Insurance in place, you will be given a lump sum which you can use to buy their shares and keep control of the business. By having complete ownership of the company you make the decisions. You can decide what is best for the company, for example you may want to replace the deceased or incapacitated Shareholder and bring someone new onboard.
The terms of the Shareholder Protection Insurance state that the deceased Shareholder’s family will not be involved in the running of your company (they will sell the shares to you, so they benefit financially and you gain control of the business). This is reassuring, as you can be safe in the knowledge that someone who is not familiar with your business will not be in control. You should also take comfort in the fact that you have been able to purchase the shares in company without having to borrow money. This means that you have put the company in a financially strong position, i.e. no debts to repay or loans from the bank that are hanging over your head.
In the second perspective, imagine that you are the Shareholder who is ill, or has sadly passed away. Shareholder Protection Insurance will make sure that your family will receive a fair value for your interest in the business. This type of insurance will give you peace of mind, as the sale of your shares will realise the true value of your stake in the company. By having Shareholder Protection in place, you are also preventing any added pressure on your family in the event of your death. They will not have to try to find a buyer for your shares in the business, as they will automatically be obliged to sell them to the fellow shareholders. All of the hard work that you have put into your business will be paid back to your family.
There are also benefits that can be attributed directly to you from Shareholder Protection Insurance. Say for example you fall ill. The last thing you need is the added worry of financial matters, which could hinder your recovery. This type of Protection will eradicate this, meaning that you can get well without any stress. You can also be safe in the knowledge that you are preventing the company ending up in financial jeopardy, caused by them having to borrow funds to buy your shares. Finally, Shareholder Protection will enable to you to retire with no money worries-as long as you are a shareholder, your family will always benefit.
As you can see, Shareholder Protection does not only benefit your family, but it also benefits your company- whether you pass away or if a fellow Shareholder dies or is taken ill. This type of Protection is something that we would recommend to all business owners.