Shareholders have an important role to play in the management and direction of an organisation. However, what happens when one of those key decision-makers suddenly passes away or becomes diagnosed with a serious illness?
It’s important to have a contingency plan in place that outlines the exit strategy of shareholders.
For this reason, many investors opt for shareholder protection insurance, a policy that can help safeguard the livelihood and success of your business. It’s a way to retain control over the organisation and raise funds in a short-term emergency scenario.
If you feel like this could be of use to your business, we’ve created a shareholder protection guide to help explain the process in greater detail.
What is shareholder protection insurance?
Shareholder protection insurance is a form of cover that allows business owners to access capital and buy out the outgoing partner’s equity at a short notice.
It involves creating a pre-established agreement, which typically outlines how shares will be transferred to surviving shareholders for a fair price.
Essentially, this insurance acts as a contingency plan in the event that a shareholder dies or becomes seriously ill.
Instead of risking the loss of control, existing shareholders have the opportunity to safeguard the organisation from unwanted outsiders or competitors.
How does shareholder protection insurance work?
If a shareholder passes away or becomes seriously ill, their shares will become available. More often than not, the remaining shareholders would then usually like to purchase these assets to retain control of the business.
However, shareholders tend to encounter two main issues:
- Waiting for probate
- Raising the necessary funds to purchase the shares
To overcome this issue, many organisations opt for a shareholder protection cross option agreement.
To help mitigate any feelings of disruption or uncertainty, the insurance policy establishes a clear succession plan, previously agreed upon and signed off on by key shareholders.
Part of the agreement involves selling shares to existing shareholders for a fair price.
Another way shareholder protection insurance works is by providing the surviving shareholders with enough funds to buy back the equity.
Typically, the amount insured in the shareholder protection policy reflects the amount of capital existing shareholders would need to purchase the remaining equity.
Insurance providers should also pay out a lump sum to beneficiaries if the insured individual passes away or is diagnosed with a terminal illness throughout the duration of the policy.
What are the benefits of shareholder protection insurance?
The benefits of shareholder protection insurance are widespread:
- Fosters a smooth transition during a turbulent time.
- Maintains the company’s vision and spirit alive.
- Avoids unwanted parties inheriting a share of the business.
- Reduces the risk of competitors buying shares.
- Helps small firms with limited funds raise capital at short notice.
- Protects businesses from using their savings to acquire outgoing shares.
- Reduces waiting times whilst facilitating productivity and business continuity.
- Acts as a guarantee to the beneficiaries of the insured individual, as they know exactly how much they will receive after a buyout.
Who are the best shareholder protection providers?
The best shareholder protection providers are those that can adapt to your unique needs and requirements.
Before you start looking for a provider, it's a good idea to write down your search criteria and understand what kind of shareholder protection insurance you are seeking.
For example, some providers can combine shareholder protection insurance with other financial protection policies, like key person insurance, life insurance, income protection and relevant life policies.
There are several ways to seek out the best shareholder protection cover providers. More specifically, you could approach insurers directly, go through a broker, look at comparison websites, or seek out guidance from a professional or financial adviser.
The best shareholder protection providers tend to be those who are specialised in their field and work exclusively with life insurance products and financial services.
Each provider should offer a unique insurance product and use varying methods to generate a quote, so make sure you do your research before settling with a provider.
How much does shareholder protection cost?
Shareholder protection insurance costs vary across several different risk factors. The price of premiums to insure a healthy 30-year-old will be significantly lower than the cost of insuring a smoker in their late 60s.
Firstly, prices will vary according to the level of coverage you choose to purchase.
Then, depending on the risk profile of the person insured, your provider will raise or lower the price of your premiums. Potential risk factors include:
- Their age.
- Their physical fitness.
- Their family history, including hereditary illnesses.
- Whether they have underlying health conditions.
- Whether they are smokers or consume alcohol heavily.
Insurance providers will offer a wide range of rates, so it’s vital to compare and contrast policy offers to find one that fits your unique needs.
What is minority shareholder protection?
Minority shareholder protection involves all the same principles as majority shareholder protection, as there is no bespoke product that caters to the legal protection of minority shareholders.
The reallocation of minority shares could similarly affect the value of a business and, therefore, this insurance policy caters equally for all forms of ownership.
Shareholder protection can provide assistance to surviving investors if a shareholder of any size, minority or majority, were to pass away or suffer a severe illness.
The most successful businesses are built from the ground up, after many years of hard work and dedication. For this reason, it’s vital that you do everything in your power to safeguard the livelihood and essence of your organisation. This includes preparing for the worst possible scenarios.
When a shareholder passes away unexpectedly, the beneficiaries may have no interest in forming part of the business.
Rather than letting your shares go to the highest bidder, a shareholder protection insurance policy ensures the predetermined exit strategy occurs as planned and provides surviving investors with the necessary funds to purchase equity on a short-term basis.
If you still need guidance regarding shareholder protection insurance, Efficient Portfolio works with a wealth of professionals who will be able to guide you further. Contact us today.