Shareholder Protection – Why you need it and why existing arrangements should be reviewed

Many companies and businesses do not have sufficient protection policies in place to cope with the death or serious ill health of a director or shareholder. Shareholder protection involves life cover on the shareholders and business owners to the value of their stake in the business.  It requires a cross option agreement. This means if a shareholder dies, the policy will provide the funds for the other shareholders to buy the deceased’s shareholding from their estate.

This simple agreement will allow the business to continue, with the ownership of the company in the right hands. 

Keep control of your business

If one of your shareholders dies or is suffering from a severe illness, their shares will usually pass to their beneficiaries. To regain full control of the business, the surviving shareholders will need to buy the shares back. But they might not have the available capital to do this.

What is a shareholder/
partnership?

Shareholder and Partner Protection provides a business with a cash lump sum if a business owner dies or suffers a severe illness. This lump sum provides the capital to enable the surviving business owners to purchase the deceased’s or incapacitated individual’s share of the business; allowing them to keep control of their business.

Who is Shareholder and Partner Protection designed for?

Where all the owners of the business are members of the same family then there is usually no problem with succession when one of the owners dies or becomes incapacitated. However, in businesses run by unconnected parties (or families where succession is not assured), the death or incapacity of an owner is likely to cause serious disruption to the business and problems for both the business and family of the owner concerned. This can apply equally to partnerships, LLP’s or limited companies.

Why is Shareholder and Partner Protection needed?

If a business owner dies or suffers a severe illness, their share of the business will usually pass to their beneficiaries. To regain full control of the business, the surviving business owners will need to buy the deceased’s or incapacitated individual’s share of the business. Many businesses will not have the available capital to do this and so Shareholder and Partner protection provides the framework where the right money is left in the right hands, at the right time.

Common Pitfalls and the Need to Review

We encourage all companies to review their shareholder protection arrangements. There are a number of reasons for doing so;

In our experience 8 out of 10 businesses do not have a scheme, or one that is fit for purpose.
Often arrangements are put in place and not reviewed.
Shareholders come and go, and percentage holdings change as well as business values
Shareholder agreements conflict with the company Articles of Association
Inappropriate levels of cover are used, and for the incorrect terms
Trusts are not always set up correctly
Cross option agreements are not put in place

The arrangements should provide the required amount of money, at the right time, and in the right hands.

Even if the arrangements in place are ‘fit for purpose’, in recent years the premiums for life cover have reduced and therefore equivalent cover can often be provided at a lower cost.

What Next?

If your business needs a financial review or to discuss shareholder protection to speak with one of our Independent financial advisers, please contact our office

or email [email protected]

IEP Financial is authorised and regulated by The Financial Conduct Authority (FCA)