Shareholder Protection

Mar 2, 2023

Running a business can be stressful, but also extremely rewarding, especially 

Have you ever considered what might happen if your business partner or a shareholder were to become critically ill or pass away? What would happen to their shares of the company? As a business owner, you would want to know that 

What is it?

Shareholder Protection Insurance is a type of business life cover that enables your firm to continue to operate if a shareholder passes away. With this cover, the business would be paid a sum of money for you to buy out the personal representative of your shareholder, allowing you to remain in control of the business and ensuring the shareholders family receives a payout for their shares.

Why is it important?

In the unfortunate event that a shareholder dies or becomes incapacitated, then their shares will go to a personal representative or whoever inherits them under their Will or intestacy (if they have one in place). This runs the risk of their beneficiary becoming a shareholder, which may cause disruptions within the business if they were inexperienced or were to sell the shares to a competitor.

Who should have it?

Any business owner who has shareholders or partners in their company needs Shareholder Protection Insurance, regardless of the company’s size. An important thing to consider is, would you be able to afford to buy their shares without an insurance payout? Having this insurance in place relieves a lot of pressure knowing this is covered, allowing you to focus on other pressing matters within the business.

What’s the process?

When setting up Shareholder Protection Insurance, there is an option for each shareholder to get their own individual cover (this is called an ‘own life’ policy). This means they will be insured for a sum equal to the value of their company shares. This can also be placed into trust for the benefit of their co-shareholders, if they wish to do so.

Depending on the nature of the arrangement, you may need to get the shareholding clients to enter an explicit agreement that if one of them dies, the remaining shareholders are able to buy their shares from their personal representatives. This is called a cross option agreement. 

by | Mar 2, 2023

The information contained was correct at the time of publication but is subject to change

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