What is Shareholder Protection?

Shareholder Protection, also known as Ownership Protection, provides a cash sum to help business owner(s) buy the life assured’s interest in the business if they pass away, are diagnosed with a terminal illness or optionally, have a specified critical illness.

If a shareholder dies with no shareholder protection in place, their shares in the business are passed to their beneficiaries, usually their family. The family could then ask for payment of the shares, a working involvement within the company or sell their shares to a third party. All of these may cause disruption and possible financial loss to the company. A Shareholder Protection Policy along with an appropriate ‘Cross Option Agreement’ ensures that these problems will not occur.

A Shareholder Protection Policy ensures that:

  • Remaining owners retain total control of the business.
  • It is possible to include Critical Illness cover so that if the life assured suffers a stroke for example, then the life assured can force the remaining shareholders to buy their shares if desired.

“58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner.” [stated in Legal & General Trading on Thin Ice 2011]

 

  • Case Study

    Company Ltd are a small-medium sized firm of Chartered Accountants who have 3 shareholders. The 3 shareholders have a meeting and realise that they don’t have a formal agreement in place to show what would happen if any of them passed away or became critically ill.

    Upon discussion with their adviser, they conclude that if any of them do pass away, they would like to enable the other 2 shareholders to buy up the deceased’s interest. They all also agree that they would like the option to be available for their families to sell their shares should they pass away, as there is no one in the family who has the relevant credentials to take up their position. The company therefore take out a shareholder protection policy on each of the owners, the sum assured for each policy equates to the current value of each life assured’s share. The policies are then written into individual business trusts and the appropriate cross-option agreements are completed.

    3 years later, shareholder A passes away. The claim is agreed by the insurance provider and the sum assured is paid to the business. Shareholders B & C then use the sum assured to buy the shares from shareholder A’s estate/family.

Why is a cross option agreement needed?

It is vital to ensure an appropriate cross option agreement (sometimes called a double option agreement) is in place. This will enable the living owners to buy the shares from the deceased’s family/estate if they wish. It also allows the deceased’s family/executors to force the sale of shares to the remaining owners if they so wish.

In the event of a critical illness claim, the cross option agreement only allows for the life assured to force the remaining shareholders to buy their shares. It does not allow the remaining shareholders to force the life assured to sell his shares as they may plan on returning to work once they have recovered from the critical illness.

Who pays the premiums?

The premiums are paid for by the company, with the policy ideally being written into a Business Trust. This will ensure the proceeds from the claim are made available to the remaining shareholders so they can purchase the life assured’s interest in the business.

The premiums are collected by monthly direct debit. An annual direct debit payment is also usually an option.

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