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What are the benefits of Shareholder Protection?
The sudden loss of a key shareholder can disrupt a company. Shareholder protection can help to mitigate some of the disruptions to the business. Typically, the cover consists of life insurance; however, it may also include critical illness cover.
This type of cover is designed to pay a lump sum in the event of serious illness or death of a shareholder. The lump sum would usually be payable to the remaining shareholder(s) to provide them with the funds required to purchase the company shares from the ill party or their estate/beneficiaries.
Shareholder agreements often include provisions for the remaining directors to buy the shares of any deceased shareholding directors. Nevertheless, there is a possibility that the remaining directors might not have enough funds readily available when a fellow shareholding director passes away unexpectedly.
If a business owner or partner dies:
- What value does the business place on their shares?
- How would their loss impact the business?
- Can the business afford to purchase the shares?
- Do the owners possess sufficient personal wealth to buy the shares?
This insurance coverage ensures business continuity without the need to raise funds from the business or its owners.
To arrange this coverage, all parties involved must understand and agree. Precise calculations are essential to determine the right amount of coverage. However, it provides reassurance to all business directors. In the event of their own or a colleague’s passing, it ensures that the remaining directors will have the necessary support to fulfil the terms of their shareholder’s agreement and continue the business seamlessly.
How is shareholder protection structured?
When recommending shareholder protection, two key elements come into play:
- The life insurance policy that pays out a sum assured in the event of a shareholder’s death or critical illness.
- A legal agreement that outlines the rights and obligations of the remaining shareholders in purchasing the shares of the deceased shareholder.
The Legal Agreement
Underpinning this solution is a share purchase agreement, the legal document detailing how the shares of the business can be bought and sold in the event of the death of a shareholder.
There are several methods of structuring the share purchase agreement, so it is important for us to confirm with the business owners whether an existing agreement is in place. For example, this can include the following:
- Automatic Accrual
- Cross-Option Agreement
- Buy and Sell Agreement
- Corporate Share Purchase (Company Buy-Back)
We strongly recommend that you seek legal advice.
The Financial Conduct Authority does not regulate legal services.
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Key Person Cover
Key person cover is life insurance taken out by a business on the life of a crucial person. It can include critical illness for cancer, heart attack and stroke, as well as many other conditions, depending on the insurer.
Relevant Life Cover
Relevant life plans will allow you to provide your employees (including directors) with a tax-efficient and cost-efficient death in service benefit, without the need for a pension scheme.
Group life insurance is an employee benefit provided by an employee’s company, which pays out a lump sum to beneficiaries, in the event of their passing.