Why shareholder protection is necessary for all business owners

Sunday 5 December, 2021

Setting up shareholder protection benefits both companies and individual business owners.  Read more to understand why it’s important for your business. 

Why companies should set up shareholder protection 

How would your business continue if you lost a senior shareholder or business owner through death or critical illness?  Setting up shareholder protection benefits your company.  If your shareholder is critical to managing the business or provides equity to finance the business, it’s important you consider purchasing shareholder protection

If you don’t have a shareholder protection plan in place, in the event of a shareholder’s death their equity will pass to their estate so your business could become partly owned by someone who is not interested in the future of your business.

If you are a shareholder protect your family by taking out shareholder protection

As a business owner if you were to die or be seriously injured so you couldn’t work you would want your beneficiaries to receive the market price for your shareholding.  With shareholder protection in place the beneficiaries of any shares can sell them to the company’s remaining owners, as the continuing owners will have the money available to make the purchase, which ensures the deceased family receive fair value for their shares.  

If your company doesn’t have shareholder protection, please contact us now.  We offer an initial consultation to review your requirements, before offering your business financial planning advice.  For more information call Richard Porter in St Albans Hertfordshire on 01727 845500.

Shareholder protection provides security for your business

Given the chance most surviving owners of a business would want the opportunity to keep control of their business and buy back the deceased owner’s shares, but unless you put shareholder protection in place you might not have the necessary finances available at the time, so selling shares to the continuing owners may not be possible and the owners will be forced to sell shares to an outsider.  

Shareholder protection will provide the necessary funds to buy back the shares from a third party, so the surviving shareholders can purchase the deceased shareholder’s business share from the deceased owner’s estate.  A business can also add critical illness cover so shareholders who are diagnosed with a critical illness can choose to sell their shares back to the company if they become ill and can’t work.

Setting up shareholder protection benefits the deceased’s family

At a difficult time for the beneficiaries, shareholder protection allows you to sell shares quickly, and not have the stress of finding a buyer for your inherited stake.  If there is no shareholder protection and the surviving owners are forced to sell shares to an outsider, you might not receive the best price available for the shares, or worse still there may be no available buyers.  As beneficiaries of a shareholding, you would then become involved in the management of the company.

What shareholder protection should you put in place?

There are several business protection options available to your shareholders.  A shareholder protection plan creates a contractual framework to support business continuity and succession planning.  We normally recommend you set up a share protection plan through Life Insurance with or without critical illness cover policies placed in trust. Each shareholder takes out life cover proportionate to their shareholding size and the value of the company.  You should also consider setting up a written agreement between the shareholders of the business, so you are all aware of the company’s business continuity plans.

How to set up shareholder protection

For shareholder protection to work effectively, each owner or shareholder must set up and maintain a Life Insurance or Life Insurance with critical illness Cover policy which is written in trust with all the other business owners.  One agreement will be set up to cover all owners and a cross option agreement is set up which underlies the share purchase arrangement.  It is recommended this is set up as a trust document.

How does the agreement work?

Richard Porter, Independent Financial Adviser, St Albans, Hertfordshire said:

 ‘The Articles of Association, Partnership or LLP agreement set up by the business owners and/or shareholders will provide information on what happens to their business share on the death of an owner or shareholder.  The agreement will state that upon the death of an owner the surviving shareholders can prevent the shares being passed to someone with no interest in the business, or to another business that might want to make a hostile takeover bid.  Setting up a shareholder protection agreement provides cash to the existing shareholders so they can purchase back their shares if required.  This is positive for the beneficiaries as they are selling to a willing buyer and should receive the market price for their shares.  This will help them if they have outstanding debts to settle, such as inheritance tax.  As independent financial advisers Lonsdale Services is well placed to offer independent business financial planning advice.  We have considerable expertise in setting up shareholder protection policies for a range of corporate clients.  If your business needs independent shareholder protection advice, please email rporter@lonsdaleservices.co.uk, or call our financial planning team on 01727 845500.’

For more information read:

Mark White – Why get independent financial advice?

How our financial advisers work effectively with local solicitors and accountants

Lonsdale Services win professional adviser award

Please note: Tax planning is not regulated by the Financial Conduct Authority

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