Shareholder/Partner Protection
What is Shareholder Protection?
It is a form of insurance which protects the company and company shareholders against critical illness or death of an owner or shareholder, share protection can provide a lump sum to the remaining business owners. This means that in the event of a valid claim being made during the length of the policy, the lump sum could be used to help purchase the deceased interest in the business.
If a business owner or shareholder dies with no share protection in place his or her share in the business may be passed to their family. Surviving business owners could lose control of a proportion, or in some circumstances, all of the business. The family may choose to become involved in the ongoing running of the business or could even sell their share to a competitor. A share protection policy can help avoid these issues.
The shareholder protection insurance provides financial support to the remaining shareholders of the company. It gives them the necessary funds to buy the deceased shares. This protects the company from falling into the hands of a reckless party and it can ensure that the critically ill or deceased shareholders dependents are able to sell the shares quickly and gain access to funds.
Who is a Shareholder?
Successful businesses often have shareholders who may or may not be actively involved in the running of the business. If this is the case the company is split financially between these shareholders.
Having shareholder protection is a way of making sure your investment is safe. Each shareholder can have an insurance policy which will cover their individual shares in the company hence protecting their family along with their interest in the business.
Shareholder Protection FAQ’S
Below are some of the most frequently asked questions asked about Shareholder Protection insurance.
What is Shareholder Protection?
Shareholder Protection is an insurance policy taken out by a company or businesses shareholder on their life, for the amount their shares in the business are worth. These policies tend to be taken out by all shareholders within the company, with an agreement that the money from the policy pay-out is used to buy their shares from their loved ones. Protecting both the company and the shareholders loved ones.
Who can take out a Shareholder Protection Policy?
The policy can be taken out by any majority shareholder in a company on their ‘own life’ with a sum equivalent to the value of their shares. The policy can then be written into trust for the benefit of their co-shareholders. The shareholders may then enter into an agreement that this sum is used to buy the shares from their loved ones.
How is Shareholder Protection different from Key Man Insurance?
A Key Man insurance Policy can be taken out on any staff member who is considered ‘key’ to the businesses profitability and value. This person may not necessarily be a director, partner or shareholder. In contrast a Shareholder Protection Policy is put in place to protect those who own a percentage of the business, whether they are a majority shareholder or are a business partner.
How is Shareholder Protection the same as Partnership Protection?
These policies are very similar, however within partnership protection because there are no shares there is no transaction. The sum assured instead of being used to buy out the deceased’s shares in the company, it is instead used to gain full interest in the partnership.
Do you need to have a Shareholder Agreement?
Shareholder agreements are at your companies’ discretion, and are not part of a Shareholder Protection Solution. However when you are taking out a shareholder protection policy it can be beneficial to check your Shareholder agreement to ensure it can facilitate a cross-option agreement.
Why protect the shares of a director?
When the business has multiple owners, putting Shareholder Protection in place, provides the business with the financial means to buy the shareholding back from the deceased shareholders estate. Should one of the owners die unexpectedly or become critically ill. Protecting the business from having to work with a third party who does not understand the business, potentially can’t contribute to the business, or may not want to be involved in the business. Ultimately, the business control remains with the remaining shareholders and the family gets financially compensated for the shareholding.
What is a cross option agreement?
A cross option agreement is fairly simple, each Shareholder within a business agrees that the other shareholders have the option to buy their shares, should something happen to them and at market value, from their representative or loved one. This will need to be written or checked by your legal team.
To take out a piolicy, do you have to have a cross option agreement?
No a cross option agreement isn’t fundamentally necessary when taking out shareholder protection; this is at the shareholders discretion.