In the interests of financial security, business stability and continuity, it is essential for private limited companies to provide a safety net following the death of a shareholder.
Shareholder Protection is usually put in place to ensure that, on the death of a shareholder, their shares are available for the other directors to buy and there is sufficient cash available to buy the shares.
This is normally done by:
- Taking out a life insurance policy for each director to the value of their shares.
- Placing these life insurance policies in trust so that any payout is available to the remaining shareholders without any tax implication
- Setting-up a Cross Option Agreement between the shareholders so that if the options are exercised, the holder of the shares must sell them and the other directors must buy them
The risk of not setting up some Shareholder Protection are as follows:
- Shares may go to the deceased’s family, which has no interest in the business and may prefer a cash lump sum
- The company or other shareholders may not have the resources to retain control by buying the deceased’s shares
- The shares may be taken over by someone who does not share the company’s objectives, and they may even be a competitor
I can provide FREE Independent advise you on the best arrangement for your business, and put the necessary policies in place. I can also provide ‘draft’ cross option agreements, again free of charge.