Shareholder Protection

The loss of a business owner may destabilise a business, resulting in financial difficulties. Unless arrangements are put in place, a deceased director’s shares and ownership could pass to someone with no interest in the company resulting in the company’s day to day operations being adversely affected.

A shareholder protection plan arranged on the life of the shareholders will ensure that should a shareholding director pass away or suffer with a critical illness resulting in them having to leave the company, that become funds available and in the correct hands to enable the surviving shareholding directors to purchase the shares and maintain control of the company from the estate of the deceased or incapacitated shareholder.

Reasons to arrange Shareholder Protection

Should a business partner pass away or suffer with an illness meaning they can no longer continue working for the company, their shares and ownership will be inherited by their estate. When inheriting a business and becoming a member of the board the family member may :

• Takeover  the deceased or incapacitated directors position within the company
• The family member may seek to sell their stake to a 3^rd party

Both of these scenarios have the potential to cause upset. Should the family member who inherited the shares wish to become a director, conflicts may arise with the surviving directors working with an unwelcome partner. Should the family member wish to sell the shares, the company must have funds ready and available in reserve to purchase from the estate to maintain control of the company. Should the company not have the funds to purchase the shares from the estate, the estate may seek a 3^rd party buyer, once again creating the potential of conflict and also a takeover.   

How a Shareholder Protection Plan works

By making Shareholder Protection provisions to protect the business ownership against the death or loss of a shareholding director, you will be ensuring that the remaining partners have the financial backing and safety net to maintain control of the business. Each shareholder should arrange a Life or Life with Critical illness shareholder protection plan, placed into trust for the remaining partners.

Cross Option Agreement

A cross option agreement will accompany a shareholder protection policy and ensures that upon death of a shareholding director, the surviving shareholding directors can avoid the shares passing onto someone without interest or the best intensions for the company.

On the death of a shareholding director, businesses will usually turn to the Articles of Association which stipulates what would happen to the shares. The Cross Option Agreement effectively provides the estate with a willing buyer, who will have funds available following the valid claim and enables the remaining shareholding directors to maintain control over the business by easily transferring the shares.

The Cross option agreements also incorporate two options.

A ‘Put’ option which enables an shareholding director diagnosed with a critical illness to sell their shares to the other owners.

A ‘Call’ option which enables the surviving owners to buy the share of an owner who has been diagnosed with a critical illness and is unable to continue their employment due to ill health eg loss of mental capacity.

At this point and the option should be selected based on the company’s articles of association which should clearly state the rules behind such circumstance.