Shareholder protection

Could you retain control of your business?

When you run a business typically your main focus is directed towards the day-to-day operations and trading position, but have you ever considered the impact of a shareholder dieing or becoming seriously ill?

Shareholder or Partnership Protection is available to people who are in business with others in a limited company or a partnership. It allows for sufficient funds to become available in the event of the death or serious illness of a shareholder. This will ensure that the company can continue to operate unhindered while the ongoing shareholder or their family receive fair compensation for their share of the business. It also enables you to retain control and ownership of your business.

It is essential to provide a safety net following the loss of a shareholder, for the continued financial security, business stability, and continuity, particularly for private limited companies where there may only be a small number of principal shareholders.

If overlooked and without prior planning for such an event, shares could end up going to the deceased’s family, which has no interest in the business and would prefer a cash sum. The company or other shareholders will usually want to retain control by buying lost shares, but may not have the resources to do so. In addition, the shares may be taken over by someone who does not share the company’s objectives and may even be a competitor.

Did you know?

You can:

• make provision for a cost-effective form of life assurance cover.
• provide cover for a defined term.
  
• pay out a predetermined lump sum in the event of death during the term of cover.
• include critical illness cover.
  
• implement a business trust and
  cross-option agreement.

Shareholder Protection sets out the procedures and policies to help ensure that you retain control, and have the necessary funds to do so. This means that you can arrange for the most appropriate transfer of shares to the surviving shareholders, or the company, at a fair commercial price.

Insurance policies set up solely for this purpose will ensure the funds are available to purchase the shares and that funds set aside for other purposes will not have to be used.

The key benefit to the business is that it prevents the sale of shares to hostile parties, or competitors, and documentation enables all transactions are made tax-efficiently.

The dependants of the critically ill or deceased shareholder also remain financially secure and the business stability and continuity is maintained. This has the positive effect that there is a retained confidence for both employees and customers.

Protection should be arranged under an appropriate trust from inception and in conjunction with an appropriate partnership agreement.

Buy and Sell Agreement - the advantage of this is that the partners or directors know exactly what will happen, but there are distinct inheritance tax disadvantages as generally Business Property Relief is not available.

Cross Option Agreement - this gives the surviving partners or directors an option to buy the deceased’s share within a specified period, usually six months. The disadvantage of this is that it is based on options rather than obligations. The advantage is that it does not prejudice the availability of Business Property Relief.

The partners or directors have an obligation to effect and maintain life policies on their own lives. A regular review is therefore necessary, and costs can be apportioned between partners or directors.

A variety of plans are available to protect the profits of the business, loans and investments.