Shareholder Protection: How to protect your business when losing a shareholder
When you’re a shareholder, you’ll want to protect your business against unexpected events to keep it running successfully. Most shareholders will put agreements in place to set out basic rules covering lots of key issues that are important. This can include overall business strategy, management decisions and what will happen in certain situations that arise. Shareholder Protection is often not considered by most companies. This can cause problems further down the line.
One of the most traumatic things can happen to a company, is the unexpected death of a shareholder. When this happens, the shares normally become part of the deceased’s estate. However, often the remaining shareholders will want to buy back the share to keep the business running.
Without shareholder protection
Shareholders may already have an agreement in place as to what might happen to the share in the event of a death of a shareholder. However, this might be subject to restrictions that can delay or cancel the transfer. In addition to this, if the remaining shareholders cannot afford to purchase the shares, then the rights will not be exercised. Furthermore, if the family wish to sell the share and receive financial support, it can result in the share going elsewhere. The share is then, therefore, at risk to be sold to competitors or unwanted parties.
Similarly, if the family cannot sell the share, they might have to go into business with the remaining shareholders. In this instance, members with no business experience or interest in the company can prove difficult.
Protecting your business
Protecting your business against such circumstances such as the unexpected death of a shareholder doesn’t have to be complicated.
With Shareholder Protection, the business, the family and the remaining shareholders can all be protected in the event of a death. This life insurance policy provides a financial fund to enable the shareholders to purchase the deceased’s shares. Each shareholder has their own policy and in the event of a death, the policy will pay out the funds necessary.
Valuing the share
The value of the policy will reflect the value of the share that the shareholder owns. To avoid any dispute in this situation, with Shareholder Protection the price of the share becomes the amount paid out by the policy. This ensures the remaining shareholders can afford to purchase the share as well as the family receiving a fair price.
There are a number of ways that the shareholders can guarantee the sale of a share after the death of an owner. These agreements are put in place rather than obligations to purchase the share.
A cross-option agreement
A cross-option or double option agreement allows both parties to buy and sell the share if they agree. In the case that the family wishes to sell, the remaining shareholders must agree to purchase the share. Similarly, if the shareholders wish to purchase, the family must agree to sell.
A single option agreement
This agreement comes into place when the shareholder wishes to sell in the event of a critical illness. In this case, the shareholders must agree to purchase the share. However, in the case that the shareholders wish to purchase off a critically ill shareholder, the shareholder does not have to sell if they choose not to.
Keeping the business running
Shareholder Protection ensures the continuity of your business in the case that a director or owner passes away or becomes critically ill. It gives both shareholders and the family peace of mind that they will be supported and that the purchasing of the shares can happen quickly and efficiently.
Shareholder Protection can be critical in safeguarding your business and protecting yourself, your employees, your fellow shareholders and your family. To get a free quote, get in touch today.