Shareholder Protection

Creating and running a successful business is hard work, but what would happen if your business suddenly stopped working?

One of the biggest problems that can happen to a business is if one of the shareholders dies, or suffers a serious illness and is no longer able to participate in the company. If they own a significant percentage of the company it may be that either they themselves (if they survive), or their estate (if they don’t) will want their monies’ worth out of the business and this could be difficult for the company in terms of cash flow.

Indeed if they were to retain the shares instead, the remaining shareholders may have to continue to run the company with “outside interference”.

Shareholder Protection insurance is a way of making sure that the financial stability of the company will continue should such a circumstance occur.

How does it work?

The first thing to do is to look at the Memorandum And Articles of Association of the company to see what happens to the shares if one of the Directors dies or becomes too ill to continue in their role.

A value for the business will be calculated and the insurance policy will pay out a lump sum that can then be used by the company to settle any financial value of the shares.

Option Agreements. It is very important to make sure that these are set up correctly as they give different people the right to determine when shares have to be exchanged for the insurance payout. They may include Cross (or Double) Option, Single Option, Buy and Sell Agreements, and Automatic Accrual. At Ashwood Law our advisers will aim to ensure that your business is well protected and can continue in the most difficult of circumstances.

They will also be able to explain the taxation issues that will need to be considered as well as the options of how premiums are calculated and paid for. This can often be a problem area if the ages of the Directors are different or if health problems for individuals are involved.

And remember, the values of businesses change so it is important to make sure that these plans are reviewed on a regular basis

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