Shareholder protection – Keeping a business running when a shareholder is lost

Every business will face challenges, but a shareholder dying or becoming critically ill is often overlooked.

Most business owners will arrange a shareholder agreement, setting out the busines strategy, management and how the company is run. Shareholder protection can often be overlooked though.

So, what’s the issue?

When a shareholder dies, their business interest is normally passed onto their estate in line with their will. This can cause many issues with family members suddenly becoming shareholders in a company they may have no interest in.

  • The spouse or family member of the deceased may decide to keep the shares and become involved in the business. This could be an unwelcome outcome for the remaining shareholders.
  • The remaining shareholder(s) could purchase the deceased’s shares, but only if their estate is willing to sell and if the business has the spare cash to purchase these. 
  • Depending on the company articles of association, the shares could also be sold to an external third party, even if this was against the wishes of the other shareholders.

Shareholder protection can remove these headaches. Shareholder protection could help everyone to reach their preferred outcome – the business retains control and the family receive a cash lump sum.


How does it work?

First, the company will need to be valued and the company accountant is the best person to do this. Once a valuation has been agreed, each shareholder is insured for their value. There are three methods of arranging this insurance with the two most common being:

Own life – Each shareholder takes out life insurance for the value of their share, on themselves. This is then written under a business trust to the other shareholders.

Life of another – Each shareholder is insured, with the other shareholder(s) being the policy owners. This is a popular option for companies with two or three shareholders. For example, x3 shareholders named Mr A, Mrs B and Miss C:

Mr A & Mrs B own a policy on Miss C.

Miss C and Mrs B own a policy on Mr A

Mr A and Miss C own and policy on Mrs B

If one shareholder dies, the policy pays out so the remaining shareholder will have a cash lump sum.

We’re not done yet…

At this point, the remaining shareholders will have a cash lump sum, but the deceased’s spouse or family member holds shares in the company. As above, this can cause issues depending on what they decide to do.

Cross-Option Agreement

Probably the most important part – this is a legal document that gives the surviving shareholders the option to buy the shares from the deceased’s’ spouse or family member. It also gives the deceased’s spouse/family member the option to sell the shares.

Still not done… Premium Equalisation

If the policies are taken out and paid for by each shareholder, premium equalisation should be used. Imagine a company with two shareholders, one aged 65 and the other aged 35. The 65-year-olds policy will be far more expensive, but the 35-year-old is far more likely to benefit given the ages of the shareholders. This could have implications for inheritance tax on death too.

By using premium equalisation, everyone pays a fair amount. This would normally be arranged and agreed through your financial adviser & accountant.

Take a look at Aegon’s Premium Equalisation Calculator to learn more.

Adding Critical Illness Cover

Adding CIC would provide a lump sum pay-out for a shareholder who suffers a critical illness, such as cancer. A seriously ill shareholder may not be able to contribute to the business and may want to retire.

Adding CIC comes with its own complications, but it’s worth considering.

How to get it right…

  • Speak to an expert (us!)
  • Request a valuation from your accountant
  • There is no fee for our advice when it comes to insurance
  • We are independent, meaning we search the market for the most competitive rates
  • We are experts in business insurance and we’re business owners ourselves
  • Don’t take our word for it, look our VouchedFor page to read what our wonderful clients say

Looking to protect your family rather than shareholders? Check out our blog on Relevant Life Policies

*This blog is for information purposes only and should not be relied upon for advice. Always seek regulated advice before proceeding*

About the author
Picture of Oliver McDonald
Oliver McDonald
Oliver is the managing director and independent financial adviser at Engage Wealth Management.
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