In a nutshell, Shareholder Protection is an insurance policy which protects the organisation and its shareholders against the death or critical illness of a shareholder or proprietor.

If a shareholder or company owner falls critically ill or dies, shareholder protection protects the other shareholders by providing a lump sum, which can be used to purchase the shares from the ill shareholder or the deceased shareholders estate, therefore ensuring the smooth running of the business.

Without the correctly structured and written protection in place, the consequences could be quite significant.  The shares could pass to a beneficiary who has had nothing to do with the running of the business and all of a sudden the remaining shareholders may have minority control.

Shareholder protection can also provide for the family members of the deceased/critically ill shareholder – the lump sum is designed to purchase the shares from the family members who will then have access to much needed funds.

There are 3 main ways that these Shareholder Protection plans can be written:

• Own Life plans using business trusts.
• Life of another plans owned by the shareholders
• Company owned plans to buy back shares

That all sounds straight forward, but there are some key elements to ensuring the policies are written correctly (which we will, of course, help you with). For example, calculating the value of the company can be challenging and can be based on a multiple of profits, dividend yield or net assets – we’ll help you through it!

And then there’s the cross option agreement, also known as a double option agreement….It gives the surviving shareholders the option to buy the shares from personal representatives.  If either side wants to exercise their option, the other party must comply (options can only be exercised after death and there will be a specific option period).