Shareholder Protection

Not to be confused with Key Person Assurance this is not a plan put in place to replace lost profits or indeed to finance the recruitment of a replacement for the key member of staff.

This is a process which protects the continuity and ownership of the business in the event of the death or serious illness of one of the shareholders within the business.

Think about it this way, if there are three equal shareholders within a business and one was to die or to be diagnosed with a serious illness which would stop them returning or continuing to perform their current role what would you want to happen to their shareholding?

The risk of acquiring chronic longstanding sickness;

16-44 years old - 1 in 10
45-59 years old - 1 in 5

The risk of acquiring any longstanding sickness;

16-44 years old - 1 in 5
45-64 years old - 1 in 2.5*

Most directors in this position might want to sell their shares for their real value in order to provide for their family or to provide cash to allow alterations to lifestyle or supplement income.

This is all well and good, but let’s think about where that cash would come from?

• Would you borrow it from the bank?
• Maybe the remaining directors would be happy to finance the purchase from their own pocket?
• Maybe the deceased’s family will sell to the highest bidder, who may not be either of the other two directors?
• Maybe the family would like to continue to receive their dividends as an income stream whilst playing little or no part in the running of the business?

At a time when the business has just lost a shareholder who contributed a significant amount to the running of the business would it not seem more attractive to be able to offer a quick sale of shares to the family or director concerned without having to pay costly interest rates or indeed try to find cash by alternative means when the business may be perceived as being disrupted and maybe even a weaker proposition that it was before.
Shareholder protection delivers the cash needed, in this example, directly to the other two directors in order for them to buy the outstanding shares.

All of this can be done without the need for a Grant of Probate or costly Inheritance Tax payments.

To discuss this and other associated issues please contact our office where one of our corporate consultants will be more than happy to discuss your situation with you.

*Source: ONS 2009 (2007 data)