Shareholder Protection

The premature death of a shareholding director can cause serious financial problems for the deceased’s family. Equally it can also cause serious financial problems for the surviving directors who may have to raise capital to buy out the deceased’s shares in order to retain control of the business. Advance planning will ensure that the business can continue without disruption following such a loss. 

On the death of a shareholding director, their share of the company passes to their estate. The deceased’s dependents may have no real interest or experience in the business. They will probably need cash at such a time and may wish to sell these shares quickly. 

In these circumstances, the remaining shareholders will need sufficient capital to secure ongoing control of the business, without being forced to borrow the required sum to purchase these shares. The advantage of this assurance is that it can provide funds for this purpose at just the right time. This removes any worry that the deceased’s shares may have to be sold to someone outside the business. 

In our opinion, each of the shareholders should take out a term insurance policy on his own life written under trust for the benefit of his colleagues. The current open market value of the shareholding , plus a possible allowance of 20% for future increases in value, should be covered. This cover is normally used to complement a ‘Double’ or ‘Cross Option’ agreement which gives the surviving directors the option to buy the deceased’s shares. The legal personal representatives also have the option to sell the deceased’s share to the surviving owners and either side can bind the other. This arrangement gives flexibility to accommodate changes in the shareholding and is potentially tax efficient, although tax relief is not available.