What is Shareholder Protection?

A shareholder protection policy can enable a cash sum to be paid to the surviving shareholders, which can be used to purchase the deceased owner’s shares. The memorandum of Articles of Association for the business will dictate what happens to an owners shares if they pass away. However, we often see that the shares would pass to the deceased owner’s family/ estate. A Shareholder Protection Policy should be coupled with an appropriate signed agreement.

A Shareholder Protection Policy ensures that:

  • Remaining owners retain total control of the business
  • It is possible to include Critical Illness cover so that if the life assured suffers a stroke for example, then the life assured can force the remaining shareholders to buy their shares if desired

“47% have left no instructions in their will or special
arrangements regarding shares in their business.” [Legal and General Business Protection State of the Nation’s SMEs report 2019]

  • Case Study

    Company Ltd are a small-medium sized firm of Chartered Accountants who have 3 shareholders. The 3 shareholders have a meeting and realise that they don’t have a formal agreement in place to show what would happen if any of them passed away or became critically ill.

    Upon discussion with their adviser, they conclude that if any of them do pass away, they would like to enable the other 2 shareholders to buy up the deceased’s interest. They all also agree that they would like the option to be available for their families to sell their shares should they pass away, as there is no one in the family who has the relevant credentials to take up their position. The company therefore take out a shareholder protection policy on each of the owners, the sum assured for each policy equates to the current value of each life assured’s share. The policies are then written into individual business trusts and the appropriate cross-option agreements are completed.

    3 years later, shareholder A passes away. The claim is agreed by the insurance provider and the sum assured is paid to the business. Shareholders B & C then use the sum assured to buy the shares from shareholder A’s estate/family.

Why is a cross option agreement needed?

It is vital to ensure an appropriate cross option agreement (sometimes called a double option agreement) is in place. This will enable the living owners to buy the shares from the deceased’s family/estate if they wish. It also allows the deceased’s family/executors to force the sale of shares to the remaining owners if they so wish.

In the event of a critical illness claim, a single option agreement only allows for the life assured to force the remaining shareholders to buy their shares. It does not allow the remaining shareholders to force the life assured to sell his shares as they may plan on returning to work once they have recovered from the critical illness.

Please note that neither Future Proof or St. James Place are able to facilitate or advise on Single/ Cross Option Agreements. You should obtain the assistance of your Accountant or a Solicitor.

Who pays the premiums?

Payment of the premiums will depend on the nature and terms of the arrangement. We can provide further information around this once we understand more about the structure and requirements of the business.

The premiums are collected by monthly direct debit. An annual direct debit payment is also usually an option.

*Trusts are not regulated by the Financial Conduct Authority

Why not call us now for expert advice?

Call 0800 644 4468Mobiles call01737 336 990