A guide to setting up shareholder protection

No business partner wants to think about what they’d do in the event another shareholder became critically ill or died.

But the reality is it can happen.

And with little warning.

In tragic times like that, when you and their family are dealing with personal grief, the last thing you need to be worrying about is the future of your business.

That’s where shareholder protection comes in.

Shareholder protection is a safety net for your company.

It ensures the smooth transaction of remaining shares from one holder to another (or multiple other shareholders).

And it protects the deceased shareholder’s family, ensuring they get fair market value for the remaining shares.

Without shareholder protection, it’s possible the remaining shares could be sold on to a third party (including a competitor).

Also, there’s no guarantee of getting fair market value.

So with shareholder protection being so useful and important, how do you set it up?

Let’s start at the basics.

How does shareholder protection work?

Shareholder protection is essentially an insurance policy that individual partners can take out on their own and pay into.

A policy can also be taken out and paid into on behalf of the business.

The amount insured is calculated based on the capital the remaining shareholders would need to buy the shares of a partner in the event they died.

The cost of the premiums depends on the level of risk associated with a shareholder’s life, such as age and lifestyle factors.

In the event of a death or critical illness, the shareholder policy would pay out, enabling the remaining partners to purchase the outgoing shares and keep control of their company.

Why would I take out shareholder protection?

There’s a number of benefits to you, your partners, and your families to taking out a shareholder protection policy.

First, if a shareholder dies and you don’t have shareholder protection, it’s possible their shares could be gifted or inherited by a third party who could damage your business.

Maybe they don’t have the business experience but decide to get involved in your company.

Or they sell the shares to someone else, who doesn’t have the best interest of your business in mind.

Second.

Shareholder protection provides peace of mind. This is the biggest benefit.

If a business partner dies without a protection policy, it leaves you and your remaining partners trying to secure the capital to buy their shares.

You might have it in your business’ savings, but there’s no guarantee.

Plus, what impact would removing that much capital from your company have on it’s long term viability?

Third.

It keeps business disruption to a minimum.

With shareholder protection, you can ensure a smooth transaction of shares to you and your other partners so you can continue running the business.

Fourth.

Shareholder protection provides assurance to your business partners’ families and clarifies how much they would receive in the event of a death.

Not the most important thing at such a difficult time, but the reassurance can help.

You can speak to one of our advisors today about setting up shareholder protection and getting a better idea how a policy could protect your business and family.

How can I set up shareholder protection?

The first thing you’ll need to know is the level of cover you need to take out in the shareholder protection policy.

To be accurate, it’s best you work this out between you, your other shareholders and your accountant.

But as a quick guide, there are a few things you’ll need to consider:

• Maintainable profit figures (based on trends of past and current performance) multiplied by an earnings ratio

• The size of the shareholding

• Whether you’d calculate a policy based on dividend yield

• Potentially the net assets on a company’s sheets

When talking to a protection provider, you’ll need some basic personal and lifestyle information about each shareholder.

This will be used to assess any risks and calculate the cost of premiums.

It goes without saying.

Make sure you’re completely honest and accurate with this information (including existing health issues) as this could impact any claims.

To business owners, we would strongly recommend that you engage with an independent financial adviser, such as those here at Anan Insurance Broker Company Limited, who can research the whole of the market place to ensure you have the appropriate policy that works for you.

Some providers will be more open to “risky” policies.

Get in touch with one of our advisors for some free information and to see how we can help you set up shareholder protection for you and your business

What information do I need and what are the rules about shareholder protection?

We’ve already covered this a bit, but it’s critically important.

Make sure you’re completely honest about the lifestyle, health factors and any information relating to yourself or any shareholder on the policy.

Even the slightest inaccuracy could cause problems down the road.

You can talk through specific information with your policy provider, but some information you’ll need is:

• Age

• Lifestyle factors

• Any pre-existing medical issues

You should also be sure to inform your policy provider if any of this information changes as it will impact the premium costs.

What are the financial rules around shareholder protection?

There are some key rules and regulations that you, your fellow shareholders and your company must follow if you set up shareholder protection.

For instance, an individual policy must be paid through taxed income (it can’t be used as a tax deduction method).

A business policy can be classed as a business expense.

Benefits and costs of a business policy must be split equally between shareholders - regardless of if they are a minority shareholder.

To be sure that remaining shareholders will use the proceeds of a shareholder protection policy to buy the remaining shares (and that their family will sell) you should set up a shareholder agreement.

Or, you can write this into your articles of association if setting up a policy at the same time as your company.

What types of shareholder protection can we take out?

There are three main types of shareholder protection you can take out:

• Own life plans

• Life of another plans

• Company-owned plans

Own life under business trust

Under this plan, each shareholder takes out their own policy for the value of their shares, and places it into a business trust.

In the event that they die or become critically ill and can’t continue in the business, the value of the policy is paid out to the remaining shareholders so they can purchase the outgoing shares.

Life of another

In this case, the individual policyholder would pay the premiums of the plan, but the benefits of the policy would be assigned to the other shareholders - rather than their family.

Any payment would then automatically go to the shareholders or business.

Company owned plan

It’s possible to take out a policy on behalf of the business, in which the business owns and pays into the policy, with the proceeds going to the business in the event of a death or illness.

Take to us today about shareholder protection

Hopefully now you have a better idea of how shareholder protection works and how you can set it up to protect your business.

Get in touch with us today and we’ll be happy to talk about a policy specific to you and your circumstances.

Get in touch today.