Shareholder Protection: What happens if my business partner passes away?
Updated: Jul 14
Shareholder protection is a vital form of contingency planning. The death of a Shareholding Company Director can have serious implications for the business and for the families involved. This event can cause immediate financial hardship for all concerned, whilst jeopardising the future of the business & its shareholders.
On death of a business partner, typically their next of kin would inherit the deceased shares. This may be a husband, wife, partner or children. We outline the importance of shareholder protection, and the different ways to go about it.
Take a simple example – on death of a Shareholding Director the shares in the business passes to his/her spouse, and at this point a number of problems arise:
The deceased Shareholding Directors spouse may not be able to sell the shares in the business in order to realise their value, which can put them in a precarious financial position.
In the event of not being able to raise the required capital to buy the spouse’s shareholding in the business, the remaining Co Directors are now dealing with a new shareholder. These may have little or no interest in the business, however are still in need of cash.
Or, in the event the deceased Shareholding Directors spouse manages to sell the shareholding freely on the open market, the surviving partners will be forced to deal with the consequences.
What is Shareholding Director Life Cover and how can it help?
When it comes to shareholder protection, an effective remedy to this problem for business owners consists of 2 parts; a Legal Agreement and Shareholding Director Life Cover:
1) A Legal Agreement (Contingent Purchase Contract) with each Shareholding Director – this provides for the event that on the death of a business partner, the Company would acquire an option to compel the deceased’s next of kin to sell their shares back to the company at a fair open market value. As well as this..
2) Corporate Shareholding Directors Life Cover – a life policy on each Shareholding Director arranged by the Company and paid for by the Company. This element provides the funds on death to enable the company to have the necessary capital to complete the buy back of shares provided for under the Contingent Purchase Contract as outlined above.
This formal arrangement has a number of benefits namely:
• The next of kin can rapidly realise their shares for an appropriate lump sum • The surviving Shareholder Directors retain full control over the company • The cost of the life assurance premiums are borne by the company
There are a number of other legal and taxation considerations involved when considering shareholder protection. We here at Guardian Wealth hope the information provided at least gives you pause for thought. This guide should allow you to begin the process of formulating an effective strategy for the possible death of a Shareholding Director in your business.
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