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12 April 2018

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How to ensure your firm survives the death of a major shareholder

One of the most devastating events that can hit a business is the death of a major shareholder.

It could mean the surviving shareholders lose control of the business – they would like to buy the shares but don’t have the funds.

It could mean the dead shareholder’s dependants end up with an unwanted encumbrance – they would like to sell the shares but there are no buyers.

Ultimately, it could mean that the business is destabilised, folds and everyone loses – shareholders, shareholders’ families and employees.

That’s why, regardless of your firm’s size or industry, it is crucial to protect it against an event like this. Yet, worryingly, over half the country’s SMEs have no special arrangements regarding shares after the death of a major shareholder. (Legal & General, State of the nation’s SMEs)

Shareholder protection insurance is designed to ensure that the aftermath of a shareholder’s death doesn’t result in financial stress over the shares, themselves, for either the surviving shareholders or the deceased’s family. Put simply, either the individual shareholders, or the company, take out insurance on the lives of each shareholder. Should a shareholder die, the policy pay-out can be used to purchase their shares without fuss.

This can also be used to cover serious illness. Given the appropriate agreements, a sick shareholder would be able to sell their shares to the continuing shareholders.

The three types of shareholder protection insurance

Shareholder protection insurance requires a series of upfront legal agreements that set out how shares are to be managed if a stakeholder passes away. The insurance can be purchased in three different forms. Centor can help you choose the form that is best suited and best value for your operation and guide you through the process.

  • ‘Life of another’ policy – This is usual when a business is run by two shareholders.  Each party applies for a policy on the life of the other to the value of their current shares. Each pays the premium out of their own pocket to avoid tax. Should one of them die, the insurance settlement allows the other to purchase their shares.
  • ‘Own life’ policy – Under a business trust, each shareholder takes out their own policy, equal to the value of their shares. The policy can be a fixed term or until retirement. Should a shareholder die, the other shareholders can then use the policy settlement to purchase the deceased partner’s shares.
  • Company share purchase – Here the company itself takes out policies on all the shareholders’ lives. The value of the policies should match the value of each investor’s shares. As the company itself pays the premiums, it receives any funds in the event of a shareholder death. Due to company law and tax procedures this is often quite a complex process, so it is usually advisable to engage a corporate lawyer and tax adviser to ensure that the policies are compliant.

Paul Mardlin, Centor’s Employee Benefits Director, says: “From small-scale enterprises to multi-nationals, shareholder protection insurance is a vital cover for any savvy company.  As well as ensuring the stability of the business, the policy also offers the peace of mind that your own family and fellow stakeholders will be looked after if the worst happens.”

For more information, please contact:

Paul Mardlin, Employee Benefits Director

0207 330 8708