Think your business isn’t ready for shareholder protection insurance? Here’s what you need to know

When you think of shareholder protection insurance you might think it’s something that can only benefit large corporations with lots of shareholders at the top of the business, with millions in revenue.

In reality, shareholder protection is a critical safety net for any business size with more than one shareholder.

When it comes to the right time to invest in shareholder protection, it’s typically best to invest in it as soon as you’re able to.

Obviously this is dependent on you being able to afford a shareholder protection insurance policy.

But it’s definitely something you want to invest in sooner rather than later.

Here’s why.

Why invest in shareholder protection early on?

Shareholder protection insurance offers a financial safety net to you and your business in the unfortunate event a fellow shareholder becomes too ill to carry on in the business, or dies.

The sudden loss of a shareholder can be devastating to a company, and the disruption caused can easily put the business at risk.

Having shareholder protection in place can remove some of the uncertainty by ensuring the smooth transition of shares to the remaining shareholders - while ensuring the bereaved family gets a fair value for the shares.

Removing the financial burden

If a shareholder does die without shareholder protection insurance in place, the remaining shareholders will assume responsibility of paying to retain their shares.

Often this means digging into a business’ savings.

While this might be possible in a large company, if you’re a small company, is it likely you’ll have that kind of money available at short-notice?

And would you be able to take it out of the business without putting the long-term future of the company at risk?

You might think you’d be able to get a bank loan to cover the costs, but banks are often reluctant to lend to companies in these circumstances because of the disruption caused.

Shareholder protection insurance ensures you have the money available to purchase shares and reduce the disruption caused to your business.

Remove uncertainty about share ownership

Another reason you should consider shareholder protection early on, is because it reduces uncertainty about what happens to the outgoing shares in the event of a death.

This is an issue that can be particularly disruptive to a business in the early days.

If a shareholder dies without shareholder protection in place, the future of the shares are in the hands of the bereaved family.

And there’s no obligation for them to sell the shares back to the remaining shareholders.

You can write a clause into your articles of incorporation, but these can be challenged and that in itself will cause more disruption.

With shareholder protection, the remaining shareholders are able to retain control of the outgoing shares once the policy is paid out.

It creates a legal agreement between all parties that the remaining shareholders will use the insurance money to buy the shares (it can’t be used for any other purpose) and that the bereaved family will sell the shares back.

Without this agreement in place, the shares could be sold to any third party - including competitors - or even retained by the deceased shareholder’s family.

Protect your small business with shareholder protection

Shareholder protection can be vital for small businesses because you might struggle to raise the capital to purchase outgoing shares at short notice in the event a shareholder dies.

Setting up your shareholder protection insurance is a relatively simple process and we have another guide that can take you quickly through the main stages of setting up a policy, just click here to read the guide.

If you want to find out more about shareholder protection insurance, get in touch with us.

Our team of insurance experts can work with you to work out exactly the level of shareholder protection you need and help you find the best deal for the business size and budget.

Get in touch today by clicking here or completing the form below