The consequences of not having Shareholder Protection
Investing in shareholder protection is a critical business continuity plan that can protect your company in the tragic event that a business partner gets critically ill, or dies.
Nobody wants to think about the possibility of these untimely circumstances.
We understand that.
But without protection in place, what is already a difficult time personally, can quickly become one of the most harmful, threatening situations facing your company.
You might have written it into your shareholder agreement what you see happening in this situation.
But even that is no guarantee that your remaining shareholders will be able to purchase the shares, or avoid crippling disruption to your business without shareholder protection insurance.
Why not talk to one of our advisors to get more information on setting up a shareholder protection policy?
What happens to my partner’s shares if we don’t have shareholder protection?
Without shareholder protection, any of your deceased partner’s shares would be passed on to their next of kin (or whoever they’ve stated will receive them).
The beneficiary could then do whatever they wanted with their inherited shares.
They could decide to get involved in your business - whether or not they have the skills or experience to do so.
Or, they could even decide to sell those shares off to a third party - even to a competitor, and there would be little you as a remaining shareholder could do about it.
It’s also possible that whoever inherits the shares could simply hold them and receive any dividend payments given out to shareholders, even though they’ve had no impact on the success of the company.
Talk to a shareholder protection advisor today to get more information
Aren’t we protected under our articles of association?
When setting up your company you may have written it into your articles of association that if you or a partner becomes ill or dies, the other partners will simply buy the shares.
But what do you do if you don’t have the available funds to buy the shares?
You’d have to find the extra funds from somewhere.
And what if your business has grown in the years since you started it - hopefully it has.
What if your business’ new value has pushed the cost of your deceased partner’s shares into six or seven figures?
How confident are you that your business’ bank account could cover that kind of capital?
Especially on short notice.
And how confident are you that you could cover the cost, without putting the longer term viability of your business at risk?
Possibly, you could apply for a bank loan to cover the capital.
But this isn’t always possible.
In fact, banks have been known to be reluctant to loan money to businesses in these circumstances given the disruption the death of a partner can have on a company.
This, afterall, is the kind of event that could cause a business to fold if not dealt with properly.
This is particularly true if a review of income and profits finds the deceased partner was the main profit driver within the company.
How does shareholder protection help?
Shareholder protection can help your company deal with this unforeseen disruption.
Having a shareholder protection policy ensures you get the funds you need to buy back any shares, help you stay in control of your company and minimise short term disruption.
There are a number of ways you can set up shareholder protection.
Each individual shareholder can take out separate cover for themselves.
This is an ‘own life’ policy, which insures the individual partner to the value of the shares they hold in the company.
There is also a critical illness option, which would give a shareholder the ability to sell their shares in the event they became ill, and their partners would have to buy them.
The policy will be paid out to the remaining shareholders as a lump sum upon the death of a shareholder or upon diagnosis of a critical illness or injury that is covered as part of the agreement.
Speak to one of our advisors for more information.
Shareholder protection also protects the deceased beneficiaries
You might think this talk of covering your business in the event of a death sounds cold.
But, shareholder protection also provides protection and reassurance for your deceased partner’s beneficiaries.
Not just your business.
Because while the beneficiary may receive the shares and decide to sell them, there is no guarantee that they’ll get market value for them.
If you have shareholder protection in place, they can be guaranteed to receive fair market value for the shares when you buy them.
Want to know more about setting up a shareholder protection policy for you and your business partners?
Get in touch with Rigby Financial today.