Shareholder Protection

If a business owner dies or is diagnosed with a critical or terminal illness, their share of the business usually passes to their beneficiaries, which means the control of that share does too. The other business owners may want to buy that share but many businesses don't have the money to do this and it can be costly to borrow.

Shareholder protection allows business owners to buy shares back from a co-shareholder who is diagnosed with a critical or terminal illness, or dies. This policy helps surviving owners stay in control and minimises disruption to the business.

Why shareholder protection matters

Dealing with ownership in a company can be difficult in the event of death or illness.

A shareholder arrangement sets out how the shares should be valued and gives the surviving shareholders the right to buy the shares, or the outgoing shareholder the right to sell.

Why recommend AIG

WIth our shareholder protection we offer:

• Share protection for most limited companies
• A choice of life or life and critical illness cover
• The flexibility to adjust cover when the financial needs of the business
  change, subject to certain limits and conditions
• The option to write the policy for a specified term or on a five or 10 year renewable basis

Setting up shareholder protection

Each individual shareholder can take out separate cover for themselves (known as an ‘own life’ policy). This insures them for a sum assured equivalent to the value of their company shares. If they choose to, they can write this into trust to benefit their co-shareholders.

You may need your shareholding clients to enter into an explicit agreement that if one of them dies, the remaining shareholders can buy their shares from their personal representatives.

They can also agree that if one of them suffers a critical illness, the affected shareholder can choose to sell their share. If they decide to do this, the remaining shareholders must buy it.

These are called double and single option agreements. We have a dedicated specimen option agreements and a specimen business trust document. We cannot advise on whether putting a plan into a trust would be suitable for the client’s particular circumstances and would recommend that they take professional legal advice on the suitability of these specimen documents.

Any policies you set up must be aligned with the Articles of Association and the shareholders’ agreement. There may also need to be a trust and/or buyback document in place, for them to be effective.