Shareholder protection allows business owners to buy shares back from any partner 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.
SHAREHOLDER PROTECTION NORTHERN IRELAND & UK
WHY SHAREHOLDERS PROTECTION MATTERS
Dealing with ownership in a company can be difficult in the event of an untimely 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.
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 also 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. There are dedicated specimen option agreements and a specimen business trust document. I 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.
IS SHAREHOLDER PROTECTION INSURANCE A BENEFIT KIND?
Where an individual pays the premiums of a shareholder protection insurance policy it would be paid out of taxed income. But in cases where the business pays, the premiums can be treated as an expense, but the insured individual will also be seen as taking a benefit in kind so will need to pay income tax.
CAN A SHAREHOLDER FORCE YOU TO SELL?
In general, shareholders can only be forced to give up or sell shares if the articles of association or some contractual agreement include this requirement. In practice, private companies often have suitable articles or contracts so that the remaining owner-managers retain control if an individual leaves the company.
CAN A COMPANY BUY OUT A SHAREHOLDER?
There are many reasons why a shareholder might want to leave a company, but using company money is often the only way that the remaining shareholder(s) can afford to buythe leaver's shares. This is perfectly possible, but it does need to be done correctly if it is to be effective and tax efficient.
WHAT RIGHTS DOES A 50% SHAREHOLDER HAVE?
Under company law, certain decisions can only be made by shareholders who hold over 50% of the shares. Shareholders with 51% of the equity have the power to appoint and remove directors (and thus change day to day control) and to approve payment of a final dividend.
CAN A COMPANY BUY BACK SHARES FROM A SHAREHOLDER?
SHARE BUY BACK
A share buyback is a transaction between an existing shareholder and a company. The company can repurchase its shares at any price. Shareholder approval is required. There must be sufficient distributable reserves.
6 OUT OF 10
Said they had no protection in place to cover the cost of purchasing shares should a business owner die
L&G 2018 Business Research