Shareholder Protection

Shareholder protection is a form of life assurance.

What Problem Does It Solve?

Family members rarely want to inherit private company shares. They usually want the cash equivalent of their value. Selling shares of private companies is difficult. Restrictions on who may buy the shares may exist. They are notoriously hard to value. Especially if a major shareholder has recently died. Without advanced planning, this enables buyers to dictate the price potentially to the detriment of the deceased’s family.

The surviving shareholders are usually dependent on the business for their livelihoods and so do not want people unfamiliar with it to have control over how it is run. Further, they may feel an obligation to provide for the deceased’s family which may cause financial strain on the company.

Shareholder protection gives both parties what they want and uncouples the financial security of the deceased’s family from the firm.

Shareholder Protection

Setting Up Shareholder Protection?

Firstly, examine the Articles of Association. This document will state what is to occur on the death of a shareholder. There at 3 arrangements which can be used:

Buy & Sell Agreement

Under this arrangement, there is an agreement in place which forces the estate to sell the shares to the company at a given value which may be based on a formula. Although it does provide certainty for all parties. This method has a negative inheritance tax consequence for UK domiciled shareholders.

Double Option / Cross Option Agreement

Here the estate has the option to sell the shares and the company have the option to buy the shares. There is no binding contract. Consequently, there are none of the negative inheritance tax consequences associated with the buy and sell agreement.

Automatic Accrual

Under this option, the director gifts his shares to the surviving directors in his Will. He compensates his family fo the loss of the value of the company by preparing a life assurance in trust for the equivalent value.

What Should I Do Next?

Please contact us to discuss shareholder protection schemes.

Get in Touch