Shareholder / Partnership Protection
Financial protection if a shareholder dies or is diagnosed with a critical illness.
Share protection helps the surviving shareholders or partners keep control of the business if a major shareholder or partner dies or is diagnosed with a critical illness.
If a business doesn’t have this kind of protection in place, losing a major shareholder or partner can cause serious problems. A shareholder’s family could end up with a share of the business, for instance. And in the case of a partnership, the partnership will be automatically dissolved unless an agreement exists to the contrary.
Life insurance as a solution
Taking out life insurance, in conjunction with a suitable share purchase agreement, could help ensure that control stays with the remaining shareholders or partners and a substantial cash lump sum is available whenever death occurs. This, in turn, could mean the remaining business partners would be able to buy the deceased’s share of the business.
A Term Assurance plan could offer protection against difficulties you may have in securing or re-allocating finance to purchase the deceased shareholder’s interest or shareholding. Cover is available for Private Limited Companies, Limited Liability Partnerships and Partnerships.
You can take out cover on your own life or the life of another and can choose the level of life cover and plan term you want. You can add critical illness if you wish and if appropriate this can be incorporated into the shareholder agreement.
There are four agreements that a Term Assurance policy could be used to support. Each of these agreements would need to be arranged, typically via a solicitor:
- Buy and sell agreements. The equivalent of a prenuptial agreement for a business. If death is the trigger for the agreement (as it would be for Shareholder/Partnership Protection), the deceased’s estate have to sell their share of the business, and the surviving business owners/partners have to buy it. A pre-agreed method of valuation is used.
- Automatic accrual method. This method is usually used for partnerships only because it doesn’t involve the purchase or sale of shares. Instead, the deceased’s shares are automatically passed to the remaining business partners.
- Double/cross option agreements. Under this type of agreement the surviving owners have the option to buy the deceased’s share of the business, and the deceased’s personal representatives have the option to sell the shares to the surviving owners. If either party exercises their option, the other is obliged to comply. Most double option agreements only operate upon death, not critical illness.
- Single option agreements. Suitable if your client wants to include critical illness with the life insurance plan. The single option agreement gives a business owner/partner the option to sell their share of a business to the surviving owners/partners if they fall terminally or critically ill.