If you own a percentage shareholding of any business, have you a plan in place in the event you pass away to ensure your estate or beneficiaries will get the full value of your shareholding? Can your company afford to compensate your estate/family or buy back this shareholding?
Shareholder/Directorship Protection is an arrangement between company directors, which allows for a deceased’s directors share of a company to be bought by the remaining Directors.
What are the advantages of Directorship Protection?
1. In the event of a director dying, the remaining directors participating in the agreement retain control and ownership of the company as they buy back the deceased director’s share.
2. The next of kin are bought out of the company by the remaining directors at market value and can therefore realise the cash value of the deceased’s share shortly after death.
3. The company/directors do not have to find the funds to cover the cost of the deceased shareholding.
4. It is a relatively straight forward shareholders plan.
How does this work?
There are two main parts to this arrangement:
1. The Legal Agreement between the directors to regulate the position on death.
2. The Life Assurance on each director’s life to provide the funds to the remaining directors to make a payment to the deceased director’s next of kin.
The solution outlined above can be achieved in one of two ways:
Personal Shareholder Protection - The shareholders enter into a personal agreement with each other to "buy out" a deceased shareholder's shares in the event of his/her death. To provide the funds to fulfil their personal obligation under the agreement, each shareholder personally effects life assurance cover which is payable to the surviving shareholders on his/her death. The proceeds of the life assurance policy are used to "buy out" the deceased's next of kin in line with the agreement.
Corporate Shareholder Protection - In this case the company enters into a put / call agreement with each of its shareholders to buy back shares from their personal representatives in the event of death. The company takes out a life assurance policy on each shareholder, to provide funds to enable the company to fulfil its obligation under the agreement. In the event of death, the proceeds of the life assurance policy are payable to the company, to be used to buy back shares from the deceased's next of kin.