How to protect your business in the event of a shareholder’s death

By Mike Palmer, Corporate Regional Manager

Many business owners are familiar with the risks that can affect their ability to operate successfully, but for some protecting the business on the death of a shareholder is often overlooked or infrequently considered and reviewed. Many businesses biggest assets are the owners, as they drive the vision, creativity and profitability of the organisation.

The sudden loss of a shareholder can create numerous issues for the business and, in extreme cases, can result in the business failing. Invariably, on the death of a shareholder, their shares will form part of their estate and typically, will be inherited by their beneficiaries, who may have no interest in continuing to be part of the company. Likewise, the shares could pass to a beneficiary that does wish to be part of the business, but the existing shareholders may prefer for the deceased’s shares to be sold to themselves.
 

There are then a few questions that need consideration:

1. What agreements do you and your co-owners have in place for the sale/purchase of shares in the business?

2. Do the agreements cover the transfer of shares on death, disability and serious/critical illness?

3. How will the purchase of shares be funded?
    

Shares in a private limited company may be difficult to sell to someone not connected to the business, particularly if the holding is relatively small, or could even be sold to a competitor. Therefore, having in place a robust shareholders’ agreement can not only protect the individual shareholders, but also the business itself. Mark Watson from Ashtons Legal explains here why, and how, shareholders can further regulate the way business between them is to be conducted.

Traditionally, funds can be provided via the provision of life assurance on all the shareholders and removes the burden on the business or surviving shareholders to find additional “cash” at what will probably be a very difficult time. The cost of life assurance can actually be a lot lower than anticipated and, in most cases, is the most cost effective way to ensure funds are available to allow the business to continue.

The whole provision of shareholder protection should involve both legal and financial advisory professionals, to ensure that the arrangements are fully meeting the needs of the business and the shareholders. Regular reviews of arrangements are also essential to ensure that changes in the valuation of the business are accurately reflected in the protection arrangements.