What is Shareholder Protection Insurance?
This is insurance that each of the Directors of a Private Limited Company should take out to ensure that if any of them were to die, then the policy will provide sufficient funds for their shares to be purchased by the remaining shareholders, with the proceeds going to the beneficiaries named by the deceased shareholder.
Why is this important?
Usually a Private Limited Company has only a few shareholders. The death of one of the shareholders could result in the shares passing to their family who probably have no knowledge of running the business and may need to sell the shares to provide funds for them to live on. If the remaining shareholders do not have funds available to buy the shares then they could find that they may lose control of the business if an outside person were to buy the shares and they could completely change the way that the business is run. Alternatively, the shares could be acquired by a competitor and the other shareholders may find themselves being forced to sell their shares in a worst case scenario.
What needs to be done to put this in place?
The standard way to proceed is as follows:- A life insurance policy is taken out for each of the shareholders to the value of their shares. Place each of the policies in trust to ensure that any payment is available to the remaining shareholders without any tax implications. Set up a cross option agreement among the shareholders such that if the options are exercised then the holder of the shares is obliged to sell them and the other shareholders must buy them.
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