This type of business protection consists of life cover (and  possibly critical illness cover) written in conjunction with appropriate agreements and Trusts.

Let’s say that a Shareholder in a business dies unexpectedly. The protection allows the surviving Shareholders to buy the shares which are now owned by the beneficiary of the deceased Shareholder  (e.g family). That way the remaining shareholders now own the entire business and the deceased’s beneficiary has a sum of money which is probably much more useful that the shares.

If there was no such protection in place then the surviving Shareholders would have a business partner (the Deceased’s beneficiary) who perhaps knows nothing about the business and so does not bring as much value. The Deceased’s beneficiary would own a number of shares and would much rather have cash which could be used with much more flexibility.

Where on earth am I going with this?

Very recently the majority shareholder (and the key person ) of a highly successful business was tragically killed in an accident. He was 29 years old and single.

A conservative value of the business at the time of his death has been estimated to be £2.25m. Let us say for the moment that the Deceased’s share of the business is valued at £1.5m

The only surviving shareholder does, under standard articles of association, have  the option of purchasing the deceased’s share of the business at market value at time of death.

With shareholder protection in place the remaining shareholder(s) would, via the settlement of the life policy on their fellow shareholder,, have the funds necessary to compensate the beneficiaries of the estate in full. Unfortunately, in this particular instance, the directors of this company “hadn’t got round” to setting up the shareholder arrangement.

As a result the remaining shareholder maybe forced  to obtain funding from banks or specialist lending  sources to raise the necessary funds to purchase the deceased’s share of the business. - not an easy task given the present financial climate. Failure to do this will leave the beneficiaries little option but to:

a)      Take their rightful seat on the board of the company despite the fact they have no epreience of running a business

b)      Place the shares on the open market selling to the highest bidder leaving the remaining shareholders exposed because they would have minority interests in the business..

To compound all of this the estate would be subject to Inheritance tax which could amount to £500,000 if the disposal of shares reached true market.

This would have been avoided with a correctly implemented shareholder plan in place. Not only would tax liabilities been reduced to nil there would have been , fewer problems for an already grief stricken family.

If you have any concerns about business protection or shareholder protection or know someone who may have a potential problem, please contact me davidwhite@lyndhurstfm.co.uk

David White – Lyndhurst Financial Management Limited

Barnet Office