What is shareholder protection?
If you own a business with other people, you've probably thought about what happens when someone wants to leave. It's easy to overlook what happens if a co-owner dies or becomes seriously ill. Their shares would usually pass to their family under their Will, who may have no interest in, or experience of, running the business - and the remaining owners may not have the cash to buy them out.
Shareholder protection solves that problem. Each owner takes out life cover (or life and critical illness cover) for the value of their share of the business. If one of them dies or, where included, is diagnosed with a serious illness, the payout gives the remaining owners the money to buy those shares at a fair price. Key aspects of this protection include:
- The departing owner's family receives cash for the shares, rather than a stake in a business they may not want;
- The remaining owners keep control of the business and avoid an unwanted new co-owner;
- It is usually backed by a legal agreement that sets out how and when the shares are sold;
- Similar cover, often called partnership protection, is available for partnerships and LLPs.
This is where Cleerly can help. Call us on 02394 212912 or request a callback and we'll help you work out the right shareholder protection for your business.
How shareholder protection works
Setting the right level of cover
The starting point is a realistic value for the business and each owner's stake in it. Insurers have their own ways of assessing value, often based on recent profits and net assets, but many businesses ask their accountant to provide a valuation. For example, if three equal owners run a business worth £1.5 million, each owner would typically be covered for around £500,000.
Business values change, so it's important to review the cover regularly. A policy set up when the business was smaller could leave a big gap if it has grown since.
The legal agreement
The insurance provides the money - a legal agreement makes sure it's used as intended. Most businesses use a cross option agreement, which gives the remaining owners the option to buy the shares and the departing owner (or their family) the option to sell them.
Your solicitor will check it works alongside your articles of association and any shareholders' agreement. Many insurers provide standard documents, and we'll work with your solicitor to get everything in place.
Expert Commentary
"Co-owners often have a plan for almost everything except what happens if one of them dies or becomes seriously ill. Shareholder protection means the family gets a fair value for the shares and the remaining owners keep control of the business. It only works properly when the cover, the trust and the agreement are put in place together."
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Shareholder protection and tax
The tax treatment depends on how the cover is structured and who pays the premiums. With own life in trust arrangements, premiums are often paid by each owner personally, or paid by the company and treated as extra pay. The type of legal agreement used can also affect inheritance tax reliefs on the shares, which is one reason a cross option agreement is usually preferred.
Because there's a lot to get right, we always recommend taking advice from your accountant and solicitor before the cover is set up. We're happy to work alongside them.
Shareholder protection FAQs
Shareholder protection is about ownership - it gives the remaining owners the money to buy back a co-owner's shares. Key person cover is about profits - it pays the business to help it keep trading after losing someone important. Many businesses have both, because they solve different problems.
Usually, yes. Each owner is normally covered for the value of their own shareholding, so that whoever is affected, the others have the money to buy their shares.
It's worth considering. A serious illness can mean an owner needs to step back from the business and would rather have the value of their shares than keep them. Adding critical illness cover costs more, so we'll talk through whether it's right for you.
The cover and the agreements will need updating. Own life in trust arrangements usually make this more straightforward, which is one reason they're so widely used. We'll help you review everything whenever ownership changes.
Premiums are based on each person's age, health and lifestyle, so they can vary quite a bit. Some businesses choose to balance this out so that each owner contributes fairly, and your accountant can advise on the best way to do this.
Ideally, as soon as the business has real value and more than one owner relies on it - and certainly before you take on investors, bring in new shareholders or plan a sale. Cover is also generally more affordable the younger and healthier you are.
Important information: Shareholder protection policies are subject to the insurer's underwriting, terms, conditions and exclusions. Critical illness cover only pays out for conditions that meet the insurer's policy definitions. Policies have no cash-in value at any time, and cover will end if premiums are not paid. Tax treatment depends on individual circumstances and may change in the future. Cleerly does not provide tax or legal advice - please speak to your accountant and solicitor about business valuations, trusts and shareholder agreements. The Financial Conduct Authority does not regulate trusts, legal agreements or tax advice.
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