Shareholder protection

Share protection insurance provides funds to buy company shares if a shareholder dies. It is intended for private limited companies where there may be only a small number of principal shareholders. This is usually done in conjunction with a shareholders’ agreement to give the remaining shareholders the first option to buy these shares.

The objectives of share protection insurance is two-fold:

• it ensures that funds are available to buy the shares from the shareholder or his/her estate, so that the share value can be turned into cash;
• it ensures that these funds are paid to those people who want to buy the shares.

Articles of Association

When looking at corporate life assurance, the starting point should be the Articles of Association. You could say this is the company’s will. They normally include a clause saying what should happen to an individual’s shares in the event of his or her death, illness or retirement.

The Articles deal with internal matters, which should include provision for disposing of the shares of a director who:

• dies;
• becomes too ill to continue; or
• retires.

When a shareholder dies, there is no automatic obligation on the remaining shareholders to buy the deceased person’s shares from his or her family or personal representatives. Instead the Articles often place restrictions on the transfer of shares, so that the remaining shareholders/directors have the first opportunity to purchase them. Small private companies face problems, as the shares can often be difficult to sell to a third party. They are generally only of value to those already connected with the business. Most shareholders leave their shares to their families on death. Often the dependants are not connected with the business and do not see any value in having the shares. As a result, without proper planning, there can be serious consequences for the financial security of the business, and also the shareholders’ family.

• Would you want a member of the deceased family, who may not know anything about your business, having a ‘say’ on how your business is run?
• Why put your business at risk?