shareholder protection
what are shareholders and what is shareholder protection?
Not to be confused with directors, shareholders are people who own shares but may not have any involvement with the business on a day-to-day basis, unless they are also directors.
When the Limited Company was incorporated, a shareholder agreement was likely created and then swiftly put in a draw to collect dust. But what does this say about the shares on the death of a shareholder?
A standard shareholder agreement may say that the surviving shareholder(s) can buy the shares back over several years from profit…but what if the profit has dipped because of the late shareholders death? What then? Other shareholder agreements will outline that the shareholders must maintain insurance on their lives for this purpose, but have they done so?
Shareholder protection mitigates this risk. By insuring the lives of the shareholders, they can provide funds for the remaining shareholders in the business to buy the shares back.
what are the risks?
The surviving shareholder(s) may find themselves in a tricky situation should the shares pass to a hostile next of kin who may have very different views on the direction of the company. At best they will likely be entitled to an ongoing dividend, which can drain the company whilst it is on its knees.
The estate of the late shareholder also has risk. The company could be worth a significant sum, but without shareholder protection, the surviving shareholders may decide to liquidate and start again rather than paying out the value of the shares.
Whichever side of the fence you sit on, as a sensible businessperson, you should take reasonable steps to protect the value you have built.