Shareholder protection and key person cover for businesses

Shareholder protection and key person cover for businesses

Have you ever considered the impact on your business if a shareholder, director or a key member of your team left the company? This could be by mutual agreement, or more critically, if they were forced to leave due to ill health, or even died suddenly?

In many cases, this could have a detrimental impact on a business and could lead to the loss of clients, depletion of profits or even the inability to offer a key product or service.

Shareholder Agreements, Shareholder Protection and Key Person Cover are all ways in which businesses can help to protect themselves against such untimely events. These need to be carefully considered as some business agreements may be liable for inheritance tax and assistance should be sought to structure these in the most tax-efficient way possible, based on personal circumstances. 

Shareholders agreements

In the event of a shareholder or director leaving, having an agreement in place can alleviate some of the uncertainties. If well prepared and executed correctly, this can help to protect shareholders’ investment in a company, establish a fair relationship between shareholders and govern how the company operates.

A shareholder agreement will be able to set out shareholders’ rights and obligations as well as outlining how the company is to be managed. It can also regulate the sale of company shares. 

In the event of the death of a shareholder, this agreement can outline how the shareholder’s interest in the company will be dealt with (such as being sold to other shareholders, rather than transferred to a family member, who may not be familiar with the company).

Shareholder protection 

Shareholder Agreements are an excellent mechanism, but in the event of the untimely death of a shareholder, funds may not be available to purchase the departed shareholders stake in the business.

This could lead to financial difficulties. The deceased’s family may wish to sell their stake in the business, or if they decide to continue with an active role, you may run the risk of having a new decision-maker with no or little understanding of the business, leading to boardroom conflict.

Shareholder Protection essentially provides an insurance policy that protects shareholders against this scenario. The business is valued and shareholders agree the amount of policy required to cover the loss of a shareholder(s). 

When this is put in place together with an effective shareholder agreement, in the event of the death of a shareholder, the family of the deceased receive a pre-agreed fair value for their interest in the business. This would then allow the remaining shareholders to assume ownership of the business with no interruption to trade. An example can be downloaded here to illustrate how this could apply.

Key person cover

Similar to shareholder protection, key person cover provides an insurance policy to cover the company in the event of the death or a terminally ill diagnosis of a key employee. For example, this could be an employee key to the sales or manufacturing operations of a business.

Key personal cover can be utilised to protect against debt, such as being unable to pay creditors and investors (you can view an example here) or to protect profit. This situation may arise if replacing a key sales manager becomes time-consuming and productivity suffers as a result (here is a further example).

Having Key Person Cover in place can provide a much-needed breathing space and reassurance in difficult times.

Family businesses

Shareholder agreements can be even more important for family businesses, where clear succession planning is required.

Here, it could protect the wishes of the main shareholder of a family business and help to ensure that succession is as straightforward as possible. For example, whilst the current main shareholder(s) may have a clear understanding of how succession in a family business should operate, changes in family circumstances, or indeed personal opinions of other family members may be different to this. 

Family businesses have an extra layer of dynamics and we can provide tailored assistance and advice in relation to integrating the next generation into a business. We have specific expertise in this field and have assisted a wide range of family businesses for many years. 

Tax implications

It is important to consider the tax implications of any shareholder agreement or insurance policies. Our advisors can provide advice to structure the arrangements properly, as otherwise, they may incur inheritance tax liabilities.

Alexander & Co, comprehensive services for clients

At Alexander & Co we can arrange shareholder agreements for our clients and ensure that these are structured in a way that is as tax efficient as possible, including protecting valuable business property relief on death for inheritance tax purposes. 

We also have close relationships with a range of trusted professionals who can also assist on the legal execution of these, alongside astute Independent Financial Advisors, who will be able to arrange shareholder and key person cover for you.

For further information, please do not hesitate to contact our tax accountants on 0161 832 4841 or fill out the form below and a member of the team will be in touch.