Shareholder protection insurance protects each of the shareholders. On the death or diagnosis of a critical illness of a shareholder, the other shareholders receive a cash lump sum which can then be used to buy the affected shareholder’s shares.
This method ensures that the shareholder’s family receive their part of the inheritance as quickly as possible whilst there is minimum disruption to the company.
Why is Shareholder Protection Insurance Important?
A company’s Articles of Association deal with the issues of transferring and selling shares. In most cases the deceased or critically ill shareholder’s shares pass to their beneficiaries who obviously have a right to their inheritance. From the company’s perspective this means that not only do they have a new shareholder, but they also have to pay that shareholder a percentage of company profits each year whilst that shareholder probably adds little or nothing to the running or profitability of the company. It could also mean that the shareholder’s estate might sell their shares to a third party who the company might not want to be in business with.
The likelihood is that the surviving shareholders will want to retain control of the company. Shareholder Protection Insurance allows the company to do this. Many companies adopt a pre-emption clause in their Articles of Association which allow the shareholders the right to buy the shares of the deceased or critically ill shareholder. Companies without Shareholder Protection Insurance often try to borrow the money from banks to do this but not only can this create a large debt for the company but the banks can be reluctant to lend if they feel that the deceased or critically ill shareholder was key to the running of the business.
Clearly Shareholder Protection Insurance is important to the company and to the shareholders estates.
Partnership Protection is similar to shareholder protection but involves the partners and the partnership shares rather than shareholders.