THE PROBLEM
The death of a shareholder can have major repercussions for the future of your company. It can cause immediate financial hardship for the remaining shareholders and perhaps even loss of control of the company.
On death, a shareholder’s shares normally pass to their next of kin and the next of kin become new shareholders in the company. The change in share ownership can lead to potential problems for both the next of kin and the remaining shareholders. The next of kin may not want to become involved in the company and may want to sell their shares as soon as possible. The remaining shareholders, on the other hand, may want to retain full control and ownership of the company and may not want to work with a new shareholder. Moreover, if the deceased shareholder owned more than 50% of the company, the surviving shareholders may have to work with a new majority shareholder – possibly the deceased’s spouse.
While the obvious solution would be for the remaining shareholders to buy the deceased’s shareholding from their next of kin, they may not have the capital required to do so.
THE SOLUTION
Life insurance cover – known as Co-Directors Insurance or Corporate Shareholder Insurance – can be put in place on the lives of each shareholder. The level of cover is set at the value of their shareholding. In conjunction, the existing shareholders and their next of kin enter into a Buy/Sell Agreement whereby, in the event of the death of a shareholder, their next of kin agree to sell their shares while the shareholders agree to buy them at a price determined by the agreement.
The advantages are as follows:
- A lump sum is provided from the proceeds of the life insurance policy to enable the purchase of the deceased’s shareholding from the deceased’s next of kin
- No new owners come into the business and the existing shareholders retain full control of the company
- The deceased’s next of kin can realise the value of the deceased’s share of the business – they have a ready buyer at market value
- The deceased’s next of kin do not have to become involved with a business in which they may have no expertise in or knowledge about
Contact us for further details.
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