I am the finance director of a small company. We have five directors, including me, all of whom are shareholders. We’ve discussed the future of the business at board meetings and want to ensure that it can continue after any shareholder wants to sell their shares or if one of us were to die. However, we would all want our families to benefit from the value of our shareholdings after death. How can we manage the transfer of the business in a way that doesn’t compromise the value of our estates?
Richard Barker of Smith & Pinching responds:
It seems to me that this is a situation that you should discuss with both a Chartered Financial Planner and a solicitor so that you can come up with the right Shareholder Agreement and protection policies to secure the future of the business and manage its transfer as needed.
A Shareholder Agreement can be used to set out a structure for the business and will determine what happens when a shareholder dies or wants to dispose of their shares. This will allow shares only to be purchased by, or transferred to, agreed parties. An agreement of this type still ensures that a departing shareholder can be recompensed for their shares and that benefits go to the estate of a deceased shareholder without the shares themselves being transferred outside the agreed group.
Shareholder protection is a form of insurance that can deliver benefits alongside the Shareholder Agreement if a shareholder dies within the term of the insurance. It secures the business for the remaining shareholders alongside providing security for the family of the deceased shareholder. Such a policy is taken out by the existing shareholders who pay the necessary premiums. It is normally set up using a trust arrangement alongside an additional agreement called a Cross-Option Agreement to provide cover for the lives of all the shareholders. On the death of one of the shareholders, it will deliver a lump sum to allow the remaining shareholders to buy the deceased shareholder’s shares. With the appropriate trust and agreements in place, the lump sum can go to the deceased shareholder’s heirs, allowing them to benefit from the legacy without retaining any connection with the business.
It is critical that this type of protection is set up to suit your specific requirements, so please talk to an independent financial adviser to ensure you get the right package in place for your business and all its shareholders.
This is a marketing communication. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk
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