Shareholder Protection Insurance

Three business shareholders

Death of a shareholder in a business case study

ABC Ltd is a successful local business.

There are three shareholders Andy, Brian and Steve, all of whom are actively involved in the business.

Andy has a 53% shareholding, Brian has 27% and Steve has 20%.

Business is going well and the company has recently been valued at £1,000,000 as a going concern.

However, on his way to work one day, Andy is tragically killed in a road traffic accident.

Depending on whether or not the business had shareholder protection, one of the following two scenarios takes place:

Scenario 1 - no shareholder protection

  • Andy was married and Sally, his widow, inherits his 53% shareholding (in theory worth £530,000) and finds herself in control of the business
  • She‘s not interested in coming into the business. She‘s got two young children and wants to sell the newly inherited shares
  • She always got on well with Andy‘s partners, Brian and Steve, and asks them if they‘d like to buy the shares
  • However, they don‘t have the money. They ask the bank if it will lend them the money but are refused, due to the bank‘s concerns about the viability of the business as a result of Andy‘s death
  • As Brian and Steve can‘t raise any money, Sally reluctantly sells the shares for a much-reduced price to a third party
  • Brian and Steve then, unhappily, find themselves with an unwanted third party who has a majority stake in their business

Scenario 2 - with shareholder protection

  • Andy had a shareholder protection life insurance policy. This pays out £530,000 on his death to Brian and Steve. This money is held by them in a trust arrangement
  • Andy‘s widow, Sally, inherits his 53% shareholding
  • Andy and Steve don‘t need to ask the bank for money, as the £530,000 from the life insurance policy is available to them to buy out Sally
  • Sally sells the newly inherited shares for the full value of £530,000 to Brian and Steve
  • Brian and Steve retain full control of their business
  • Brian and Steve‘s shareholdings increase in proportion, so Brian now owns 57% and Steve owns 43% of the business

I have used a Limited Company in the above example. However, the equivalent Partnership Protection Insurance would be put in place for partners in a Partnership.

Shareholder and Partnership protection can be cheap to have and perhaps very expensive not to have.

I specialise in helping small firms set up business protection.

Contact me for advice or if you‘d just like to have an informal no-obligation discussion.

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