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You’ve put a lot of time, work, and planning into your business to make it a success, but have you ever thought about what would happen to it and its shareholders if you pass away?
Or, indeed, what would happen if one of the other shareholders died? What would that mean for you and the succession of the business?
That’s where co-shareholder protection comes in.
Co-shareholder insurance is designed with partners, directors, and shareholders in mind. Its purpose is to protect your business, as well as your family and shareholders if you should die or are unable to work due to an accident or illness.
To ensure shareholder protection, the shareholders and business owners should consider entering into a cross option agreement or single option agreement – which will also play an important role in their business succession and continuity planning.
Safeguarding Shareholders and the Business
When a shareholder or business partner passes away, their shares are transferred to the beneficiaries of his or her estate.
But what happens if the beneficiaries have no interest in the business’s future or want to sell the shares because they need the cash?
The remaining shareholders may be forced to work with new business partners who have different ideas for the business – or worse – don’t have the best interests of the business at heart.
That’s why it’s vital that the partners and shareholders put agreements in place and plan for the future of the business early on.
Option Agreements
An option agreement is an arrangement for one or more parties to have the option to take certain, agreed-upon actions – such as selling an interest in the business or buying or selling shares.
There are two main types of option agreements – single option agreements and cross option agreements.
Cross Option Agreements
Cross option agreements (also known as buy and sell agreements) are designed to give surviving shareholders a ‘call option’ to buy the deceased’s shares at market value before they are redistributed by the estate.
Additionally, the deceased’s representatives are granted a ‘put option’ (note that this is not an obligation, it is a right) to sell the shares to the surviving stakeholders.
A life insurance policy written in trust for the benefit of the other shareholders is also taken out. This policy is designed to ensure that the amount that the surviving shareholders need to buy the deceased’s shares is available upon their passing.
Single Option Agreements
Single option agreements are designed to benefit a shareholder if they become terminally ill. The agreement grants the terminally ill the option to sell his or her shares to the other partners, directors, or shareholders without having to forfeit his or her shareholdings.
The way this agreement is written allows the terminally ill to return to the business if they recover.
The Bottom Line
Shareholder protection insurance is a vital part of business succession planning.
It is an agreement that ensures that the shareholders and the future of the business are protected if another director, partner, or shareholder dies unexpectedly or falls critically ill.
