Shareholder Protection Insurance
What is Shareholder Protection Insurance?
Shareholder protection insurance, or buy/sell cover, is a specialised business insurance designed to protect co-owners of a company. It creates a legally binding agreement between shareholders, outlining exactly what will happen to an owner’s shares if they can no longer participate in the business due to unforeseen circumstances. In essence, this cover provides a lump sum payout that allows the remaining shareholders to buy out the departing owner’s shares at a pre-agreed fair value.
Why Your Business Needs Shareholder Protection
Building a company with fellow shareholders takes hard work and trust. But what if something unexpected happens to one of them? Without a plan, you could suddenly find yourself in business with a late partner’s family or executors or face months of uncertainty while their estate is settled. Shareholder protection insurance spares you this uncertainty by funding a smooth transfer of shares.
Key reasons to have a policy in place include:
- Business Continuity: The remaining owners can quickly purchase the departed shareholder’s stake, keeping decision-making power and ownership structure intact.
- Fair Value for Shares: A proper shareholder protection plan locks in a fair share valuation, ensuring your late co-owner’s next of kin receives fair compensation for their share of the business without lengthy negotiations.
- Avoiding Distress: By arranging funding in advance, you save all parties from the stress of scrambling for financing or selling shares under duress.
How Does Shareholder Insurance Work?
Shareholder insurance works in tandem with a buy/sell agreement. All co-owners agree on how shares will be valued and transferred if one shareholder exits unexpectedly. Each shareholder then takes out an insurance policy on their own life, with the other shareholders or the business as beneficiaries. If a covered event occurs, the policy pays out a lump sum to the remaining shareholders. They use these funds to buy the shares from the affected shareholder at the pre-agreed price.
Key features of a shareholder protection plan:
- Coverage Triggers: Covers serious health events and the passing of a shareholder, ensuring the policy activates when an unplanned exit occurs.
- Lump Sum Payout: The sum insured usually matches the value of the insured shareholder’s ownership stake.
- Ownership of Policy: Policies can be owned individually or via a business trust, depending on how your agreement is set up.
Benefits for Shareholders and Their Families
- For Remaining Shareholders: They retain full control of the company without financial strain. You won’t need to borrow money or dip into company reserves to buy out shares. The continuity in ownership reassures employees, customers, and creditors that the business remains stable.
- For the Departed Shareholder’s Family: They receive prompt, fair compensation for the shares without needing to negotiate or stay involved in the business. This avoids the difficult situation of the family attempting to manage or sell a stake in a company they may not wish to run.
By planning ahead, you prevent scenarios where shares fall into limbo or end up with outside parties.
Integrating Shareholder Protection with Your Business Insurance Plan
In New Zealand, shareholder protection insurance is often a cornerstone of a broader business risk protection plan. It can be bundled with other covers to provide comprehensive protection. For example, businesses often combine shareholder protection with key person insurance and business interruption cover. Packaging policies ensures that both your ownership structure and your operations are protected against life’s uncertainties.
Tip: It’s wise to review your shareholder protection cover regularly, especially if the value of your business changes, to make sure the insured amounts still reflect each owner’s share value. Also, keep your buy/sell agreement up to date as shareholders join or leave the business.
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Get Advice on Setting Up Shareholder Protection
Arranging shareholder insurance involves legal and financial considerations, from crafting the buy/sell agreement to choosing the right insurance policy and coverage amount. At Capital Advice, we specialise in helping New Zealand businesses put the right insurance cover in place. We’ll work with your lawyers and accountants if needed to ensure your shareholder protection plan is robust and meets your needs.
Don’t leave the fate of your business to chance or goodwill. With the right shareholder protection in place, you guarantee a fair outcome for all shareholders and their families, keeping your business on track even after a shareholder’s unexpected exit. Contact Capital Advice’s team today to discuss safeguarding your business ownership with a tailored shareholder protection plan.
