Shareholder protection: Is your business protected should the worst happen?

One of the most harmful events a business can fall victim to is the death of a shareholder. The unexpected loss of a business owner, particularly for SMEs, can have serious consequences on yo financial difficulties. However, despite the difficult subject matter, this is a topic which needs to be discussed to ensure that your business is fully protected.

By taking out shareholder protection, shareholders can ensure continuity in the business should a director pass away or become critically ill. This form of protection will allow surviving shareholders peace of mind knowing that they will receive the necessary funds to buy the deceased’s shares quickly and efficiently, meaning the business can return to normal as quickly as possible.

However, recent research from Legal and General has shown that many of the over 800 businesses surveyed for the “State of the Nation’s SMEs” report have not planned for such an eventuality. Over half (51%) have left no instructions in their will, nor arranged any other special arrangement regarding what would happen to their shares should they sadly pass away. Further uncertainty among business owners is highlighted, with over a quarter (26%) saying they would buy any shares left following the death of a shareholder, with most saying they would raise funds to do so from the personal wealth of the remaining owners.

This does raise some very interesting questions; not least, whether the remaining directors will have the private funds to buy the shares. In addition, they will have to consider how much those shares are going to be worth at that point of time. If you are one of the remaining shareholders, you are not going to want to pay more than you have to for the shares. If you are the shareholder who has passed away, your family are going to want to sell the shares for as much as possible. No one likes conflict, especially over money at a moment of tragedy.

SME owners and directors should leave an indication in their will of what should happen to their shares in the event of their death. This can help to avoid shares being tied up in probate, and any confusion around ownership of the business, which could potentially threaten its operations. It is also important to include information on this in the company’s Articles or their shareholder agreement.

Shareholder protection is critical in safeguarding your business and the interests not only of yourself, but also of your employees and fellow shareholders. If no provisions are made in the unfortunate event of a shareholder passing away, it is likely the owner’s shares will be passed to their family, which could ultimately lead to the loss of control of some, or all, of your business. Indeed, over a fifth (21%) of business owners surveyed in our research acknowledged that any beneficiaries of the deceased would become active in the business.

Despite the evident risk of not having cover, many businesses have not considered taking out business protection insurance. This may be due to a lack of awareness of these products and the potential risks of not taking out cover or simply that the directors, busy with the day to day running of their business, have not had a chance to pause and consider the ‘what if’s’. However, all business owners need to address this issue, and make sure they have answers to the key questions of what would happen to their shares in the event of their own death or the death of a fellow shareholder to guarantee they remain in control of the business.

Many companies have a disaster recovery plan to cope with potential future setbacks, that could cause big issues within the business. Things like the office burning down, computers crashing and machinery breaking down are all things that can be fixed fairly quickly and without major issues. Buildings can be rebuilt and temporary offices found. New computers can be bought and machines can be repaired.  However, the death of a business owner is not so easy to fix, but few disaster recovery plans include this scenario. Why?

Although it’s not something anyone wants to think about, it’s important for businesses to be prepared for unexpected events such as this. The difficult and uncertain period following the death of a shareholder can be somewhat mitigated by making sure there is a financial plan in place to deal with the consequences should the worst happen. By having these difficult conversations, shareholders can ensure that their family get a fair value for the shares and the remaining business owners retain control of their business in a tax efficient and pre-agreed process.

It is important for businesses to evaluate these potential risks and speak with an adviser about business protection to help find a policy that suits their requirements. Business owners should be discussing and considering shareholder protection, otherwise they could find themselves in the precarious position of fighting for control of their business.

If you want to find out more about how you can protect your business, you can visit our Rough Guide to Business Protection.

By Richard Kateley, head of intermediary development, Legal & General