Shareholder or partnership protection cover is a significant element that is often overlooked by many businesses across the country. To better put things into perspective, the overall purpose of the cover is to ensure that the decision-making process, along with the control over the business, remains in the hands of the surviving partners or owners.
By ensuring this step, you are minimizing the chances of your hard work being passed down to someone who is unable, unwilling, or uninterested in contributing to the success and future of your business. In this article, we will outline only the main benefits of getting a shareholder protection cover for your business are, pointing out the variety of situations which may arise along the way.
What is Shareholder Protection?
Simply put, a shareholder protection scheme is a business agreement drawn up between two or more shareholders. The process involves setting the rules of the management or disposal of shares, once one of the involved parties is either deceased or unable to further contribute.
As a general rule of thumb, the agreement does not stand alone. Instead, it is supported by a series of interlocking life assurance policies and trusts, allowing for a tax-efficient way to buy the corresponding shareholder for the value held in the company.
In other words, this can be viewed as a form of insurance which protects both the shareholders and the company against unpredicted or tragic circumstances (i.e., death, incapacitation, or critical illness).
Should the situation arise, shareholder protection can provide a lump sum to the remaining business owners. By contrast, if a business owner or shareholder passes away and there is no share protection set in place, the family may be given the opportunity to seize the asset or company.
However, it should be noted that surviving business owners could lose control of a percentage of the firm, or in some cases, the entire business. Alternatively, you may choose to let go of your assets or even sell them to a competitor – depending on how much the family business is worth to you.
In either case, a shareholder protection scheme can help avoid these circumstances by protecting the company from falling into the hands of a reckless or disinterested party who will only destroy its reputation or give it away to the competition.
The Main Benefits
Utmost Business Security
A shadow of uncertainty can fall upon a business should that particular company fail to make the necessary plans needed for the purchase of the shares. In fact, the stocks could be vulnerable and left exposed to competitors trying to buy them.
By contrast, through the purchase of shareholder protection for your business, the shares can be distributed among the remaining business partners, providing the consistency and continuity needed to help the company succeed despite a tragic or unforeseen event.
Relatively Inexpensive Solution
By contrast to other means, a shareholders’ policy is a relatively budget-friendly way to minimize the potential threats associated with your business slowly slipping through your fingers.
Moreover, it minimizes disputes between owners by making it clear how individual decisions are to be made – all while offering a framework as well as procedures for recurring dispute resolutions.
Support for the Family of the Shareholder
In some cases, the family of the deceased or incapacitated person is either unwilling or unable to work and further the business.
At the same time, since personal tragedies can have a substantial psychological and monetary impact on the family, shareholders and their families would prefer having an influx of cash coming in. This is because the monetary value will help pay for medical expenses, funerals, or others.
If, for example, the shares cannot be purchased by the remaining shareholders, families could see themselves pinned with an asset that is illiquid, all while the remaining shareholders may begrudge their involvement if the contribution is limited.
Shareholder protection insurance provides a way through which the family and the business can have peace of mind, knowing that they will be safe regardless of the outcome – with families inheriting the value created in the market, while the remaining shareholders maintain full control of the business and the accompanying decisions.
Protecting Minority Shareholders
A shareholders’ agreement is also set in place to support the rights and entitlements of the minority shareholders. Without having such a deal set in place, the “little guys” may be forced out of contributing to decisions, since their say won’t be taken into consideration as much as before.
Once in place, a shareholder’s agreement can only be amended with the approval of all of the shareholders, while only a 75% majority can alter the company. In other words, this agreement is set in place to also better protect minority shareholders, their opinions and their decision-making skills.
Illness and Disability
In addition to helping family members and fellow shareholders in the grim event of a death, a shareholder protection cover can also be used to deal with severe illnesses within the family.
Bearing in mind that the right policies and agreements must be put in place before the event, the legal agreement can allow the sick party to sell shares to the other shareholders ahead of time.
Should a shareholder fall ill, the knowledge that they have shareholder protection insurance will take a huge weight off their mind.
It’s notable that most companies and their shareholders can struggle to find the needed funding to purchase shares at short notice. So, having an agreement can minimize your losses and offer peace of mind for others within the business.
To sum it all up, shareholder protection is an agreement through which the money from the policy payout is used to buy the shares of an ill family member or deceased. It offers an added level of protection for both the shareholders remaining in the company as well as the extended family of the loved one affected. In other words, the overall gains far outweigh the initial financial costs.