1. What Is a Shareholder Agreement?
A Shareholder Agreement is a formal contract between business owners that sets out roles,
responsibilities, and how decisions are made. A key part of this agreement is deciding what happens in the event of one of the shareholders passing away.
2. Key Areas Covered by Shareholder Agreements:
- Decision-Making: Voting rights and dispute resolution processes.
- Ownership Changes: What happens if someone leaves, wants to sell their share or passes away.
- Profit Distribution: Clear rules to prevent misunderstandings.
3. Benefits of a Shareholder Agreement
- Prevents disputes.
- Clarifies roles and expectations.
- Protects the business and those involved during key events.
4. The Importance of Shareholder Protection (Life Cover)
For most people, an ideal scenario would be for the Shareholder Agreement to allow the surviving shareholders to have an option to buy the deceased shareholder’s shares. This allows the control and ownership to remain with the current shareholders and gives a clean break and a financial windfall for the beneficiaries of the deceased shareholder.
One of the biggest challenges is how to fund the share purchases. This will often be a very significant amount, which is not readily available to the other shareholders. It can be solved by taking out a life insurance product for the value of the shares, called Shareholder Protection.
If set up correctly, this type of policy would pay out a lump sum to the surviving shareholders to buy the shares and provide a significant windfall to the beneficiaries.
At their most difficult time, it could provide a payment large enough to secure the financial future of the deceased shareholder’s family.
Next Steps
- Consider if your current Shareholder Agreement is up to date and gives you options in the event of one of your business partners passing.
- Consider speaking to a specialist Solicitor to review your Shareholder Agreement.
- Consider speaking to a Financial Planner to review your legacy plan, including your life cover needs.
About the author
Adam Downes is the founder of Pura Vida Financial Planning. As a Chartered Financial Planner, he specialises in helping business owners achieve financial security and freedom.
You can find out more about Adam at www.puravidafp.com/adamdownes
