Financial Protection

We view this to be a key part of any corporate planning.

At the outset, with the assistance of your Company’s accountant and solicitor, it should be decided on the value of the shares and the business and on what basis the Company would be restructured in the event of the death, ill health or retirement of one of the shareholders.

In regards to the death of one of the shareholders, provision should be effected to either: -

• compensate the deceased’s estate for the loss of the shares if these are cancelled or absorbed by the business,
  
  or
• where these fall into the deceased estate, to enable the remaining shareholders to purchase the shares.

In the case of the latter, you should effect a cross option agreement (also known as a double option agreement), rather than a buy & sell agreement. This is worth considering, as the former does not constitute a binding contract for sale.  Because of this, any Inheritance Tax Business Property Relief is protected.  An option to sell the deceased’s shares is granted to the executors and an option to purchase the shares is given to the remaining shareholders.  Either side may exercise the option, which is then binding on the other party. 

The purchase can be financed either by self-funding out of company assets, or by raising debt. If either of these are not viable, a highly cost effective alternative is to effect life assurance in respect of each shareholder.

Effective planning in this area avoids shares being sold to external parties or a spouse or partner of the deceased being able to participate in the running of a business.

In conclusion, the key benefits of a share protection arrangement are certainty and control. Certainty in knowing that the business can finance a prospective purchase and that the business can survive the death of a shareholder and control in that the surviving shareholders can decide who they continue to run their business with.