What is Shareholder Protection and is it Necessary

There are plenty of events that can negatively affect the running of your business. One of those is losing a shareholder. Shareholders play a crucial role of providing both direction and equity for the business.

So have you ever pictured how the passing away of one of them would affect your business? Naturally, their dependents or next of kin would have to inherit their wealth which comprises their shares in your company. Suddenly, someone or a group of people are part owners of your business and can dictate how it is run. As you can imagine, this can put you in a very difficult situation or even cripple your business.

Luckily, you can avoid getting into this kind of a mess by taking out the shareholder protection cover. In this guide, we explain what this life policy is all about and why you need it.

What is shareholder protection?

Shareholder protection is simply a form of succession plan for your business. The cover helps to alleviate stress during an already traumatic and distressing time when you’re mourning the loss of a friend, a colleague and a leader. With it, your business can continue operating with minimal interruptions.

When a shareholder passes away, it’s natural that their family inherits his or her estate. Shares are a form of assets which makes them part of the estate. This means that the deceased shareholder’s family automatically become part owners of your business and can influence business decisions. Should this be allowed, it poses a potential risk for the business as the family may not have the necessary expertise or skills to run a business.

In some cases also, the deceased’s beneficiaries may choose to sell their shares to the highest bidder. What this means is that your business could fall in the hands of another unqualified party or worse your competitor.

The shareholder protection cover provides the surviving shareholders with enough capital to buy shares from the deceased family. This helps to protect the future of your business and guarantees that shares remain within the business should a shareholder pass away.

Is the policy necessary?

Absolutely! Shareholder protection helps to ensure a smooth transition of shareholding in the event that a shareholder passes away or becomes critically ill. It provides a binding agreement between the company’s shareholders to prevent the business’s shares from falling into the wrong hands.

Losing such a key person is already a stressful time for the shareholders left behind. The policy helps to soften the blow by providing the business with the much-needed finances to maintain stability moving forward.

The deceased family also receives a lump sum payout in exchange for the shares. This is a win-win situation. Shares remain within the business while the bereaved receives financial support which is of more value to them at that moment than the shares.

Benefits of shareholder protection

Business continuity

Shareholder protection guarantees that there’s sufficient protection in place to help secure the future of your business. It does so by averting a possible conflict of interest that may arise between the share beneficiaries and the surviving shareholders.

In most cases, the recipients of these shares may not have the expertise or interest to join your organization. The timing might also not be right. They’re mourning their loved ones and an entrepreneurial endeavor is possibly not at the top of their agenda.

A shareholder protection policy provides a solid plan on how to allocate the deceased shareholder’s shares to their loved ones. Besides, it allows the remaining stakeholders to rest easy knowing that such a challenging situation will not affect the stability of the business.

Financial support for the bereaved family

As a form of life insurance, this policy is designed to take care of the shareholder’s dependents once they are gone. A fair sum of money might just be what the bereaved family needs. The idea is to help provide financial support to the shareholder’s dependents after losing their breadwinner.

Shareholder support

With shareholder protection, you have the option to include critical illness cover. In the event that a shareholder becomes incapacitated or critically ill, based on the agreement in place, he or she can still sell their shares to the other shareholders.

The lump sum amount can be used to support their loved ones financially as they recover from the illness.

Have you considered taking out shareholder protection insurance for your business? We would love to hear your feedback in the comments below.