Shareholder Protection

There are a number of questions you can ask yourself to determine whether or not you need shareholder protection. These are:

• What would happen to the shares if one of the shareholders passes away?

Most of the time shares in a business are left to the next of kin. This could create a problem if suddenly there are fewer people contributing to the business than there are people taking money out of the business. IE: a spouse who has inherited shares would be entitled to dividends but is not a revenue generator and does not contribute to the business in anyway. This would create an imbalance.

• Can the business afford to keep paying a share of the profits out to the next of kin of the deceased shareholder?

It can put a huge strain on a business if they must continue to pay out profits to a shareholder who doesn't work or contribute into the business.

• Will the surviving shareholders still have full control of the decision making within the business?

The surviving shareholders may not own enough of the shares to have a majority when it comes to decision making. This could create an issue going forward if things cannot be agreed on.

• Do the other shareholders have enough money to buy the shares?

If the remaining shareholders do not have enough money to buy the shares back then they may be left with no choice but to leave them with the family of the deceased, or surviving shareholder if they are critically ill. 

As a shareholder in the business, shareholder protection protects both you and the other shareholders should one of you die. For the deceased shareholders family, it ensures they get their share of the value of the business, for the remaining shareholders, it ensures they have enough money available to buy the shares from the deceased party's estate.

It can also be set up for critical illness as well, meaning that if one of the shareholders is diagnosed with a critical illness shareholder protection can provide enough money to buy the shares from the poorly partner.

Shareholder protection is usually written in trust for the benefit of the surviving shareholders.

A cross-option agreement is put in place to stipulate that if the surviving shareholders want to buy the shares from the deceased's estate, they have the option to enforce this. If the deceased shareholder's estate wants to sell the shares, the surviving shareholders must buy them. The cross option means that either party can enforce the transaction to happen, even if only one side wants it. Both sides have to agree if the purchase/sale of the shares is not going to happen.