What will happen to the shares in my business when I die? What is a cross-option agreement and why do I need business protection insurance?

When a shareholder in a business dies, his or her shares will automatically pass to their estate – either under a Will or, if there is no will, under the rules of intestacy as described below. Many Companies will have been set up using standard ‘Model Articles of Association’ or ‘Table A’ articles of association, which simply say that the executor of the deceased’s estate can seek to become the registered shareholder or transfer them to another person.

In my experience, this isn’t what most people want.

Firstly, the family of the deceased is usually grieving and so it is tough for the Company (the remaining shareholders) to put too much pressure on to ‘sort out the shares’ as it would look mean-spirited.

Secondly, sometimes partners of deceased shareholders don’t wish to sell the shares. They think that they can (and indeed sometimes actually can) do the job better. Alternatively, they may just say they would rather sit on the shares, not playing an active role, and just take the dividends from the Company. They therefore refuse to sell or hand back the shares. This isn’t great, usually, for the Company particularly in small owner-managed businesses, as all of a sudden a percentage of profit is being paid to someone who isn’t working and given many small companies do not pay full salaries and instead pay via dividends, that often feels unfair to the remaining shareholders.

Thirdly, what would a fair price be to pay for the shares if the executor did want to sell? And how can the Company/other shareholders find the money to pay for the shares anyway?

A shareholders agreement could be a better option

What I find most small owner-managed businesses prefer to do is have a shareholders agreement which states that on death of a shareholder, their shares will be automatically transferred to the remaining shareholders for a set price or a price to be determined.

This ensures that:

  1. The spouse or estate of the deceased gets a lump sum of money, rather than have to deal with the shares etc. The process can happen pretty much automatically without too much involvement from the executors.
  2. The remaining shareholders can get on with running the business and taking money out of it.
  3. Where there is shareholder protection insurance or relevant life plans in place, the remaining shareholders will have sufficient funds to pay for the shares, which means no cash flow impact on the company and no significant tax liability in drawing out profit to pay for the shares.

What is a Cross Option Agreement?

A cross option agreement is a contract between the shareholders of a company in which each shareholder grants to the other shareholder the right to purchase shares on the event of death. They are linked with insurance products held in trust for each of the other shareholders.

It is another way of ensuring that, on death, the shareholders have the right to buy the shares of the deceased and that they have the cash to do so.

Personally, I do not think a cross-option agreement is absolutely necessary if you have one of my excellent shareholder agreements in place. But for smaller companies who only want to deal with shares on death, a cross option agreement is necessary.

Sometimes financial advisors providing certain types of insurance will want to put in place cross-option agreements, but a shareholders agreement is really what you want.

What is shareholder protection / relevant life insurance?

NOTE: I am not regulated to give advice on financial products. If you require any advice, I can refer to some excellent independent financial advisors who are regulated by the FCA to provide you with advice.

There are a few different types insurance which can be taken out:

Key person protection — in case a key individual dies or becomes critically ill
Shareholder protection — in case a partner or shareholder dies or becomes critically ill
Relevant life insurance — tax-efficient life insurance for employees and directors
Business loan protection — to cover any business debts

The one I see the most is relevant life insurance, which I understand is a policy in the individual shareholder/directors names, but for which premiums can be paid by the Company to make it tax-efficient. On death, the insured sum gets paid to the other shareholders who can then use it to buy the deceased shares. There’s legislation around relevant life plans and tax avoidance and so it’s really important you get proper advice from an IFA.

When we link relevant life cover with a shareholders agreement, we have a really nice and simple way of ensuring the shares can be brought back, and the deceased’s estate gets a lump sum of cash.

Shareholder protection is another option, and my understanding is that the funds get paid into the Company and it is the Company who buys back the shares.

If you’re one for learning and reading about the different options, Royal London has a really comprehensive guide here – but it is really for qualified advisors and so again, my advice is to take advice! There are a number of great financial advisors in Leicester who I can happily recommend.

If you’re a business in Leicester or Leicestershire and you’re looking for shareholder or business protection insurance to cover death, or are looking for a shareholder agreement solicitor, then get in touch.

Contact me today

If you need advice on a shareholders agreement, cross option agreement or want a recommendation to great financial advisors in leicester to help with the business insurance, get in touch.

Call: 0116 3667 900

Email: Steven@stevenmather.co.uk

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