Shareholder Protection

What happens when a major shareholder dies or falls seriously ill? If that person is also a contributor to the success of the business then the problem is multiplied (consider keyman insurance). For now, lets consider the affect on losing a shareholder...

If the shareholder is married then you have a new business partner straight away. The amount of control that your new partner has will depend on the number of shares they control and this can have serious ramifications for both small and large shareholdings; a large shareholder could take control; a small shareholder could join forces with another shareholder to exert control or influence, maybe even sell shares to another shareholder who then gains control.

First and foremost, have a shareholder agreement that states what will happen if someone dies or falls ill. Existing shareholder should have the right to purchase the shares before they are offered to anyone else. This raises another question, how much are the shares worth and on what basis should their value be determine... the company's value including or excluding goodwill (bear in mind that the death of a shareholder that plays an active part in a business could also result in lost goodwill if customers decide to move elsewhere).

OK, you have a shareholder agreement that gives you the right to purchase shares but where will the money come from to buy them? If you can't buy them then someone else may be offered the shares... maybe a competitor?

The solution is that each of the shareholders take out a life assurance policy for the value of their shares. If that person dies or suffers a serious illness then it is agreed that the benefits from the policy will be used by the remaining shareholders to buy the shares. This way, control of the company remains with the existing shareholders who may then decide to retain the shares for themselves or offer them to another partner\investor - the choice is theirs. The shareholder or shareholder's family (depends whether insurance was arranged for death or illness), whose shares have been purchased, will receive a lump sum for their shares which should be sufficient to recompense them for the lost benefit arising from the shares.