Ask the Experts: Shareholder Protection

Question: What happens in your business if the worst happens to a Shareholding Director?

Management of risk is a critical part of the good governance of any well run business. However, the day to day operations of managing customers, suppliers and distributors can sometimes blur the bigger strategic picture.

One of the major assets not protected in around 30% of Private Companies, according to Legal & General, is the intrinsic value in the shareholding held by the Directors. 

On a business level, impacts can range from; smooth succession to catastrophic, measured by reduction in profits, cashflow, orders, stalled research and development and loss of critical contacts.

On a private level, there are big issues to address:

• Agreeing fair value of the shares for the estate
• Retaining control for smooth succession of the business
• Realising the physical cash for the estate of the deceased

Good governance demands the consideration of all risks to the business through contingency planning. No contingency planning is fully complete without the audit of the loss of a shareholding Director through death or indeed disability. Thought needs to be given to how assets will be dealt with, what tariff is applied to the shareholding value and the mechanism by which the assets are distributed.

Case Study

Rob is the Managing Director of a Company that delivers stock control technology for small businesses who supply major supermarket chains. He owns 51% of the shares in the business with Ian and Julie who own 25% each. The business is nominally valued at £5,000,000.

In the event of Rob’s death Julie and Ian would need to raise £2,550,000 for Rob’s estate. This, in all probability would cause significant financial difficulty; possibly leading to the business not being able to realise fair value.  Julie and Ian clearly do not want a dispute to occur or to put the business at risk. So they find themselves in a very difficult position. So what do they do?

Outplacing the investor risk to an insurer is simple, inexpensive option that addresses the impact of realising value for the estate. Without Rob, the business would find it difficult but with the added financial burden of raising funds to pay the estate. 

What it does need is foresight on behalf of the business and a careful consideration of what sort of cover is needed and how it is set up.