Key Person and Shareholder Protection
As a family business owner, you will want assurance that your business will be protected if and when things go wrong. Key person and shareholder protection can protect your business against undesirable situations if the worst was to happen.
Ensuring your business has the necessary protection in place is crucial to safeguard your business and family, and having suitable agreements in place from the outset, such as a shareholders’ agreement and cross-option agreement, can provide security for your business and deal with various situations, for example, if you or a significant employee or shareholder becomes critically ill or passes away.
Key person protection can be provided in the form of an insurance policy and will provide your business with a ‘cash cushion’ and help protect your business against the financial repercussions if any of your key employees were to suddenly pass away or fall critically ill. This lump sum payment is paid out directly to the business and can be used to cover the cost of any profit losses, replacement staff, or loan repayments. It will help keep your family business afloat during a difficult time and could be the difference between your survival or closure. At Brabners, we work alongside financial advisors and insurance brokers to ensure your business has sufficient protection in place.
Alongside any insurance policy, you should ensure that you have sufficient shareholder protection in place which can be provided under the company’s articles of association, a shareholders’ agreement, or a cross option agreement.
A shareholder’s agreement should be drafted in conjunction with the articles of association and both documents should coincide to avoid any of the provisions conflicting with one another. Under a shareholder’s agreement, family business owners can include a number of protections, for example, the shareholders can specify which matters are to require shareholder consent and can include restrictions on the transfer of shares. Similarly, the company’s articles can outline what is to happen in the event of shareholder illness or death.
In addition, a cross-option agreement can be entered into by all shareholders under which they each grant to the other ‘put’ and ‘call’ options over their respective shares which are exercisable on death, and the agreement is often backed by an insurance policy covering the value of the shares. The options grant the surviving shareholders the power to buy the shares from the deceased’s estate rather than them being passed through the estate.
This can be really important for family business owners as it allows the remaining shareholders to keep control of the business and also benefits the beneficiaries of the deceased as they will be paid out from the insurance policy.
It is important for family business owners to implement the protections mentioned above as this can not only protect the business in the event of ‘things going wrong’, but also protect the key employees/shareholders in the family business. In the absence of adequate protection, the business may suffer financially.
As a family business owner, the wealth of your business coincides with your own personal wealth and, ensuring your business has adequate protection and is covered in the event if ‘things going wrong', will inevitably protect your own personal wealth and inheritance planning.
Here at Brabners, our team of expert family business lawyers can advise you on the importance of the key person and shareholder protection, what documents should be put in place to protect your business and can ensure your family business has the right protection in place to coincide with your inheritance planning and personal wealth management.
