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Kirk Rice Blog

Shareholder Protection In SME’sWritten on March 8, 2018 by Kirk Rice LLP

Shareholder Protection In SME’s
Financial Services Questions

The Question:

You no doubt have numerous questions in your mind with regards SME Shareholder Protection. In this article, we pose some of the questions and consider some of the answers.

Kirk Rice LLP answers:

If you own shares in a UK small or medium business (SME), you are probably aware of how much your shares are worth. but are you aware of shareholder protection options?

If one of your fellow shareholder directors is unable to work through serious illness or dies, how will you and the remaining shareholders provide them, or their heirs, with a fair value for the shares? They may be relying on you to provide for their financial security. Likewise, your business needs to survive this financial shock and be able to continue to prosper.

  • Can the business afford to buy the shares? It’s rare a business is not utilising its cash in the business so this is unlikely.
  • Can you or your fellow shareholders afford to buy the shares now? Do you know your shareholders well enough to answer this?
  • Could your business suffer loss of orders/sales if one of your fellow shareholders is not able to be involved?

If any shareholders provide personal guarantees or security for lending, then expect the lender to be reviewing the facilities after a serious illness or death. Some companies experience loss of staff or  reduced confidence from key customers, and lending difficulties.

A properly constructed shareholder protection arrangement provides a guaranteed amount of cash on critical illness or death of a covered shareholder in exchange for shares.

The shareholders will agree the value of their business at least annually and review the shareholder protection arrangement to ensure it still provides the correct amount in the event of a claim.

Each shareholder would need to set up a new life and critical illness policy owned by a specific business trust. All shareholders would have a binding legal agreement, which ensures the money is used for the intended purpose, should there be a claim. The shares of the affected shareholder would be exchanged for the cash from the insurance policy.

In addition, a cash sum could be paid to the business which can be used however the directors see fit. For example; reducing debt, improving cashflow if sales dip; meeting recruitment and inducement costs of a suitably skilled person to cover any expertise lost.

Setting up these arrangements can be complex and legal agreements need to reflect the business circumstances to be effective. Common problems that can be avoided include;  cash being subject to inheritance tax; and the business being taxed on the receipt of cash on a claim.

As always, seek the advice of your professional advisers.

 Read our Key Guide 

 Business Succession Planning

If you are interested in discussing the best Shareholder Protection options for your SME,  please telephone Michael Powell on 01344 875000 or email info@kirkrice.co.uk.

If you would like to receive our fortnightly Money Matters & Taxing Times newsletter electronically, simply email info@kirkrice.co.uk stating ‘newsletter’, in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.