Can a shareholder be excluded from shareholder protection? Read on to find out the answer and the information on the circumstances under which this can happen.
The purpose of shareholder protection is to ensure the continuity of a business. If a shareholder dies or becomes incapacitated, the shareholder protection clause allows the company to purchase the deceased or incapacitated shareholder’s shares from their legal heirs. This leads to the question: Can a shareholder be excluded from shareholder protection?
What is shareholder protection?
Shareholder protection is a type of business insurance that protects the company from situations in which a shareholder dies, becomes ill, or is otherwise unable to continue their duties as a shareholder. It’s designed to help the remaining partners buy out their outgoing co-partner’s equity in the business.
Shareholder protection insurance ensures that those shares stay in the company, so that it can continue to grow and be successful after one shareholder is gone.
This type of insurance is essential for companies with multiple shareholders because it ensures that any unforeseen events will not affect the business.
In addition, if a shareholder dies unexpectedly and leaves behind dependents that need financial support until they’re of age, this kind of policy can help them receive income for their living expenses during this period.
The cost of the policy will depend on several factors
The sum insured
This is the amount paid out to cover any outstanding debts if your company were to go under. That amount depends on how much capital the remaining partners would need to buy out the outgoing shareholder’s equity in the corporation.
The level of risk
The insurer will assess how risky it thinks they are taking on by providing this insurance, and it will also take into account your age and lifestyle choices (e.g., smoking).
For example, a 30-year-old non-smoker with no existing health conditions would likely have lower insurance premiums than an older person with high blood pressure or someone who smokes.
Suppose you are diagnosed with a life-threatening illness or given a certain period to live. In that case, your family could be eligible to receive a lump sum payout under a shareholder protection policy.
What are the benefits of shareholder protection?
Shareholder protection policy provides financial stability for both the business and the deceased’s family. Without this policy, there’s no guarantee that your heirs will receive any money from your business. Your business may be taken over by a successor who is not passionate about the business or interested in maintaining its legacy.
It gives investors confidence that they will be able to recoup their initial investment if anything goes wrong with the company’s operations (such as the death of a shareholder), which can help attract more investors and increase liquidity on exchanges where shares are traded regularly at all times throughout each day.
Without this policy, there is no guarantee that shares will change hands smoothly when there is a change in ownership.
Lastly, beneficiaries have a clear idea of what they will receive when selling back their shares to the shareholders.
Can a shareholder be excluded from shareholder protection?
The most commonly asked question we get is: can a shareholder be excluded from protection under a shareholder protection plan? Yes, but only under certain circumstances.
A shareholder is a party to a contract, so it is possible for them to be excluded from shareholder protection. However, the exclusion must be clearly and unambiguously stated in the contract for this exclusion to be valid.
The law considers that this exclusion is only valid if there are no other reasons it should not be applicable. If a reason does exist, then the exclusion will be considered valid by law.
You are better protected if you have the terms of your shareholders’ agreement set out in a professionally drafted Shareholders Agreement.
Protect your business
Shareholders are the backbone of your business. They’re the ones who put their trust in you and who give you the capital to grow your company. But what happens if one of them unexpectedly leaves? What if they die? What if they get sick and can’t work anymore?
That’s where WIS Business Protection comes in. If a shareholder cannot continue working for some reason, our company will reimburse you for any costs associated with replacing that person. You don’t have to worry about losing your investment.
If you want to know more about how you can ensure your shareholders are covered, contact us today!