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Shareholder Protection: 3 Things That Need to Be in Place to Protect All Parties

Shareholder Protection: 3 Things That Need to Be in Place to Protect All Parties

If you are sitting the CII AF2, AF5 or J03 exams, then this post is of particular use to you. It discusses the main point of business protection and what needs to be in place to protect the interests of both the dependants of a shareholder/director who has passed away and also those of the surviving shareholders of a company.

Knowledge of shareholder protection can be important for the AF5 exam as well as essential knowledge for J03 and AF2 the two business planning exams.

The main point of business protection is to ensure that dependants receive cash for the value of a deceased’s share in the business and also that the surviving shareholders retain control of their company.

Three things need to be put in place:

  • A shareholder agreement to decide on how to transfer the shares
  • Insurance provision so that the funds are available to buy the shares
  • Documentation to ensure that the arrangement is tax efficient

Term Assurance

Term assurance is the cheapest and simplest form of policy to use – either level term, short term or long term, or short term with the option to renew can be used.  Each shareholder/director takes out a life policy on their own life for the amount that covers the value of their shareholding and places it in a trust for the benefit of the other director/shareholders.  The trustees and beneficiaries are usually also the shareholding directors.  When a death occurs, the money pays out quickly to the trustees, who can then use that money to buy the shares from the deceased’s estate.


Business protection serves both dependants and the surviving shareholders. Click To Tweet


Cross Option Agreement

A cross option agreement then needs to be completed – also known as a double option agreement.  In this, the shareholders of the business have an option to buy the shares from the estate of a deceased shareholder, and the estate has an option to sell.  If either side exercises their option, the other has no option but to comply.   There is usually a timescale for the option to be exercised; most agreements state 6 months from date of death, although other time periods can be agreed.   The main advantage of using this type of arrangement is that it retains business relief for IHT purposes, as well as ensuring both parties achieve what is best for them.

Type of Trust

The trust used must be a business trust, where the trustees have a power of appointment, so future changes in the shareholder’s arrangements can be catered for.

Over to You…

If shareholder protection is not put in place, what problems could exist for the deceased shareholder’s family and the other shareholders left to run the business?

Grab the resources you need!

If you’re studying for your CII AF2 exam, and you want to do everything you can to secure a good result, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF2 calculation workbook taster now!

Click here to download our free calculation workbook taster for CII AF2


Alternatively, you can download taster resources for AF5 or J03 if one of those is your exam of focus.