Company Share Buy Back Insurance

I am a 25% Shareholding Director of my own Company with 3 other business associates each owning 25% of the company. I have heard of Company Share Buy Back Insurance or Corporate Co-Directors Insurance and feel it may be appropriate given our circumstances. Can you please explain this to me?

The death of a Company Director would have serious implications for the business and for the families involved. Such an event can cause immediate financial hardship for all concerned and can also jeopardise the future of the business and the livelihood of the remaining Directors.

On death of a Shareholding Director, typically their next of kin would inherit shares of the deceased. This may be a husband, wife, partner or children.

Take a simple example – on the death of a Director the shareholding in the business passes to his wife, what are the likely consequences if a suitable plan is not in place?

• The deceased Directors wife may not be able to sell the shareholding in the business in order to realise its value,
• In the event of not being able to raise the required capital to buy  the wife’s shareholding in the business, the remaining Directors are now dealing with a new shareholder who may have little or no interest in the business,
• The deceased Directors wife may sell the shareholding freely on the  open market and surviving Directors will be forced to deal with the  resulting new Shareholders

What is Company Buy Back / Corporate Co Directors Insurance and how can it help?

A Company Buy Back / Corporate Co Directors Insurance consists of 2 parts, a Legal Agreement and Life Insurance Covers:

1)    A Legal Agreement (Contingent Purchase Contract) with each Shareholding Director – this provides for the event that on the death of a Shareholding Director the Company would acquire an option to compel the deceased’s next of kin to sell their shares back to the company at a fair open market value and:

2)    Company Buy Back / Corporate Co Directors Insurance– a life policy on each Shareholding Director which provides the funds on death to enable the company to have the necessary capital to complete the buy back of shares provided for under the Contingent Purchase Contract as outlined above

This formal arrangement has a number of benefits namely:

• The next of kin can rapidly realise their shares for an appropriate lump sum
• The surviving Directors retain full control over the company
• The cost of the life assurance premiums are borne by the company

Whilst there are a number of other legal and taxation considerations involved when considering this issue, I hope the information provided at least gives you pause for thought and allows you to begin the process of formulating an effective strategy for the possible death of a Shareholding Director in your business.