Small companies have many commercial advantages. However, one disadvantage is that the shares can be difficult to sell. This is particularly so when a shareholder dies or becomes seriously ill and wants to leave the business. It is also likely to be a problem for the continuing shareholders, since if a shareholder has died, his or her executors or widow are unlikely to be interested in the business. Normally the remaining shareholders will want total control of the business themselves. Often, they cannot afford to buy the deceased’s shares even if his or her personal representatives are willing to sell them.
What each shareholder can do is to effect insurance on his or her life in trust for the benefit of the other shareholders. Such insurance should equate to the value of the shares.
The directors then enter into a cross option agreement with each other, whereby the personal representatives of the deceased shareholder are required to sell the deceased’s shares to the remaining shareholders (or the personal representatives can require the remaining shareholders to buy the shares) at a value either equal to the sum insured or at open market value.
This may mean that the continuing shareholders have to find the difference between the open market value of the shares and the sum insured. Such insurance could also provide for the sum to be payable on the serious illness of one of the shareholders.
While your financial adviser will need to put in place the necessary insurance, Wills Pluscan prepare the necessary cross option agreement between the shareholders.
