Shareholder protection, often used by businesses, protects shareholders against the impact a death or illness of a shareholder may have on the financial stability of a business.
In most cases shareholders leave their estate including their shares to their beneficiaries upon death and sometimes critical illness. Consequently the business now has a new shareholder with possibly no experience and little knowledge of the business.
It is quite likely the new shareholder will take a wage or even a percentage of the profits when contributing very little to the business themselves. Potentially the inherited shares could be sold onto a third party, even a competitor. Any of these scenarios caused by the replacement of a crucial team member through inheritance could be detrimental to the future success of the business.
Generally companies adopt a clause in their deeds or Articles of Association so that should a shareholder die the remaining shareholders can reserve the right to buy the shares, usually at a pre-determined price.
For businesses that are prepared for this situation shareholder protection can ensure that remaining shareholders are financially able to deal with the situation that has arisen. The sum of protection can be determined by the amount perceived necessary to buy out the deceased or critically ill shareholder’s share of the business.