Company Share Buyback Insurance is a means of solving the financial problems that can arise following the death of one of the shareholding directors of a company.
How it works
The company enters a Contingent Purchase Contract with each shareholding director, so that in the event of his death, the company would acquire an option, which it can exercise within a limited period after death, to compel the deceased’s next of kin to sell their shares back to the company at a fair open market value. Likewise the deceased’s next of kin would also acquire an option to compel the company to purchase the shares from them.
In this way either the company or the deceased’s next of kin can trigger the purchase/sale of the deceased’s shares after death.
The company effects a life assurance policy on the life of each director covered by such an Agreement,
to provide funds on death to enable the company to complete the buy back of shares. The company pays the premiums. In the event of the death of a director covered by such a Contingent Purchase Contract, the company would use the proceeds of the policy on his life to buy back his shares on death and cancel them, or hold them as ‘treasury shares’. The surviving shareholders would therefore retain full ownership of the company.
Company Share Buyback Insurance brings benefits for both sides in the event of the death of a director:
• The next of kin are not locked into the company, and can rapidly realise their shares for a substantial capital lump sum.
• The surviving directors retain full control over the company as the company buys back and cancels the shares of a deceased director.
• The cost of the life assurance is borne totally by the company, with no personal outlay for the directors.
Company Share Buyback Insurance is complex, and may not be appropriate in every case.
There are two main areas that may restrict the use of Corporate Co-Directors Insurance and hence should be considered carefully before entering into such an arrangement:
• The legal power of a company to purchase its own shares, and
• The taxation treatment of the buy back of the company’s own shares.