Background
P&W Shipping Services Limited is a very successful company in the Shipping industry. The directors who were also the business owners of the firm have recently undergone a share buyout as one of the business owners was retiring. They requested that they have all their corporate insurance and investment plans reviewed, taking into account the impending changes in the company. Their main concerns were that in the event of the loss of one of the remaining directors in the company due to premature death, the business may destabilise which could quickly lead to financial difficulties. They ideally wanted the remaining directors to remain in control of the business following the death of any director.
If a director dies with no share protection in place, his/her share in the business may be passed to his/her family. This means that the surviving business owners could lose control of a proportion or, in some circumstances, all of the business. The family might then choose to become involved in the ongoing running of business or could even sell their share to a competitor.
Our approach
Logic Wealth Planning arranged a meeting with the directors to discuss the company’s existing protection arrangements and put together a list of all the plans, their purpose and calculate any shortfalls. Once the directors valued the company, Logic Wealth Planning was in a position to start undertaking research into the matter further. It was agreed after a number of discussions that a shareholder protection scheme be set up with a cross option agreement in place.
A cross option agreement gives surviving shareholders the right (but not the obligation) to require the deceased shareholder’s personal representatives to sell the shares to them (known as a “Call Option”). It also gives the personal representatives the right (but not the obligation) to require the surviving shareholders to buy the deceased shareholder’s shares (known as a “Put Option”). By combining a Call Option with a Put Option in a single agreement, each side has the option of ‘forcing’ a sale of the shares.
A complete plan was produced which enabled the firm to understand that:
- In the event of a director dying or being diagnosed with a terminal illness, the share protection plan can provide a lump sum to the remaining directors. This means that in the event of a valid claim being made during the length of the policy, the policy could pay out a lump sum to help purchase the deceased director’s interest in the business.
The directors of P&W Shipping Services Limited accepted our recommendations and applied for the cover to be undertaken. Logic Wealth Planning arranged for the plans to be set up under a suitable trust arrangement together with the execution of the cross option agreement.
The outcome
By following our financial advice, P&W Shipping Services Limited were now in a position that if one of the directors suffered a premature death, their shares in the business would be passed to the surviving directors. This was possible by way of the life insurance benefits paying out into the trust arrangement and the surviving directors exercising their right under the cross option agreement to purchase the remaining shares from the surviving spouse. The business of the company is left in the hands of those who are committed to it’s long-term success whilst bereaved loved ones would receive the value of the shares in cash assisting them to rebuild and move on with their lives.
