Thursday, 7 July 2016

For Owners and Partners of SME's: Shareholder/Partner Protection

Are you an Owner or Partner in an SME? If you are, then it is likely that you have inadequate business protection in place. Swiss Re estimates Asia’s “protection gap” to have increased to US$58 trillion in 2014 from US$42 trillion in 2010. Based on current trends, AIA estimates that this gap will grow to US$82 trillion by 2020, of which US$763 billion will relate to Hong Kong.

We have created a three part series for important elements of business protection you need to consider: Keyperson Insurance, Shareholder/Partner Protection and Loan Insurance.

Here is an overview of Shareholder/Partner Protection:

What is it and why is it needed?
If a shareholder/partner(“participant”) dies, the family of the deceased will want to realise the value of the deceased’s holdings in the business. This could be a substantial sum and it is unlikely that the business will have sufficient liquid assets that could be realized to pay for the Shares/Partnership Share of the deceased. It may well be that the continuing participant’s are happy for the deceased’s family to join the business, but if this is not the case the business will therefore either have to be fully or partially liquidated to buy out the deceased’s family or, potentially as detrimental, the shares sold on the open market to a 3rd party. This could lead to an unwelcome takeover or Shareholder/Director disharmony.
In any event, the business would not continue in its current form as all would all have wished.

What is the Solution?
The business is valued and the proportion relative to each Participant agreed. The valuation does not have to be carried out formally – the key point is that all the relevant parties agree and the valuation is sustainable by reference to the accounts and projections of the business and is robust enough to automatically vary with changing circumstances. Individual life insurances are then put in place for each participant reflecting their share. The proceeds are paid to the surviving participants in the event of a death. To remove any possible conflict, a “double option” in put in place, where the deceased’s family have the right to sell and the surviving participants have the right to purchase the deceased’s holdings.

In this way, the business’s risk has been transferred to an Insurance Company and its’ future becomes a lot more secure.

Further Considerations
Memorandum and Articles of Association are generally silent on the above so it is important to draw up a Shareholder/Partnership Agreement that fully reflects the above and the relevant ancillary details.

Neil Stokes, a partner at Just Service, is a UK Chartered Accountant.
He was for many years a partner in medium-sized Accountancy Practices dealing with these issues on a regular basis. If you feel you need more advice on the subject please contact us and he will be happy to assist in any way he can.

Disclaimer: All content provided on this page are for informational purposes only. Just service Hong Kong makes no representations as to the accuracy or completeness of any information on this page or found by following any link on this page. Just Service Hong Kong will not be liable for any errors or omissions in this information nor for the availability of this information. Just Service Hong Kong will not be liable for any losses, injuries, or damages from the display or use of this information. This policy is subject to change at any time.

Just Service Hong Kong is a member of the Hong Kong Confederation of Insurance Brokers in Hong Kong, transacting Long Term (including linked long term) Insurance business. Nothing in the comments above should be taken as offering investment advice or making an offer of any kind with regard to financial products or services of any kind. It is therefore important to reinforce that all comments above are designed to be general in nature and should not be relied upon for considering investment decisions without talking to licensed advisers.

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