An Outline

Corporate Shareholder Protection Insurance is an arrangement between a private trading company and one or more of its shareholders whereby:

• The Company enters into an agreement with a shareholder to buy back his shares from his personal representatives on death, and
• The Company effects a life assurance policy on each shareholder covered by such an agreement to provide funds on death to enable the company to complete the buy back. The company pays the premiums on this policy.

The Benefits

The benefits of this arrangement for the shareholders are as follows:

• On a death the surviving shareholders retain control of the company, as the deceased's shares are bought back by the company and cancelled.
• The dependants of a deceased shareholder can realise their shares for cash, shortly after death.
• The cost of the life assurance policies is borne totally by the company, and not by the shareholders personally.

Putting The Arrangement In Place

There are a number of steps to be taken to put the Insurance in place:

Check Articles Of Association

If the company's Articles of Association do not currently authorise the company to purchase its own shares then the Articles will need to be amended to include a provision authorising the company to purchase its own shares in accordance with the provisions of Part XI of the Companies Act 1990.

A special resolution of the members of the company is necessary to amend its Articles of Association.

Prepare Put & Call Option Agreement

Once the Articles have been amended, the company, in conjunction with its own legal and taxation advisers, then prepare a separate Put & Call Option Agreement suitable to its own particular circumstances. A separate agreement is required in respect of each shareholder whose shares are to be bought back on death.

On the death of a shareholder covered by such an agreement:

• the Company can exercise a Call option to compel the deceased's personal representatives to sell the shares back to it at market value, or
• The deceased's personal representatives can exercise a Put option to compel the Company to buy the shares back from them at market value.

If neither side exercise their options then the shares are not bought back and go through the deceased's estate to his next of kin.

We can provide a specimen Agreement. However the company and its shareholders should consult with its own legal and taxation advisers before drawing up an Agreement appropriate to their own particular circumstances.

Check on Capital Gains Tax Treatment

Provided certain conditions are met, the sale of shares in an unquoted trading company to the company is treated as a disposal by the vendor for capital gains tax purposes, rather than as a distribution received from the company for income tax purposes.

It is important that all parties are satisfied before the Put & Call Option Agreement is entered into that the sale of the shares by a deceased shareholder's personal representatives to the company, under the Agreement, is likely to qualify for capital gains tax treatment under section 61, Finance Act 1991.

If Capital Gains Tax (CGT) treatment does apply on the sale of shares to the company by a deceased shareholder's personal representatives then any CGT liability would only arise in respect of any increase in value of shares from the date of death of the date of sale. As this period is unlikely to be more than a few months in most cases no material Capital Gains Tax liability is likely to arise in such circumstances.

Company Proposes for Life Assurance on Shareholder's Life

To put itself in funds to meet its potential obligations under each Call Option Agreement, the company proposes for an Irish Life Protection Plan on the life of each shareholder to be covered by such an Agreement.The sum assured would normally be equal to the estimated market value of that individual's shareholding. The decision to propose for these policies would normally be taken at a board meeting specifying the reason for effecting the policy, i.e. to buy back a shareholder's shares on death.

• A meeting of the Company to authorise the Put & Call Option Agreement

• A copy of each proposed Agreement must be available at the company's registered office for at least 21 days before the meeting, and at the meeting itself.

• The authorisation of the company to enter each Agreement must be approved by a special resolution of the company.

If a shareholder subject to an Agreement holds more than 25% of the equity and votes in favour of the resolution in respect of that agreement then the special resolution will be ineffective. (Section 213(3) Companies Act 1990). To pass such a resolution in such circumstances the shareholder would need to absent himself from that meeting; and allow the other shareholders vote through the special resolution with regard to his shareholding.

Life Assurance policies are issued to the company who pay the premiums.

Under current legislation and Revenue practice it is our opinion that the premiums would not be tax deductible for Corporation Tax purposes while the proceeds are likely to be exempt from Corporation Tax.

The Company and shareholder(s) sign the Put & Call Option.

Agreement(s)

The Corporate Shareholder Protection Insurance arrangement is now in place.

For more information please contact our sales team at 014097090 or info@orca.ie