The Risk of Having a Shareholder Agreement Without Shareholder Protection Insurance

Many business owners have taken sensible legal advice and put a shareholder agreement in place.

Some have also gone a step further and signed a cross option agreement.

At first glance, this can feel like the problem has been solved.

After all, there is now a documented plan for what happens if a shareholder dies.

The difficulty is that a legal agreement and a funding solution are two very different things.

The Problem

A cross option agreement provides a mechanism for surviving shareholders to buy the shares of a deceased shareholder.

It also provides the deceased shareholder’s family with a mechanism to sell them.

This can create certainty and help avoid disputes.

However, the agreement itself does not provide the money needed to complete the transaction.

This raises an important question:

If a shareholder dies tomorrow, where will the money come from to buy their shares?

A Common Scenario

Imagine a company with four shareholders.

A solicitor drafts a shareholder agreement and cross option agreement.

Everyone signs the paperwork.

The business owners leave the meeting feeling reassured that a plan is in place.

Several years later, one of the shareholders dies unexpectedly.

The agreement says the surviving shareholders can buy the shares.

The deceased shareholder’s family would often prefer cash rather than becoming involved in the running of the business.

The problem is that the surviving shareholders may not have hundreds of thousands of pounds available to fund the purchase.

At that point, everyone knows what should happen.

Nobody knows how it will be paid for.

Why This Matters

Without funding, several difficult outcomes can arise.

The surviving shareholders may need to raise finance personally.

The business may need to use working capital that was intended for growth or day to day operations.

The deceased shareholder’s family could remain shareholders for longer than anticipated.

Disagreements can arise over the value of the shares or how the purchase should be funded.

The result is that a legal solution intended to create certainty may still leave all parties facing difficult decisions.

Where Shareholder Protection Fits In

Shareholder Protection Insurance is designed to provide the funding element.

The insurance policy sits alongside the legal agreement.

If a shareholder dies, the policy provides funds that can be used to purchase the shares from the deceased shareholder’s estate.

This can help:

• Provide financial security for the deceased shareholder’s family
• Help surviving shareholders retain control of the business
• Support business continuity
• Reduce uncertainty at an already difficult time
• Create a clear route for ownership succession

The legal agreement provides the mechanism.

The insurance provides the funding.

Both are often needed to make the arrangement work effectively.

A Question Worth Asking

If your business already has a shareholder agreement or cross option agreement in place, it may be worth asking one simple question:

If a shareholder died tomorrow, where would the money come from to buy their shares?

If the answer is unclear, there may be a gap between the legal planning and the financial planning.

Final Thoughts

We regularly speak to business owners who have shareholder agreements in place but have never reviewed how those agreements would actually be funded.

The legal work is important and the funding strategy is equally important.

Getting both right can help protect business continuity, support the families involved and provide clarity for everyone concerned.

If you would like to discuss Shareholder Protection Insurance, or simply understand the options available, feel free to get in touch.

Important Information

Information correct at time of writing – July 2026.

Symmonds de Lacey is a trading name of Easy Street Financial Services Limited which is authorised and regulated by the Financial Conduct Authority.

We do not provide tax or legal advice. Any taxation references are based on our understanding of current legislation and practice, which may change. Professional tax and legal advice should always be obtained before making decisions.