An untimely death is obviously distressing, and, with a company director, there can also be serious financial and operational implications for the business and its surviving shareholders.

For this reason, corporate co-director insurance is essential cover to address challenges both the company and next of kin may face.

Not widely understood, this cover is an arrangement between a private company and one or more of its shareholding directors, allowing the company buy back the shareholder’s stake from his or her benefactors on death.

It addresses some potential difficulties in advance, such as whether the remaining shareholders could raise the required capital, or if the next of kin refuse to sell.

Without some form of co-director insurance, the deceased’s company shares would normally become part of their estate, passing to a spouse or children. The new share owner may not have business experience, or may wish to move the company in a new or unwelcome direction.

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If the deceased shareholder owned more than 50% of the company, their next of kin could automatically become the new majority shareholder, taking control of the company or selling the shareholding to an external party, with remaining shareholders having limited control.

Next-of-Kin Challenges

Selling company shares can create difficulties for next of kin too, particularly if the company’s Articles of Association give the other shareholders the right to block the sale.

Without a way to sell the shares on the open market, the deceased’s family could be forced into a ‘fire sale’ to the other shareholders at a lower price than market value.

There can also be cashflow difficulties, especially as the deceased’s salary will have stopped. Depending on the family’s financial reserves or personal life policies, shares may need to be sold to provide an income. A cashflow problem is exacerbated if the shares inherited also give rise to an immediate inheritance tax liability.

Co-director insurance therefore is an important solution to limit the financial pressures and uncertainty faced by surviving directors and next of kin.

Both corporate co-director insurance and a more traditional co-director insurance exists – the benefit of the former being that its cost is borne by the company, and not by shareholders personally.

As well as allowing company operations continue with minimum disruption, it ensures next of kin receive the value of the shareholding within a specified period.

Some taxation issues and legal restrictions apply, so corporate co-director insurance is not appropriate for all companies. A financial advisor and/or legal counsel can help come to a decision on this.

Corporate co-director Insurance can be confused with key person Insurance, but the two types of protection are very different. A key person policy is written solely for the benefit of the company, whereas a corporate company director insurance policy has immense value in safeguarding both the interests of the company and of the deceased’s family.

+ John Molloy (pictured) is a co-director and co-founder of Orca Financial, a Dublin-based independent financial services company founded in 2004