Keep control of the business when an owner exits unexpectedly

Shareholder protection NZ, common questions.

Quick answers to what New Zealand business owners ask us most. Something not covered? Give us a call.

• What is shareholder protection insurance in New Zealand?

  Shareholder protection (also called ownership buy-out cover, partnership insurance or buy/sell insurance) is life and disability cover arranged to fund the purchase of a shareholder's stake if they die, are diagnosed as terminally ill, or become permanently unable to work in the business. The insurance provides the cash; a buy/sell agreement drafted by a lawyer sets out who buys, at what value, and on what terms.

• Do we need a buy/sell agreement as well as the insurance?

  In practice, yes. Insurance proceeds are always paid to the policy owner, and the policy itself does not compel anyone to buy or sell shares. The buy/sell agreement is the legal mechanism that obliges the exiting shareholder or their estate to sell and the remaining shareholders to buy, using an agreed valuation method. Cover without an agreement leaves the outcome to negotiation at the worst possible time.

• What happens if a shareholder dies without shareholder protection in place?

  The shares form part of the deceased's estate and pass under their will or the intestacy rules. The remaining owners can end up in business with an executor, a surviving spouse, or adult children who may have no involvement in the company and may need cash rather than shares. Without agreed funding, the options are usually borrowing, selling assets, diluting ownership, or selling the business.

• How is the cover amount worked out?

  It's based on each shareholder's proportion of an agreed business value, so the sum insured needs to reflect a valuation method your accountant and lawyer are comfortable with – often an earnings multiple, a capitalisation formula, or an annually reviewed value. Because business values move, the agreement should set a review cycle and the cover should be revisited with it.

• Who should own the policies?

  There are several structures used in New Zealand: each shareholder owning cover on the others (a criss-cross or cross-ownership arrangement), the company owning the policies, or an independent bare trustee holding them under the terms of the buy/sell agreement. Trustee ownership is often used where there are three or more shareholders or where the structure is complex. The right answer depends on your ownership mix and tax position, and it should be settled with your lawyer and accountant before cover is issued.

• Is shareholder protection tax deductible?

  Generally no. Cover taken out to fund a change of ownership is capital in nature, so premiums are usually not deductible and the proceeds are usually not taxable income. That is the opposite treatment to key person cover taken out to replace lost profits. Inland Revenue looks at the purpose of the policy, so purpose, ownership and beneficiary need to line up – confirm your position with your accountant.

• Does it cover disability as well as death?

  It can, and this is often the more likely scenario. Ownership buy-out cover is typically written for death and terminal illness, with an option for total and long-term disability, where a shareholder is unable to work in the business and that absence is confirmed as permanent. Trauma cover can also be included so a serious diagnosis triggers funding before it becomes permanent.

• We're a partnership, not a company – does this still apply?

  Yes. The same structure is used for partnerships, LLPs and closely held trading trusts, with the agreement drafted to match your ownership documents. Sole traders generally can't use ownership buy-out cover because there is no co-owner to buy the interest; key person and debt protection cover are usually more relevant there.

• Can the company just buy back the shares instead?

  A company share buy-back is possible, but it has to satisfy the Companies Act 1993 solvency requirements and the tax treatment of the payment needs care. Many New Zealand businesses find shareholder-to-shareholder buy-outs simpler to fund and document. Either route needs legal and accounting input – we work alongside your advisers rather than in place of them.

• How long does it take to put in place?

  Underwriting for life, trauma and disability cover typically takes a few weeks, depending on medical history and the sums insured involved. Larger sums insured can require medical examinations and financial underwriting. The buy/sell agreement runs in parallel with your lawyer, so the funding and the legal framework start at the same time.