| Issue | Further comments | Universal Buy-Sell |
| Covering all relevant Uncontrolled Events | Rights to buy or sell interests in your enterprise arise under a buy-sell arrangement when certain "events" occur (called "Trigger Events"). Our Universal Buy-Sell Deed can apply to some or all of a number of "uncontrolled" Trigger Events, i.e. events that may occur without a Principal taking any deliberate action. Such Trigger Events include: - Death;
- Disability (including prolonged sickness and trauma);
- Divorce; and
- Default (including bankruptcy or a failure by a Principal to adhere to the agreed terms on which the enterprise is to operate).
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| Covering all relevant Controlled Events | Our Universal Buy-Sell Deed can apply to some or all of a number of Trigger Events that are within the deliberate control of one or more of the Principals. Such Trigger Events include: - Departure (retirement, resignation, etc);
- Disagreement (resulting in a permanent failure in the relationship between the Principals); and
- Deadlock (meaning that one or more key decisions can not be made by the Principals).
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| Applying to all relevant entities within your enterprise, not just the main trading entity | Most modern business structures involve multiple entities, for example, a company may carry on the trading operations, a trust may hold certain business assets, and another trust may hold the premises from which the business operates. Most buy-sell agreements we have reviewed do not adequately apply to all these relevant business entities – so when a trigger event occurs, some but not all relevant business interests are adequately dealt with. Our Universal Buy-Sell Deed covers all relevant entities within your enterprise, not just the main trading entity. | ü |
| Excluding either specific entities, or specific assets, from the operation of the Deed | You may want to exclude certain entities from the operation of the buy-sell arrangement, so that your business partners do not have the option to acquire a specific interest when a Trigger Event occurs. For example, you may wish to exclude the entity that owns the premises from which the business operates, or an entity involved in a distinct segment of the business operations. Our Universal Buy-Sell Deed provides you with the flexibility to exclude individual entities, or even assets within entities. | ü |
| Adequately bind all relevant parties | It is very common for the Principals in the enterprise, i.e. the "controlling individuals" behind the enterprise, not to directly own the equity in the enterprise. The equity may be owned through a holding structure of some kind, usually a trust or spouse. Our Universal Buy-Sell Deed binds all relevant parties, including the Principals and their respective holding entities. Furthermore, there may be other parties that need to come within the ambit of the Buy-Sell Deed, including the business entities themselves, and the partners or spouses of the Principals. | ü |
| Binding current and future spouses, to mitigate challenges upon separation and divorce | Divorce is one of the "Eight 'D's" that may trigger a disposal or acquisition under the Buy-Sell Deed, (along with Death, Disability, Deadlock, Default, Departure, Disagreement and Determination of Value). It is important that the existing spouses of the Principals acknowledge and agree to the terms of the Buy-Sell Deed, or the Buy-Sell Deed includes a warranty from each Principal that they will procure the consent of their spouse to the terms of the Buy-Sell Deed. If appropriately handled, the unaffected Principals will have some remedy if they are caught up in the divorce of another Principal, and will be able to exercise their rights under the Buy-Sell Deed in an unfettered manner. | ü |
| Tying in with the individual constituent documents of the various entities within your enterprise | Each entity within your business structure will have its own constituent document. For example, a company will have a Constitution, a trust will have a Trust Deed and a partnership with have Articles of Partnership. Most constituent documents include limited provisions that deal with "exit scenarios". For example, most company Constitutions include provisions dealing with pre-emption rights, the rights of directors to block a transfer, and sometimes "drag-along" and "tag-along" transfer rights. The same applies to Articles of Partnership. It is critical that these documents are reviewed and integrated with the more comprehensive terms of the Buy-Sell Deed. Furthermore, any potential "overlap" must be considered. | ü |
| Tying in with the personal Estate Planning documents of the Principals, including Wills and Powers of Attorney | It is important that the rights under the Buy-Sell Deed are noted and taken into consideration in the personal Estate Planning documents of each Principal (and vice versa). For example, it may be inconsistent for a Principal's Will to give their interest in the enterprise to a child, if the interest in the enterprise is to be sold under the Deed. In these circumstances, the terms of the Principal's Will should deal with the consideration received under the Deed, as opposed to the business interest itself. | ü |
| Choosing between a "mandatory" sale or purchase of interests upon a Trigger Event, or an "optional" sale or purchase of interests | Depending on the commercial deal between the parties, our Universal Buy-Sell Deed can provide that a sale and purchase of interests in the enterprise is automatically triggered if a Trigger Event occurs, or alternatively, that a transfer only occurs if an option is exercised by one party or the other after a Trigger Event. It is also possible to specify whether only a Buy Option is granted on a Trigger Event (i.e. an option for the continuing parties to purchase the interests of one terminating party), or only a Sell Option is granted (i.e. an option for the terminating party to require the continuing parties to acquire their interests), or whether both Buy and Sell Options are granted. This provides the necessarily commercial flexibility to meet the commercial objectives of the parties, as well as the adopted funding sources. | ü |
| Selecting an appropriate valuation methodology | A key component of a buy-sell arrangement is agreeing on a value or "valuation methodology" (to determine value) that applies if a Trigger Event occurs and a sale takes place. It is very important that a clear and unambiguous value or methodology is selected, and in the case of a fixed price, that the value is reviewed and updated regularly. If the value is to be determined by a third party, our Universal Buy-Sell Deed includes comprehensive provisions dealing with the selection of the independent valuer, and the manner in which they are to carry out their role. | ü |
| Preventing a CGT liability arising at the time the Buy-Sell Deed is entered into | Entering a buy-sell arrangement ordinarily involves the parties granting "options" to each other to buy and sell their respective interests in the enterprise at some future date – if one or more of a number of events arises (i.e. a "Trigger Event"). Furthermore, a buy-sell arrangement that is funded with life, TPD and/or trauma insurance may involve the departing party effectively transferring their interest in the enterprise to the continuing parties for no consideration, and instead being compensated for their interest in the enterprise in the form of the proceeds under their own personally held insurance policy. What this means from a tax perspective is that the rights granted under the Deed – i.e. to acquire the interest – may have significant value. Furthermore, this value would ordinarily arise at the time the deed is signed, rather than when the Trigger Event arises. This would ordinarily give rise to tax liabilities for the parties – at a time when they have no cash to meet these obligations. Our Universal Buy-Sell Deed is drafted to avoid this issue. Under our Deed the options to acquire and sell interests in the enterprise only arise when a Trigger Event occurs, and not at the earlier time when the Deed is signed. This defers any relevant tax liability to the same time that proceeds are likely to arise to meet the tax liability. | ü |
| Deferring the point in time that a CGT liability is incurred after a Trigger Event | The occurrence of a Trigger Event followed by the exercise of an option would ordinarily trigger any CGT liability in respect of the whole of the relevant interest in the enterprise. This means that the whole of any tax is then payable in the year of the Trigger Event. This can cause cash-flow difficulties for the selling party if payment of the cash price by the continuing parties is deferred into later years under a "vendor funding" arrangement. Some level of vendor funding is common in these arrangements, because the continuing parties may find it difficult to raise sufficient cash to pay the purchase price outright. In these circumstances a liability to tax arises, but there may be insufficient cash to pay the liability. Our Universal Buy-Sell Deed contains provisions that can be invoked to defer the point in time that the CGT liability arises into later income years – to properly match the time when the selling party actually receives the cash consideration from the continuing parties – and is therefore in a position to pay the associated tax liability. | ü |
| Nominating other parties to take up an interest acquired following a Trigger Event | Our Universal Buy-Sell Deed provides the parties with the ability to nominate one or more other parties to acquire an interest in the enterprise under the Deed. Put another way, the existing parties are not necessarily required to acquire further interests in their own right, but rather may nominate another party to take up the interest on their behalf. | ü |
| Procuring, maintaining and paying for insurance cover | Insurance funding is a common element of buy-sell arrangements. Whether the obligations under your buy-sell arrangement are to be wholly or partly funded by the proceeds of an insurance policy is a critical issue that requires considerable care and thought. Our Universal Buy-Sell Deed clearly sets out: - Whether insurance funding is required;
- Who is responsible for taking out and maintaining the insurance cover;
- Who is responsible for paying premium on the insurance cover (whether it is the individuals themselves, or the enterprise); and
- The consequences of a failure to do any of these things
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| Nominating the purpose for which insurance proceeds must be applied | There are a number of different types of insurance that may be taken out, as well as a number of different "purposes" for which any insurance proceeds may be applied. The most common purpose is "Equity Benefits", where the insurance proceeds are received as compensation for the transfer of an interest in the enterprise to the continuing parties. Other purposes for insurance proceeds include: - "Internal Debt", where the proceeds are utilised to repay debt owned to or from the enterprise to parties involved in the enterprise;
- "External Debt", where the proceeds are used to repay debt to third parties (such as banks);
- "Key Person", where the proceeds are utilised to compensate the enterprise for the loss of a Key Person, including the cost of replaying them or loss of income associated with their departure;
- "Guarantee" payments, where the proceeds are used to secure the release of parties from guarantee obligations; and
- "Personal", where the proceeds are used for one or more personal purposes of a party.
Our Universal Buy-Sell Deed can ensure that certain insurance policies are used for certain purposes. | ü |
| Dealing with any "unfunded balance" of the Purchase Price in circumstances where insurance proceeds (if any) are insufficient | For "unfunded" Buy-Sell Deeds the whole of any purchase price must be funded by the continuing parties. For "funded" Buy-Sell Deeds, the proceeds from insurance policies may partly or fully fund the acquisition price of an interest in the enterprise (or meet the other purposes for which the proceeds are earmarked). Where proceeds only partly fund the Purchase Price of an interest in the enterprise, or where the Deed is unfunded, it is necessary to consider how the Purchase Price, or the unfunded balance of the Purchase Price, is to be paid by the continuing parties. The solution is either for the terminating party to forgo any balance (which can be unfair), or for the balance to be provided by the departing party as "vendor funding" to the continuing parties. If vendor funding is involved, it is necessary to consider issues such as: - The period over which repayment is required;
- Whether security for the amount outstanding will be provided; and
- Whether interest is payable on the unpaid portion.
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| Dealing with insurance proceeds in excess of the nominated Purchase Price | As a general rule, any proceeds from an insurance policy in excess of what is required to fund a particular purpose under the Buy-Sell Deed generally goes to the Principal (or their family) in respect of which the benefits have been paid. | ü |
| Owning insurance policies through a Bare Trust arrangement | To benefit from potential insurance buying advantages, control over premium payments and control over the application of benefits to intended purposes | ü |
| Continuing salary benefits after exit | Our Universal Buy-Sell Deed makes provision for a departing Principal (or their family) to be paid either continuing salary or termination benefits following a Trigger Event. | ü |
| Dealing with termination payments | If a Principal is employed in the enterprise then even if they do not have an expectation of such things as accrued holiday leave and termination pay, they may have a legal right. Furthermore, leave taken by Principals is seldom documented, and leave entitlements can be significant. This can come as an unpleasant (and unfunded) surprise to the continuing parties. Our Universal Buy-Sell Deed makes specific provision for termination payment rights. In particular, it can preserve such entitlements, or provide for the proceeds under the Deed to also cover any such entitlements. | ü |
| Terminating the employment of associated family employees | It is common in some enterprises for people related to a Principal to be employed in the enterprise. It is also often the case that the ongoing employment of these people is tied to the ongoing involvement of the Principal. There is an expectation that on the departure of a Principal their associated family members will also resign their jobs. However, this is seldom documented. Our Universal Buy-Sell Deed makes provision for the orderly termination of the related family employees of a departing Principal. | ü |
| Dealing with termination distributions | Trigger Events invariably occur throughout the year, and not at neat times, like 30 June. The parties must decide and document whether a departing party will be entitled to a pro rata share of the profits of the enterprise up to the Trigger Event. Our Universal Buy-Sell Deed has provision to require an interim distribution of profits (or part thereof) to a terminating party (or their Estate). | ü |
| Adopting comprehensive dispute resolution provisions | Our Universal Buy-Sell Deed includes comprehensive dispute resolution procedures to avoid arguments necessarily escalating into potentially costly formal legal disputes. | ü |
| Incorporating comprehensive termination provisions | It is critical to specify the circumstances in which the buy-sell arrangement may be brought to an end. | ü |
| Providing for periodic reviews | An enterprise does not stand still. The Buy-Sell Deed must include a mechanism for regular reviews of key issues. These include: - Which entities are included in the Deed (for example, if new entities are added);
- The valuation methodology (if it has become out of date);
- The valuation itself (if the parties have adopted a fixed value or tied it to a fixed level of insurance);
- The type and levels of insurance cover – and whether it is still available to all Principals (if applicable)
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| Special Conditions | Our Universal Buy-Sell Deed provides a robust mechanism to seamlessly incorporate detailed special terms and conditions. | ü |
| Pro forma Exercise Notices, Nomination Notices | Our Universal Buy-Sell Deed comes with hard and soft copies of relevant Notices that may issued under the Deed. | ü |
| Statistics | Pages | Up to 45 pages |