Buy/Sell Agreements

It is commonly recognised that small proprietary limited companies and unit trusts are the most popular vehicles for parties to come together to establish and operate a business or to participate in an investment.  The most well managed of those vehicles are regulated by shareholder agreements (for companies) and unit holder’s agreements (for unit trusts).

In recent years a trend has developed where many of those agreements now contain provisions which require death and total permanent disability insurance for each shareholder/unitholder (participant).  The intention being that in the event of death or total permanent disability of a participant, the proceeds of those policies are to be used by the surviving participants to purchase the shares/units of the deceased participant.

The main effect of these provisions is twofold:

1.   to provide funds for the surviving participants to acquire interest of the deceased participant; and

2.   to provide funds to the family of the deceased participant in a situation where there may not be a ready market for the estate of the deceased participant to sell the shares/units. 

There are various ways to structure the required insurance cover and each has different taxation implications. There are also various ways to structure buy/sell clauses.  In this regard, one of several important matters to be taken into account is the need to ensure that the terms of the buy/sell clauses adequately provide for an annual review of the level of insurance cover against the value of the shares/units held by respective participants to ensure the proceeds of the policies is sufficient to acquire the interests .

We can assist with the preparation of shareholder and unitholder agreements containing buy/sell provisions.