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.
