Buy-Sell Agreement Planning Checklist Template - Sun Life Financial - Canada

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Buy-Sell Agreement
Planning Checklist
Buy-Sell Agreement
Planning Checklist
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The Buy-Sell Agreement
Whenever a corporation has more than one shareholder, it is commonly recommended
that the shareholders enter into a buy-sell agreement to operate in the event of a
shareholder's death, disability, retirement, or conflict with other shareholders or a number
of other specific circumstances.
There are numerous objectives for such an agreement. The agreement can provide for a
smooth transfer of the business interest, avoiding potential disputes about the need for the
sale/purchase, the price and other terms of sale. Most importantly the buy-sell agreement
creates a degree of liquidity for the normally illiquid shares of a private corporation.
Failure to facilitate this smooth transfer could jeopardize the financial well being of the
departing shareholder and his/her family. It could also jeopardize the financial health or
even the viability of the business.
By providing for a sale, the likelihood of a confrontation between the departing and
remaining shareholders will be minimized.
Employees, customers, suppliers and
creditors will be reassured about the continuity of the business. Where appropriate
funding has been mandated in the agreement, creditors will also be reassured about the
financial health of the business and the remaining shareholders after the buy-out.
Unanimous Shareholder's Agreement
The buy-sell agreement can be a separate document or part of a more comprehensive
unanimous shareholder's agreement that governs banking, dividend and various other
corporate policies. Recent Income Tax Act changes regarding share redemption and life
insurance create the need to review whether the buy-sell agreement or amendments to the
buy-sell agreement should be done outside of the remainder of the shareholder's
agreement. It is recommended that an experienced tax and legal advisor be consulted in
the drafting of such agreements.
This Checklist
This checklist offers a number of issues to consider in the development of a thorough
buy-sell agreement. However, it does not in any way reduce the need to review these
matters with competent legal and other advisors or to have the buy-sell agreement
developed by a competent legal practitioner.
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This document is for discussion purposes only and in no way binds those
named parties to an agreement. The buy-sell agreement must be prepared by
independent legal counsel of the parties involved.
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Table of Contents
THE BUY-SELL AGREEMENT........................................................................................................... 1
UNANIMOUS SHAREHOLDER'S AGREEMENT ............................................................................. 1
THIS CHECKLIST................................................................................................................................ 1
WHAT SHOULD BE INCLUDED IN A BUY-SELL AGREEMENT?................................................ 3
I
.......................................................................................................................................... 3
N GENERAL
O
....................................................................................................... 3
N THE DEATH OF A SHAREHOLDER
O
-
.............................................................................. 3
N THE LONG
TERM DISABILITY OF A SHAREHOLDER
L
-
(
,
.)....................................................................................... 4
IVING BUY
OUT
RETIREMENT
DISPUTE ETC
M
.......................................................................................................................... 4
ARITAL BREAKDOWN
B
.............................................................................................................. 4
ANKRUPTCY OR INSOLVENCY
PROVISIONS FOR AN INTER VIVOS SALE..................................................................................... 5
GENERAL INFORMATION ................................................................................................................ 6
WHAT EVENTS MAY TRIGGER THE BUY-OUT? .......................................................................... 7
WHAT SHARES ARE REMAINING SHAREHOLDERS REQUIRED TO PURCHASE? ............... 7
WHAT PROPORTION OF SHARES WILL OTHER SHAREHOLDERS PURCHASE? ................. 7
WHAT CONDITIONS ALLOW FOR THE SALE TO AN OUTSIDE PURCHASER? ..................... 8
WHAT SALES ARRANGEMENT WILL BE USED FOR EACH TRIGGERING EVENT?............. 8
HOW WILL THE BUY-SELL AGREEMENT BE FUNDED? ............................................................ 9
WHERE INSURANCE IS IN PLACE FOR FUNDING PURPOSES ................................................ 10
D
................................................................................................................................................ 10
EATH
D
......................................................................................................................................... 11
ISABILITY
HOW WILL THE SHARES OF THE COMPANY BE VALUED? ................................................... 12
F
-
..................................................................................................... 13
ORMULA
DRIVEN PURCHASE PRICE
F
................................................................................................. 14
AIR MARKET VALUE PURCHASE PRICE
OTHER CONSIDERATIONS ............................................................................................................. 15
TERMINATION PROVISIONS.......................................................................................................... 15
NOTES ................................................................................................................................................. 15
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What Should be Included in a Buy-Sell Agreement?
In general
In general, regardless of the triggering event, certain elements should be considered for
inclusion:
• A specific definition of the triggering event. For example, where disability is the
triggering event, a clear, verifiable definition of disability, often coordinated with the
definition used in the insurance purchased to fund the buy-out, may be advisable.
• A dollar value or a clear, verifiable valuation method arbitrated by a pre-determined
third party if necessary.
• A clear definition of the manner in which the purchase will be financed. Where
financial contracts such as life or disability insurance are to be utilized, the
requirement to purchase these contracts and a reference to contract numbers or similar
information should be included.
On the death of a shareholder
Among the things to consider in the event of the death of a shareholder are the following:
• The beneficiaries of the deceased shareholder may not want to become actively
involved in the business.
• The beneficiaries of the deceased are entitled to the fair market value equivalent of
the deceased’s interest in the business.
• The surviving shareholders may not want the beneficiaries to be actively involved in
the business.
• The surviving shareholders may need a source of funds with which to purchase the
deceased shareholder’s interest.
• The sale of the business interest may create taxes and other expenses for the estate of
the deceased shareholder.
• Additional capital may be required to replace lost cash flows, or to train or hire a
replacement, if the deceased shareholder was key to the business.
On the long-term disability of a shareholder
Among the things to consider in the event of the long term disability or critical illness of
a shareholder are the following:
• The disabled shareholder may no longer be able to make a contribution to the
business. The other shareholders may want to purchase his or her interest.
• The disabled shareholder may want to exit the business and realize the full market
value for his business interest.
• The other shareholders may need a source of liquidity to purchase the disabled
business owner's interest.
• Additional capital may be required to replace lost cash flows, or to train or hire a
replacement if the disabled shareholder was key to the business.
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Living buy-out (retirement, dispute etc.)
Among the things to consider in the event of the departure of a shareholder due to
retirement, dispute or similar reasons are the following:
• In situations where the shareholder(s) are contemplating succession amongst
themselves or an involved family member, there should be provisions to allow for a
smooth transfer of ownership.
• The terms of the transaction and the appropriate approvals of the other shareholders
should be stated.
Marital breakdown
Among the things to consider in the event of the marital breakdown of a shareholder are
the following:
• The business interest is an asset that may be subject to division of property regimes
under provincial matrimonial law.
• In some circumstances, the particular shareholder may be required to provide an
amount equal to a portion of his/her business interest or even of the actual business
interest itself to his/her former spouse.
• The end result may be the addition of the former spouse as a shareholder or the
imposition of a significant debt upon the shareholder because of the division of assets.
In either case, the expectations of this shareholder or former spouse with respect to
dividend policy or other business policies may no longer align with those of the other
shareholders.
• Provisions can be added to the buy-sell agreement to give the remaining shareholders
the entitlement to buy out the shareholder undergoing division of property and/or that
shareholder's spouse, should shares in the business be awarded to that person under
terms of the division of assets.
Bankruptcy or insolvency
Among the things to consider in the event of the insolvency of a shareholder are the
following:
• Will creditors (the new shareholders) have the right to seize or otherwise encumber
the shares of a shareholder in the event of that shareholder's insolvency? If so, the
creditor becomes the shareholder and is afforded all the same rights.
• The creditors may be entitled to sell the shares in the open market without prior
approval of the other shareholders.
• The creditors may force a liquidating dividend in order to satisfy claims. Other
shareholders may be powerless to prevent liquidation.
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