Having discussed the general concept and funding for the Business Value Protection (BVP), we will move on with the contents of the Buy-Sell Agreement for BVP. There are two types of agreement i.e. Buy-Sell Agreement and Cross Option Agreement. I intend to cover only the salient points for the Buy-Sell Agreement that is to be considered by business owners. Let's leave the actual contents and manner of drafting to the lawyers, which is what you are paying them for. The agreement must be drafted by experienced corporate lawyers who are familiar with BVP.

Whether it is a Buy-Sell Agreement or Cross Option Agreement, when executed by the parties, it is a legally binding contract ensuring the protection of the business value and its continuation by the remaining business owner(s).

1.

Buy-Sell Agreement

When one agrees to a Buy-Sell Agreement, it is mandatory that upon occurrence of one of the trigger events such as death, total permanent disability, retirement and critical illness, the remaining business owner(s) as the purchaser MUST buy from the outgoing party who is the vendor. In turn the vendor MUST sell to the purchaser. There is no longer any room to negotiate about the pricing and whether to purchase or sell the business interest. When a party fails to fulfill the obligation stated in the agreement, it amounts to a breach where the defaulting party is liable to pay damages.

The salient points of the agreement are:

a.

Method of valuation? In every Buy-Sell Agreement and also Cross Option Agreement, it must clearly state the value of the business. Usually, the parties prefer a formula basis to determine of the business value. This is because it avoids the need to execute further supplemental agreement(s) when a review of the value if made. The method of valuation must be clearly stated to avoid confusion. This should be approved by an experienced accountant. In the event a fixed/agreed price is used, the parties must be prepared to execute supplemental agreements and to pay for such supplemental.

b.

What are the trigger events agreed upon? The traditional events are death, total permanent disability, retirement and critical illness stated in such agreements. However, there is a need to determine whether additional events such as loss of professional license, divorce, bankruptcy or deadlock between co-owners are to be included.

c.

How is the purchase funded? If life insurance is used and it is assigned to the Trustee, it is to be stated. In some cases, instead of an assignment of the insurance to the Trustee, the Trustee is appointed in the insurance nomination under Section 166 of the Insurance Act 1996. This is to prevent the 5% service tax being charged to the client. However, the nominees named in Section 166 and their entitlement must be exactly the same in the Trust Deed.

d.

When is the completion date of the sale and purchase? - this depends on the trigger events agreed by the business owners, sometimes there will be different completion dates on the occurrence of different events. For example, the parties can agree on 12 months upon occurrence of death but on 36 months when it comes to retirement. If life insurance is used as funding, there will be different time frames for the pay out by the insurance company as it depends on whether the type of disability. Sometimes, it can as long as 36 months. Whether the completion date is 1 month or 60 months, what is important is that the business owners must agree on the time frame for the completion of the sale and purchase. They have to ask themselves whether they can pay up the moneys to complete the purchase.

e.

What about the Trust Deed and Power of Attorney? As these two instruments are an integral part of BVP, the business owners are to execute them at the same time with the Buy-Sell Agreement.

f.

When should the parties review the value of the business? Usually the agreed period is three years. When the review period is agreed upon, with the necessary attendance quorum being achieved, and there is an increase value, the business owners will be required to prepare the necessary funding. This could mean they may have to purchase additional insurance policies.

g.

Dealing with shortfalls - the parties have to agree on this important point as the life insurance proceeds may not amount to the full purchase price due to the revision of the value and where the parties are no longer eligible to be insured further. What needs to be decided is the instalment period to pay up for the shortfall. For the purposes of convenience, when a trigger event occurs and upon the initial payment of the purchase price, the Trustee using the power of attorney shall transfer all the business interest of the outgoing party to the purchasers even though the full payment have yet to be received. The purchaser(s) shall owe a debt to the Trustee who represents the vendor and his beneficiaries.

h.

What happens if the insurance policy proceeds exceed the value of the business interest to be purchased? Any excess shall be returned to the party who pays for the insurance premium of the vendor. I doubt that the parties would agree to the vendor receiving the excess.

2.

Usage of Cross Option Agreement

A Cross Option Agreement is also known as a "wait-and-see" Buy Sell Agreement or Double Option Agreement. It is considered as "wait-and-see" because it may be difficult to decide in advance what steps to be taken by the business owners upon the occurrence of certain specified events. Unlike Buy-Sell Agreements, having a Cross Option Agreement provides flexibility. The parties to agreement are given either a Put Option or a Call Option or both. Only when a party exercises the option given, it shall bind the other party(s).

In a Cross Option Agreement, the surviving business owner(s) have an option to buy ("call") the business interest from the deceased business owner's personal representative, and the legal representatives of the deceased business owner have an option to sell ("put") the shares to the surviving business owner(s).

For example, if the surviving shareholders want to buy the deceased shareholder's shares then the latter's legal representatives must sell them. Likewise, if the shareholding is offered by the personal representative to the surviving shareholders then they must buy. Just like Buy-Sell Agreement, it must state the trigger events for the option to be exercised and also the agreed period for an option to be exercised when a trigger event occurs.

Different events may allow the exercise of different types of options available to the business owners under the Cross Option agreement:

a.

What happens upon the death of any of the business owner? "Double Option" is given to the parties - here the personal representative of the deceased business owner shall have the option to require ("put option") the other surviving business owners to buy the interest of the deceased business owner and at the same time the other surviving business owners shall have the option to require the personal representative to sell ("call option") the interest of the deceased business owner.

b.

What happens upon the occurrence of any critical illness and disability of a business owner? "Single Option" is given to the disabled business owner shall have the option to require ("put option") the other surviving business owners to buy his interest. This prevents a disabled business owner who can still contribute to the business effectively from being forced to sell (and forced out of the business) to the other co-owners when they exercise their call option. The diagram below illustrates the usage of Single Option.

In some cases especially when there is an inactive business owner who do not intend to buy out the others when an event occurs, a Call Option is preferred and is given to the active business owners. This is because it will give the "purchasers" an option whether they would want to purchase the business interest of the inactive party.

There are various issues to be determined whether a Buy-Sell Agreement or Cross Option Agreement is to be used. It is essential to seek the advice of Professional Estate Planners to help you make an informed decision.