There are business continuation plans or business succession plans executed by business owners that are defective in some ways. A substantial part of this article will discuss on the defects and the later part of this article on the advantages of having a professional BVP plan.

Problems with some existing business continuation or business succession plans

a.

Without the appointment of a trustee and power of attorney

In order to save cost to set-up the plan, the business owners decided to leave out the need to appoint a trustee and to execute a trust deed, as well as the power of attorney. This would be fatal to the plan. For example, Low, Tan and Chong are shareholders in a plastic manufacturing business and they have executed only a buy-sell agreement and the insurance policies bought by them are assigned to the Company who acts as the trustee.

The problem arises when, for example, Low dies. The Company would receive the proceeds from the insurance company and it is to be used to pay to Low's family in exchange for Low's share. There will be two problems here. Firstly, if there is no power of attorney, how would Low's share be transferred to Tan and Chong? Tan and Chong would have to wait between 6 months to 3 years (because of Probate or Letter of Administration) for Low's personal representative to sign Form 32A transferring the shares to Tan and Chong.

In addition, Tan and Chong will only release the insurance proceeds (as the sale proceeds) that they received much earlier, to Low's family only when they receive Low's shares. If Low pre-signed Form 32A when the agreement was executed, this would be dangerous because the Company is being "controlled" by Tan and Chong who may not want to transfer the proceeds possibly due to the weak financial health of the Company at that time. Tan and Chong can also always misuse the pre-signed Form 32A to defraud Low of his shares. Low's family can always take legal action to recover proceeds or shares pursuant to the buy-sell agreement. It is their right to take such legal action and Low's family would win the matter without any problem but it is not going to be cheap. It is also very time consuming. What is worrying is the actual recovery of the proceeds from Tan and Chong which can take many years. If you are Low, would you want yourself or your family to go through such difficulties?

The same problem above could be faced by Tan and Chong as well. Sometimes the family of the deceased could be the "trouble-maker" and cause Tan and Chong time and money to take legal action to recover the shares they have paid for.

By including a trustee company such as Rockwills Trustee Berhad and a power of attorney the above issues can be solved. The trustee company will be the independent party who will receive the sale proceeds from the insurance company and who also the "compliance officer" of the BVP plan to benefit all the parties. The power of attorney would authorize the trustee company to transfer the shares of the outgoing business owner to the purchasers with ease and without any delay.

b.

Distribution of the sale proceeds to the estate of the deceased

There are two main reasons to include the trust deed as part of the BVP plan. Firstly, it is to ensure that the sale proceeds received by the named beneficiaries are not misspent within a short period of time. This is because the sale proceeds tend to be a substantial amount. If the trust deed states that the sale proceeds are to form part of the estate of the deceased, it is meaningless to have a trust then. This is because the trustee would claim the insurance proceeds and receive such proceeds within a few weeks from the insurer and thereafter to deliver the proceeds to the personal representative of the estate. This prevents the beneficiaries from receiving the proceeds immediately as they would have to wait for the personal representative to obtain either Probate or Letters of Administration to be granted by the court.

However, if the trust instructs the trustee to pay the sale proceeds to be used for maintenance, medical and education expenses of the beneficiaries, their financial hardship would be lessen. The distribution if the proceeds can be structured to make periodical payment based on the needs of the beneficiaries, rather than one-off payment to them.

c.

Using keyman insurance to fund the purchase of the shares

Many business continuation or business succession plans are created using the proceeds from keyman insurance policies. A keyman policy is a policy that is insures the life of a key personnel of the company. It is paid for and owned by the company, rather than by the key personnel. The idea behind keyman policy is to compensate the contracted amount to the company for the financial losses that would arise from the death or extended incapacity of the key personnel specified on the policy. This facilitates the continuity of the business.

When a keyman policy is used for BVP, it will be caught under section 67 of the Companies Act 1965. It prevents a private limited company from purchasing its own shares or to provide any form of financial assistance to the shareholder or any third party directly or indirectly to purchase the company shares of another shareholder. As such, when the proceeds are used to purchase the shares of the deceased shareholder, whether it is disguised as gratuity to the family or not, on the understanding that such payment is in exchange of the shares of the deceased shareholder, it will be caught under section 67 of the Act.

The Directors of the company will be held liable when the company is found to infringe section 67. The penalty faced will be a fine of RM100,000 or 5 years imprisonment or both.

d.

Payment of insurance premium by the company

As mentioned in the earlier articles, the business owners are to pay for the premium using their personal funds. If the business owners are Directors, he will be able to use part of the Director's fee received to make such payment. If he is a shareholder, then any dividends received can also be used to make such payment. The company is not allowed to use its funds to pay for the premiums (whether or not it is categorised as deductible expenses or not) and if it does, it will contravene section 67.

What are the advantages to have a BVP plan?

a.

The BVP plan and business owners guarantee the sale of the business interest at a full and fair value. It sale price is stated in the buy-sell agreement. At the same time it avoids the unqualified heirs from being part of the business or selling of the deceased's shares to outsiders.

b.

When the BVP plan is put in place it avoids any argument or negotiation over the purchase price between the heirs and the surviving business owners. This is important even though the Memorandum of Association and Articles of Association (for private limited companies) provide pre-emptive rights to shareholders regarding the disposal of the shares by way of a sale. However, the pre-emptive rights do not amount to pre-agreed price that is fair to the parties. The heirs and surviving business owners would still need to agree on a price to sell the shares. The heirs and surviving business owners may disagree for on the proposed price and the deadlock can last a very long time. In the mean time, the surviving business owners would have to work with the heirs.

With a BVP Plan, this is avoided as the parties can longer have the right to discuss on the pricing. It has been agreed and stated in the agreement that binds the business owner, his heirs and estate of the business owner.

c.

With a power of attorney it provides for a smooth transfer of outgoing business owner's interest to the purchaser when the specified events occur. There is no need to wait for the personal representative to act or worse still when the outgoing business owner is disabled or in coma, to wait for his recovery to sign Form 32A.

d.

As the business or the company is a not a public listed company, there is no outside market to sell to. The existing business owners would be the natural purchasers. Thus, with a BVP plan, it ensures that non-liquid stock/interest is converted to liquid income, providing a fund for outgoing business owner or for his loved ones to use during their time of need.

e.

The Trustee ensures that the outgoing business owner's interest are properly transferred to the surviving business owners and the sale proceeds are distributed proper without involving the surviving business owners and family members of the outgoing business owner. By implementing a trust, the business owner can ensure that the sale proceeds are not misspent by his beneficiaries.

f.

The business carries on like normal and the suppliers/creditors can be assured of the existence of the business. The key employees will be willing to remain within the business due to the smooth transfer of ownership to the remaining business owners.

If you are interested to create a BVP plan for your business, it is very important to engage a knowledge and experienced professional, such as a Professional Estate Planner of Rockwills, who can trouble shoot and also structure a professional BVP plan.

This article is prepared by Azhar Iskandar Hew, General Manager. Rockwills Trustee Berhad

Rockwills Trustee Berhad provides a wide range of Private Trustee and Estate Planning services, including Business Value Protection Trust. Rockwills Trustee is part of the Rockwills International Group and is an associate company of Rockwills Corporation Sdn Bhd, the No. 1 Professional Will Writing Company in Malaysia. Azhar can be reached at 03-77811993 or at azharhew@rockwills.com