Risks of not making a legal Buy/Sell Option Agreement

Too often business owners use Self Ownership or Cross Ownership structures to hold polices of insurance in respect of each other without formalising their intentions pursuant to a written Buy/Sell Option Agreement.  The maintenance of insurance policies overcomes a funding problem only, however, does not address the usual problems that can arise in the absence of a written agreement.

The following are some of the implications of not formalising a Buy/Sell Option Agreement in relation to a Business Succession Planning Strategy:

  • Disputes may arise in relation to the enforceability and/or terms of the agreement, including:
    • the method of calculating the price for an outgoing owner’s equity,
    • the obligation to accept the insured amount in lieu of the market value, or
    • when and how the price is to be paid,
  • If a dispute arises and Self Ownership has been the preferred strategy for structuring ownership, the dispute will be occurring at a time when the Life Insured (or their Estate) has or will receive the insurance proceeds directly without any ability for the continuing owners to control the application of those proceeds, and
  • Finally, in the absence of an agreement in relation to the existence of terms of a Buy/Sell Option Agreement, litigation may result in the Court making an order determining that the continuing owners have a beneficial interest in the policy pursuant to a verbal Business Succession Plan evidenced by previous discussions, correspondence and the parties’ conduct in taking out personal insurance. The potential effect of such a finding may be that the Death Benefit loses it’s CGT exempt status in the hands of the Life Insured (or their Estate) due to the insurance proceeds being received by a party who the Court has determined was not the sole “beneficial owner” of the policy.

It has been suggested that approximately 90% of all Business Succession Planning Cover is maintained without any written Buy/Sell Option Agreement in place.  If you fall within this group it is not too late to act.  Call us today to discuss your Business Succession Plan.

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By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)

Sam Roberts