Highlighting Problems with current existing Business Exit Agreement

Evanna Phoon wrote the below article and she is a Senior Franchisee of Rockwills. She can be contacted at info@malaysiawills.com

In order to have a proper Business Exit Agreement or sometimes called business continuation agreement, it is very important that the agreement is properly drafted dealing with the important issues, there are

  1. the incorporation of a power of attorney into the Business Exit Agreement plan in favour of the trustee,
  2. The existence of a trust deed providing the instructions to the trustee regarding the periodical distribution of the sale proceeds.
  3. As part of the Business Exit plan, the business owners would have to strategize the manner of funding the purchase in the future, where life insurance plays a very important & economical role;
  4. The trustee of the arrangement is a trustee company rather than an individual. Having a trustee company ensures a professional independent party among the business owners and also most importantly continuity without being affected by death, illness or by a busy schedule where an individual would be exposed to.

In this issue, we’ll explore on some of the business exit plans or business succession plans executed by business owners that are done wrongly & defective in some ways. A substantial part of this article will discuss on the defects.

Problems with some existing business exit planning or business continuation plans

a)    Without the appointment of a trustee and power of attorney

In order to save cost to set-up the plan, some 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 their own company who acts as the trustee.

The problem arises when, 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 Process or Letter of Administration) for Low’s executor to sign Form 32A transferring the shares to Tan and Chong. It’ll take a long time to transfer the shares.

Secondly, Tan and Chong will only release the insurance proceeds (as the sale proceeds) that they received much later, 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 very dangerous because the Company is being “controlled” by Tan and Chong who may not want to transfer the proceeds (money received from insurance company) 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 a quick and cheap option. It is 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, it could also be Tan and Chong paid the family of the deceased but this time, the family of the deceased could be the “trouble-maker” and refuse to transfer the share to Tan and Chong. This will cause Tan and Chong time and money to take legal action to recover the shares they have paid for.

By including a trustee company 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 business exit plan to benefit all the business owners. The power of attorney would authorize the trustee company to transfer the shares of the outgoing business owner to the surviving business owners 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 business exit 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.

In the next session, we’ll continue to highlight more problems with current Business Exit Agreement. Stay tuned …

 

About the Author:

MalaysiaWills CEO Evanna Phoon

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com, Malaysia’s first online will writing service provider for Rockwills Corporation Sdn Bhd & as-Salihin Trustee Bhd. Visit her website to download FREE ebooks & watch over 300+ videos on the topic of Will Writing for Personal & Business. She can be contacted via info@malaysiawills.com.

 

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Monday, April 2nd, 2012 article

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