MalaysiaWills

Seminar: Offshore Company Formation

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

Have you set-up an offshore company? If yes, have you planned for the succession of how to distribute your company shares? REGISTER NOW at RM 10 per person to find out the solutions to help you to distribute the offshore company shares effectively!

Target Audience: Business Owners of Offshore Companies and Company Secretaries who helped clients setup Offshore Companies

Online Registration for MalaysiaWills Offshore Company Formation Seminar:

Topics: Dealing with BVI Company Shares Upon Death: A Survey of Options for Smooth Succession

Speaker: Mr. Lee Chiwi (CEO of Rockwills Singapore)

Introduction of Seminar: Without question, the BVI as an offshore jurisdiction has been a resounding success. Since the enactment of the International Business Companies Act 1984 (replaced by the Business Companies Act 2004), about one million offshore companies have been incorporated with over 457,000 active companies today as of September 2011. Many thousands of these companies that were set up in the last few

decades, today have ageing shareholders who may not have planned for or even thought about the succession of their company shares. The result of not planning for succession can be troublesome ranging from loss of confidentiality and costly probate (a rule of thumb suggests a cost of 2% of asset value) to uncertainty among family members how company shares should be distributed.
This seminar discusses the array of options available for succession.
Despite the technical nature of the topic, the speakers are able to deliver this important topic in an accessible and easy-to-understand manner. You do not have to have a technical or legal background to attend this seminar. Note that even if you do not deal with BVI company shares, you will learn solutions that are relevant to the company shares of other jurisdictions like Bermuda, Seychelles and even Singapore.

Objectives of Seminar:

At the end of the workshop, participants will have learned:
1. The law underpinning the succession of offshore company shares
2. To evaluate the various options for the succession of offshore company shares

Outline of Seminar:

The Law of BVI Succession and BVI-Specific Options
• The Business Companies Act
• The process and cost of probate / administration in the BVI
• Using the standalone BVI will solution
• Using the special VISTA trust solution
• Using pre-signed forms and joint tenancy solutions
• Using a full-form trustsolution (based on conventional trust)
• Using a managing-custodian trustee solution (based on New Zealand trust)

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.

Premarital agreement between Business Owners – Cross-Option Agreement

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

In the previous article on Oct 8 issue, we covered the important elements of Buy Sell Agreement in Item #3 of Diagram A. Buy Sell Agreement generally is a forced buy or forced sell if triggering events such as death, coma, total permanent disability or critical illness happens. There is no room for further consideration – a transaction must take place. However, there is another type of agreement, which offers a more flexible approach so that the business owner is not locked in to a forced buy or sell position. We call this the Cross-Option Agreement.

Diagram A: General Structure of Business Exit Agreement

Rockwills, Rockwills Malaysia, Will Writing

A Cross Option Agreement is also known as a “wait-and-see” Agreement or Double Option Agreement. It is considered as “wait-and-see” because it may be difficult to decide in advance what action is to be taken by the business owners upon the occurrence of triggering events. Under such an agreement, the business partners give each other both a Put Option and a Call Option (some, however, may only want one or the other but not both, depending on how flexible they want things to be). Only when a business owner exercises the option given, shall it bind the other business owner(s).

In a Cross Option Agreement, the surviving business owner(s) have an option to buy (“call”) the business interest from the affected business owner’s legal representative, and the legal representative of the affected business owner has 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 representative must sell them in accordance with the terms of the Cross Option Agreement. Likewise, if the shareholding is offered by the personal representative to the surviving shareholders then they must buy. Just like in the case of a Buy-Sell Agreement, the Cross Option Agreement 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, for example:

Event #1: 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. Please see Diagram B for this scenario.

Diagram B: Business Owners execute a Double Option and surviving owners execute call option upon death of one

Rockwills, Rockwills Malaysia, Will Writing

Event #2: What happens upon the occurrence of any critical illness and disability of a business owner? “Single Option” is given to the critically–ill or disabled business owner, he/she 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. Diagram C illustrates the usage of Single Option.

A, B and C enters into a cross option agreement and in the event B suffers from a minor heart attack, he is not forced to sell to A & C. After a few months of resting, if he is able to continue to work, he can then choose not to exercise his put option. If in this example, after a few years of working, a second heart attack strikes and this time, it is more severe and B becomes disabled, he can now choose to exercise his put option & sell his shares to A & C. The money he receives may be used for his maintenance and medical purposes.

Diagram C: When to a Single Option Agreement is used

‘

Rockwills, Rockwills Malaysia, Will Writing

In some cases especially when there is an inactive business owner who does 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 “buyer” an option as to whether they would want to purchase the business interest of the inactive party. But note that in the event something happens to him, there is no compulsion for the active business owners to purchase from him so he or his family can be stuck with the shares.

Both a Buy-Sell Agreement and Cross Option Agreement, when executed by the business owners is a legally binding contract ensuring the protection of the business value and smooth transition of the business when a partner suddenly exits the business due to unforeseen circumstances. The agreement must be drafted by experienced corporate lawyers who are familiar with Business Value Protection.

In the next issue, we’ll explore some of the defective agreements which were not done properly. It is our responsibility as a Professional Estate Planner to educate the Malaysia SME business owner on the do’s and don’ts when executing such important 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.

The Problems with Current Business Exit Agreements

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

In the previous section, we have discussed the two examples with some existing business exit planning, firstly, to save cost, some business owners execute it’s business exit plan without the appointment of a trustee and power of attorney. Secondly, the distribution of sales proceeds were not well thought off. Resulting in more trouble and hardship to the beneficiaries.

In this issue, we’ll explore two more examples on business exit plans or business succession plans executed by business owners that are done wrongly & defective in some ways.

Problems with some existing business exit planning or business continuation plans

a)    Using keyman insurance to fund the purchase of the shares

Many business exit plans created using the insurance proceeds from keyman insurance policies. In summary, a keyman insurance policy is a policy that is insures the life of key personnel of the company. It is paid for by the company and therefore, this keyman insurance policy is 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 total permanent disability of the key personnel mentioned on the insurance policy. This insurance policy facilitates the continuity of the business.

When a keyman insurnace policy is used for business exit plan, 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.

a)    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. Again, if caught, the penalty faced by the company directors will be a fine of RM100,000 or 5 years imprisonment or both.

In summary, let’s take a look back on the advantages of creating a proper business exit planning

a)    The Business Exit plan and business owners guarantee the sale of the business interest at a 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 Business Exit plan is put in place, it avoids any unnecessary 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 mention 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 meantime, the surviving business owners would have to work with the heirs.

With a Business Exit 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 Business Exit 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.

In reality, when we discussed the exit planning with business owners, it is very common that they will try to find a way to “save cost”. However, as a professional, our duty is always to highlight the issue and suggest suitable options for business owners after evaluating their situation.

We’ve been discussing extensively for the past 5 issues in Malaysia SME articles, talking on exit planning when businesses consist of partnership among non-direct family member, which includes friends, siblings or relatives

Starting from next issue, our topics will switch to Family Owned Businesses and how to plan for the continuation of Family Business. 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.

Premarital agreement between Business Owners

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

This article appeared in Malaysia SME magazine.

Rockwills, Rockwills Malaysia, Will Writing

In this issue, I will share more in detail on the general structure of this “Premarital Agreement” and what would be the funding options for a business owner to buy-out the other business owner. The diagram below illustrates the overall general structure:

Rockwills, Rockwills Malaysia, Will Writing

Let me give you an example, where Ismail, Chong and Ramesh are shareholders in ICR Design Services Sdn. Bhd. which provides designs and construction services for offices. The business is thriving and last year, the company made a net profit of RM5 million. Ismail is a 40% shareholder, whereas both Chong and Ramesh own 30% each. All of them are married and have children. All of them agree that their family members should not be involved in the business. This is because their wives are working elsewhere with their own careers and their children are all under the age of 18. Ismail is 40 years old, Chong is 35 years old and Ramesh is 38 years old. All of them presently, are healthy and do not have any pre-existing medical condition that would prevent them from being insured by a life insurance company.

When they first started out 5 years ago, exit planning was the least of their priorities because at that time, their business was still relatively small and all their energy was focused towards building their business. All their hard work paid off and their business grew and thrived. They are keen to explore on the exit planning because they have come to realize that any unforeseen events might happen as they have clients or vendors who suddenly passed away due to heart failure or accidents at a very young age. And they realize that they need to make time to seriously arrange for a exit strategy because it makes it very easy for them (or their estate subsequently) to sell their shares to the others without having to discuss on the pricing and the purchasers would not be financially drained to pay for the purchase.

To start, Ismail, Chong and Ramesh would need to agree on the value of the business. The purpose of the valuation is to establish a method for determining a purchase price for the ownership interest and avoids costly disputes over its values. There are two commonly used ways to value the business

1. Engage an accountant to conduct a valuation or agree on the formula to be used to value the business in the future
2. Have an agreed price which is subjected to review periodically (for example: every 3 years)

Once the valuation method is sorted out between them, the next critical issue would need to be determined – funding to purchase in the future. Unless Ismail, Chong and Ramesh have a huge cash reserve of their own, it would be difficult for them to buyout the shares when one of them exits. In my opinion the easiest way to fund such a purchase is by way of life insurance policy. In this respect, keyman insurance is inappropriate for the reason stated below.

Next is how will Ismail, Chong and Ramesh be able to pay for the insurance premiums? Part or all of the premiums may be paid through the dividends received as shareholder and/or director’s fees. It is very important to highlight to Malaysia SME reader that the company itself cannot be paying the premiums (whether it is categorized as deductible or non-deductible expenses) as it would contravene section 67 of the Companies Act 1965. For Sdn Bhd, the company is not allowed to buy back its own shares or directly or indirectly providing financial assistance to the shareholders to purchase the shares of another shareholder.

There are 3 scenarios that I will be sharing

Scenario  #1: All owners are insurable

Scenario  #2: Some owners who are not insurable

Scenario  #3: Some owners who are in active in the business

Scenario  #1: All owners are insurable (See Diagram 1)

Regardless of the type of life insurance (except for Keyman insurance), each of the eligible shareholders shall be insured. If all of the shareholders are insurable, there are two methods in approaching this.

Method #1:

1^st party method is to be used. This means Ismail will insure himself (and he is the policy owner-life assured) whereas Chong and Ramesh pays for the premium of Ismail’s policy. The same method is used for Chong and Ramesh’s policies. In this respect, keyman insurance is inappropriate for the reason stated below.

Method #2:

3^rd party method where Ismail will insure and pays for the premium on the life of Chong and Ramesh. This is commonly known as cross purchase. However, this method may give rise to issues of insurable interest (to prevent a policy owner to gamble on lives of others commonly known as moral hazard) and multiple policies requirement.

Generally the 1^st party method of insurance is the choice recommended

If Ismail, Chong and Ramesh are insurable, the funding structure is as illustrated in the diagram below. Once the policies are enforced, each of them shall assign the policies to the Trustee.

Rockwills, Rockwills Malaysia, Will Writing

Scenario  #2: Some owners who are not insurable (Diagram 2)

If Ismail or anyone of them is not insurable due to health reasons, the ownership of the policies will be different. The diagram explains how to structure the insurance ownership when one of the shareholders is not insurable, which uses a 3^rd party method. Alternatively, Chong and Ramesh could start a sinking fund right now or pay all of it by cash or based on an agreed schedule of instalments when the time comes to buy-out Ismail’s shares.

Rockwills, Malaysia Rockwills, Will Writing.

Scenario  #3: Some owners who are in active in the business (See Diagram 3)

When one of the shareholders is not active in the business and that shareholder has no intention to purchase the shares of the others, then the funding structure would be different as shown in the diagram below. Let’s assume Ramesh is merely a shareholder who invests but he is not active in the business. He is also not a Director of the company.

Rockwills, Malaysia Rockwills, Will Writing.

Each policy owned by Ismail, Chong and Ramesh is to be assigned to the Trustee. This would enable the Trustee to claim and to receive the insurance proceeds when an unfortunate event such as death or disability or critical illness befalls one of the shareholders. The advantage of incorporating the Trust into Business Value Protection Trust is to ensure that the proceeds are received by an independent party as well as to distribute the proceeds to the outgoing shareholder or his family avoiding the need to apply for Probate, in the event of death. The Trust would be most advantageous when a shareholder dies because it contains instructions to the Trustee how to distribute the proceeds as there is no need to distribute all the proceeds to the beneficiaries at one time but a structured distribution can be designed. This prevents the beneficiaries misspending the funds.

Once the funding is sorted out, we shall then put in place together with the other components of which is the buy-sell or cross option agreement, power of attorney and trust deeds.

About the Author:

MalaysiaWills CEO, Evanna Phoon.

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com. 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.

Rockwills Talk in Sibu

• 主题： 如何利用遗嘱与信托，建立富过三代的企业
• 日期和时间: 7 Apr 2012 (2pm – 5pm)
• 地点: TBD
• 费用：免费 （包括美味午餐）
• 主讲者 1：Ms.Evanna Phoon （MalaysiaWills.com 首席执行员)
• 主讲者 2：Mr.Azhar （Rockwills Trustee Berhad Senior General Manager)

Booking for Personal Consultation with Ms. Evanna Phoon & Mr. Azhar can be done directly by contacting our  Rockwills Sibu representative:

• Ms Cecilia (+012 212 9648)
• Email: event@malaysiawills.com

Day #1 : 7 April 2012 (Sat)

• ​10am – 11am​: breakfast appointment (already booked)
• 11am – 1pm ​: 1:1 consultation (2 families) (already booked)
• 1pm – 2pm​: lunch appointment (already booked)
• 2pm – 5pm ​:  Talk , Q&A
• 6pm – 7pm​: 1:1 consultation (1 families) (already booked)
• 7.30pm​: dinner appointment (already booked)

Day #2 : 8 April 2012 (Sun) 

• ​9am – 10.30am: breakfast appointment
• 11am – 1pm ​: 1:1 consultation (2 families)
• 1pm – 2pm​: lunch appointment
• 2.30pm – 7pm​: 1:1 consultation (5 families)
• 7.30pm​: dinner appointment

​Day #2 : 9 April 2012 (Mon) 

​9am – 10.30am: breakfast appointment

要报名， 请填写以下表格

Press Release For the event can be found below

Rockwills Singapore Internet Marketing 2012

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

Rockwills Singapore organizes Internet Marketing 2012 Workshop conducted by Evanna Phoon

 Online Registration Form

Rockwills Annual Convention 2012

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

Rockwills Event: Rockwills Annual Convention2012

• Date: 2 Mar 2012 (Friday)
• Time: 9am-5pm (Speaker invited by Rockwills Sharing) 730pm-11pm (Rockwills Annual Dinner)
• Venue: Sunway Resort Hotel
• Topics: Rockwills Business Updates, Rockwills Award Presentation, Rockwills MD and CEO speech, Rockwills Invited Speaker from Singapore and Canada

This is the 2nd time Rockwills had organized such an international event. We started with a light breakfast and at 930am sharp, Mr. Saw Leong Aun (Rockwills Group MD) gave the opening speech followed by Mr. Low Wan Gem (Rockwills Malaysia CEO) giving Rockwills Business Updates to 500 Rockwills Franchisees.

There were also award presentation in between. Lunch time started from 12:30 noon – 1:30 pm, buffet style. The afternoon session 1:30pm, Mr. Lee Chiwi (Rockwills Singapore CEO) share on Offshore Trust structure. Then followed by Rockwills Invited Speaker from Canada, Ms Millie and Mr. Otto-Hans sharing on Holistic Global Estate Planning from 3pm – 430pm.

There’s a short break to freshen up to prepare for the Rockwills gala dinner from 730pm – 1130pm. Mr. Saw (Rockwills Group MD) and Mr. Johari (Rockwills Chairman) gave their opening speech followed by dance, award presentation and a 10 course dinner. I booked two tables for my downlines.

After having a family with two young children, I tend not to stay after 9pm for dinners and functions (exception for the Jimmy Choo dinner, my high school friend’s wedding dinner or dinner set up by my closest best friends to talk about nonsense & gossips ). So, I left early taking away loads of valuable knowledge with us. oh, and a CD on some copywrited Rockwills Video that we can use to benefit our business. TQ Rockwills for great organization of this mega event. Looking forward to attend again next year !

If you want to find out the business opportunity by joining Rockwills, we conduct regular FREE seminar on Rockwills Business Opportunity. You can checkout more details on the schedule and register for FREE at http://malaysiawills.com/2012/01/rockwills-malaysiawills-bop/

Rockwills Convention 2012 - Rockwills Chairman gave the opening speech during Rockwills Annual Dinner

Rockwills Convention 2012 - Rockwills CEO sharing on Rockwills Business Updates

Rockwills Convention 2012 - Beginning of event

Rockwills Convention 2012 - During Lunch Break

Rockwills Convention 2012 - During Convention about 500 attendees

Premarital agreement between Business Owners – Buy-Sell Agreement

 

Rockwills, Rockwills Malaysia, Will Writing

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

In the previous article, we covered Item #1 & #2 of Diagram A. Basically, we described the method of valuing businesses and appropriate funding in various scenario where all partners are insurable, some partners are not insurable while some partners are in-active co-owners.

In this issue, let’s move on to explain more in detail on Item #3 of Diagram A.

Rockwills, Rockwills Malaysia, Will Writing

There are 2 types of agreement,

Type #1: Buy-Sell Agreement

Type #2: Cross Option Agreement.

I intend to cover only the important content or points for the Buy-Sell Agreement. Let’s leave the detailed 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 Business Value Protection.

Please be assured that 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 seller. In turn the seller 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 important content or points of the agreement are:

a) Method of valuation?  In every Buy-Sell Agreement, it must clearly state the VALUE of the business. There are 2 ways to establish an agreed valuation method,

Method #1 Formula Basis: if the business owners prefer a formula basis to determine of the business value, it should be approved   by an experienced accountant. 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.

Method #2 Fixed Price: if the business owners agreed to use a  fixed price , they must be prepared for a periodical review and to execute supplemental agreements and to pay for such supplemental if there’s a change in value

b) What are the trigger events agreed upon?

The most common triggering events we encounter are

• Death
• Total permanent disability
• Retirement
• Critical illness

However, there are some not so common triggering events, such as

• Loss of professional license,
• Divorce,
• Bankruptcy

Deadlock between business owners.

c) How is the purchase funded? If life insurance is used and it is assigned to the Trustee, it is to be stated in the agreement. 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 6% 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 business owners 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 all 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 Business Value Protection Plan, 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 3 years. When the review period is agreed upon, with the necessary attendance quorum being achieved, and there is an increase in 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 business owners have to agree on this important point as the life insurance proceeds may not amount to the full purchase price due to the appreciation of the value of business and where the parties are no longer eligible to be insured further. What needs to be decided is the installment 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 seller. I doubt that the parties would agree to the seller receiving the excess.

About the Author:

MalaysiaWills CEO Evanna Phoon

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com, Malaysia’s 1^st 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.

maxbutton id=”1″

“Premarital Agreement” between Business Owners

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

This article appeared in Malaysia SME magazine.

Rockwills, Rockwills Malaysia, Will Writing

” Adam was a successful businessman. He had joined his childhood friend, David, to start a factory manufacturing carpets. Adam had a 60% share of the business while David had the remaining 40%. Ever since they started, the business had grown by leaps and bounds. Annual profit was now in the region of RM2 million. Their accountant had indicated that the business should have a value in the range of RM10 to RM15 million.

Then tragedy struck. Adam was diagnosed with third stage cancer of the liver and his health deteriorated. Adam immediately wrote a will to give his assets to his wife and children. He took comfort in the thought that the value of his share of the business alone was enough to take care of his family comfortably and see his kids through their tertiary education. He also felt comfortable that his partner, David would not short change him as they had been childhood friends and had gone through thick and thin together for so many years.

After Adam’s departure, his wife wanted to dispose of his shares because she has no interest to run her late husband’s business but David turned her down because he was already controlling and running the company.

Unfortunately for her, no outside party was willing to buy her shares and she had no choice but to plead to David to reconsider the purchase of the shares. He offered her a price of only RM1 million, rather than the actual value of RM4 to RM6 million. Adam’s wife had no choice but to accept the offer even though clearly, she was short-changed.”

This was a real case story that happened to a friend of mine and will continue to happen to many SME business owners if there were no awareness being created that it is crucial to have proper exit planning put in place.

This doesn’t directly apply to family owned SME businesses & I will be sharing more in-depth about planning of family run SME businesses in future articles. In this issue, I am going to share about exit planning for SME businesses where the shareholders are non-family related.

Having a Will is very important, and it is the basic document that all business owners should have to dispose their personal asset. But when it comes to partnerships or private limited company (Sdn Bhd), Will alone is not a complete solution to secure smooth transition of shares and interest among business owners when unforeseen events happen.

A large number of businesses in Malaysia do not have a plan to handle such events. In most Wills that I have seen, there are 2 common intentions of a business owners, 1^st option is they wish to sell their business interest or 2^nd option is they wish that their shares to be inherited by their heirs. However, there are problems that we commonly see with this type of arrangement when triggering events happen.

Triggering events that normally will cause disruptions to businesses are death, total permanent disable and retirement of a business partner. However, depending on different types of business activities, there are also other triggering events such as critical illness, bankruptcy, divorce, loss of professional license or even a deadlock between co-business owners. All the mentioned events will cause huge lost to the business value.

On the untimely death of a business owner, his/her heirs inherit his/her interest and quite often the heirs are unqualified or inexperience to work with the surviving business partners. And due to their inexperience, it may cause disruption to the business and the heir could be demanding for things without a good understanding of the business.

In some cases, the heirs may not even be interested in the business like Adam’s case; his wife has no interest to continue his business and wanted to sell her shares quickly. But her problem was there is no ready market for private limited companies (Sdn Bhd) and partnership and it is very difficult for her and David to agree on a price (or the value of business) when Adam was no longer around. Another fact is that David, being the remaining business owner knows that Adam’s wife is desperate. People’s perception of things changes when money is involved, especially substantial sum of money.

Even if the remaining business owners would want to buy-out the heir’s, they will have difficulty raising the money because funding was never planned for such buy-outs. Indirectly, it will affect business credibility, employee’s confidence and in most cases, it is not uncommon to see some profitable business has no choice but to go for dissolution & discontinuation due to this major disruption.

In short, if business owners do not have an exit plan, it will lead to problems for his/her family and surviving business partners. To minimize these problems, a proper business exit planning or business value protection planning is important. Some authors describe it as “premarital agreement” between business owners. Where business owners during their lifetime and when everyone is still alive make necessary arrangement to plan for available options on how to dispose his/her business interest in the any unforeseen triggering event.

There are typical checklist questions that you can spend 5 minutes asking yourself to roughly gauge whether there’s a need for an exit planning for your business

1. If your business partners die today,
   1. Can you work with his family to run the business?
   2. Can you work well with your partner’s family members?
   3. Can you afford to buy out his business share at a fair price?
   4. If you as a business owner passes away today,
      1. Can your family run your business?
      2. Can your family members work well with remaining business partners?
      3. If your family where to sell of their shares to the remaining business partner, would you want to ensure they get to sell a fair value?

Assuming that the answers above indicate a need for business owners to create a business exit plan, we will then proceed to state down some important elements to address in our legal documents. They are

1. the value of the business;
2. the agreed trigger events for a sale and purchase to be made;
3. whether a forced buy-sell is to take place or a “wait and see” buy-sell is to adopted
4. the funding for the purchase of the business interest;

A complete Business Exit Plan must include all 4 documents below.

1. Buy-Sell Agreement or Cross Option Agreement
2. Power of Attorney
3. Trust Deed
4. Life insurance or funding

The diagram below indicates the relationship between the various parties and the relevant documents.

A brief explanation about the functions of the various documents?

a)      Buy-Sell Agreement: stating the terms and condition of the sale including the share value of the parties, triggering events of the buy-sell and funding (normally it would be life insurance and cash) to purchase the business interest. When such an agreement is adopted, upon occurrence of any of the trigger events, the outgoing business owner MUST sell his business interest and the remaining business owners MUST buy.

b)      Cross Option Agreement: This is sometimes called Double Option or Put and Call Option. It is a flexible form of buy and sell agreement whereby e.g. in the event of the death of a business, the estate of the deceased has the option to sell and the remaining business owners have the option to buy. When one option is exercised, the other must follow. Cross Option Agreement is used when it may be difficult to decide in advance what steps to be taken by the business owners upon the occurrence of certain specified events. Once the exercise of those options (either “Put” or “Call”) it creates legally binding contract.

c)       Power of Attorney: each of the business owners instructs and empowers the Trustee to sign the transfer documents of the outgoing business owner to the surviving business owners when a trigger event occurs. The usage of a power of attorney will eliminate any delay caused by the death or disability of the outgoing business owner and the Trustee need not rely on the business owner’s Executor of the estate to obtain the Grant of Probate before such transfer can be made.

d)      Trust Deed by each business owner: upon the receipt of the sale proceeds by the Trustee, the Trust Deed provides the necessary distribution instructions. It states the manner of distribution to the beneficiaries which will avoids the need to obtain the Grant of Probate or Letters of Administration.

e)    Life insurance/Other Funding: it is prudent that in any Buy-Sell or Cross Option Agreement it is to be funded. One of the easiest methods to provide such funding is by way of a life insurance policy. Where each business owner buys on his own life worth the value of his business interest and the remaining business owners pays the premium, this is known as a 1^st party policy;. Alternatively, the business owners can pay cash to purchase the business interest when one of them exits. However, it is financially burdensome on the purchasers.

For businesses, there’s time to make money, and there’s time to protect your money. Planning for a “Premarital agreement” or “Exit Planning” among business owners are consider an important step made to look into options to protect your money and loved ones. And it is advisable that this planning & discussion should take place when all business partners are still around.

About the Author:

Evanna Phoon is CEO & Founder of www.MalaysiaWills.com. Her website has FREE downloadable ebooks & over 300+ videos on the topic of Will Writing for Personal & Business. She can be contacted via info@malaysiawills.com.

maxbutton id=”1″