Compliance in buy-and-sell agreements: What is overlooked?

When properly implemented, it is a powerful tool with significant advantages. Some of these benefits are:

• The disabled shareholder or the deceased estate will receive a fair price for the shareholding.
• The executor of a deceased estate will be obliged to sell the shares to the remaining shareholders; therefore, it enables a smooth transition and liquidity in the estate.
• The remaining shareholders don’t have the burden of finding the funds to pay for the shares.
• The shares will not be sold to a third party that doesn’t have the expertise or personal skills required to operate the business.

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To avoid unnecessary complications and even disputes, the buy-and-sell agreement needs to be correctly structured.

• If any shares are held in a trust, it is essential to obtain a copy of the trust deed to ensure that all trustees either sign the buy-and-sell agreement directly or provide a signed resolution authorising the transaction.
• It is crucial to verify the marital regime and any antenuptial agreements of each member that could impact the validity of a buy-and-sell agreement. If a member is married in a community of property, their spouse must also sign the agreement, as they have a legal interest in the shares.
• A buy-and-sell agreement will take precedence over a Last Will and Testament, and it may be necessary for participating members to consider updating their Last Will and Testament and their estate plan.  

• A buy-and-sell agreement will not take precedence over the legal documents that govern a business’s operations, such as the Association Agreement, Shareholders’ Agreement, or Memorandum of Incorporation.  These documents must be carefully reviewed to ensure alignment before implementing a buy-and-sell agreement. If they are not aligned, they will have to be amended to reflect the terms of the buy-and-sell agreement. Any inconsistencies may render the agreement unenforceable.
• An Association Agreement of a close corporation sets out the procedures to be followed when a member wishes to dispose of their interest, specifies the method for valuing that interest, and defines the rights of heirs and legatees upon the death of a member. 

• A company’s Memorandum of Incorporation may include provisions that restrict the transferability of shares, and it is often complemented by a Shareholders’ Agreement. This agreement governs the relationship between shareholders and typically includes clauses that facilitate the buyout of shares in the event of a shareholder’s death or disability.
• An appropriate valuation method must be used, as specified in the business’s governing documents. The business valuation should be reviewed regularly, and the buy-and-sell agreement updated accordingly to reflect any changes.

• To prevent possible disputes in the event of a funding shortfall or surplus, the buy-and-sell agreement should include a clause that outlines how such situations will be handled. A practical solution for a shortfall is to allow the outstanding amount to be paid in instalments, subject to a specified interest rate. In the case of over insurance, the agreement should clearly state whether the surplus proceeds are to be retained by the policy owner or paid to the deceased shareholder’s estate.
• Trigger events – the catalysts that activate buy-and-sell agreements – must be clearly defined, along with the method of funding the agreement. If insurance policies are used for funding, they must be properly structured to correspond with the specified trigger events to ensure that the agreement functions as intended.
• If the life assured has paid any premiums on the policy, or if it is a one-sided buy-and-sell agreement, the requirements of Section 3(3)(a)(iA) of the Estate Duty Act, 1955, cannot be met. The policy proceeds will therefore be regarded as ‘deemed property’ in the deceased’s estate for estate duty purposes. Consequently, the life cover should be adjusted to account for potential estate duty liabilities.
• A buy-and-sell agreement should include a clause addressing how policies will be handled if the business dissolves, or a shareholder sells their shares. In such cases, I recommend transferring ownership of the policy to the life insured through an absolute cession.

In conclusion, a buy-and-sell agreement is a highly effective business assurance tool. To avoid unnecessary complications and even disputes, the buy-and-sell agreement needs to be properly structured. Due to its complexity and legal requirements, it is advisable to seek professional assistance to ensure that it is compliant and effective.

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