Buy & Sell Agreements are concluded when shareholders take out an insurance policy on the life or disability of another shareholder, so that on the other shareholder’s death or disability the first shareholder is paid out the funds by the policy to be able to afford to buy that other shareholder’s shares. The Buy & Sell Agreement records all the detail about how this will occur, and what each shareholder’s rights and obligations are.
When insurance companies draft these agreements they often lack the coherence and detail of an attorney-drafted legal document. We recommend getting an attorney to draft it for you.
Here are some important matters that a Buy & Sell Agreement should deal with / record:
- Are the deceased or disabled shareholders’ shares and claims on loan accounts against the company sold together, or only the shares? And if it’s both – does the insurance premium cover both or only the shares? What if the company’s memorandum of incorporation (“MOI”) records that they MUST be sold together?
- If a shareholder is unable to get insurance cover, must it put a fixed amount of money aside monthly into a nominated account as a savings towards being able to afford to buy the deceased or incapacitated shareholders’ shares one day?
- If the insurance company refuses to pay out the policy on a shareholders death or incapacity because he/she did something wrong to cause it (such as drunk driving) – what happens? Can the shareholders that were going to buy the shares still demand the sale goes through- but at R nil? Can the deceased or incapacitated shareholder still demand the sale goes through for the full price? And if there is a payment due- can it be paid in instalments over a period to make it more affordable, and does the balance owing accrue interest?
- If a shareholder who has a policy taken on his/her life stops being a shareholder of the company – can the other shareholders buy or take over the insurance they have been paying to date on his/her life? Or is the policy just cancelled and all premiums paid to date just ‘ lost’.
- how this agreement can be terminated.
- that the shareholders waive their pre-emptive right to otherwise buy a ‘selling’ shareholders shares if they sell due to this death or incapacity.
- and recording a good dispute resolution clause which covers dealing with disputes about the agreement through mediation first and then arbitration. Avoiding court is always a good idea.
Conflict with the MOI?
Importantly, the insurance companies do not check whether the Buy & Sell Agreement conflicts with what is already recorded in the existing MOI or shareholders agreement regarding death or disability of a shareholder. The MOI trumps all other agreements between shareholders, so if it conflicts with the Buy & Sell Agreement, the provisions of the MOI will prevail. As such, if a Buy & Sell Agreement is concluded, the MOI may need to be amended so there is no conflict between the two.