

It is well known that Australian companies are legally bound to adopt and defer to a constitution when determining the way in which an entity will operate.
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However, a constitution does not usually provide a comprehensive set of rules governing how shares are bought and sold between company shareholders or third parties, nor how such parties deal with each other.
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A ‘Buy Sell Agreement’ can be drawn up to specify those arrangements in detail.
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What is a Buy Sell Agreement?
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A Buy Sell Agreement is a contractual arrangement entered into by members of a jointly owned business, which sets out how a departing principal’s interest will be reabsorbed by the surviving owners or company, subject to the occurrence of certain events.
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Such events may include:
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• Death
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• Trauma or long-term disability
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• Divorce of a partner
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• Bankruptcy of a partner
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• Retirement at compulsory age or sooner
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• Dismissal from the partnership
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Generally, the agreement is written in such a way that it does not matter which business structure the partners have chosen to own the business i.e. partnership, company, family trust.
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Types of Buy Sell Agreements
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There are two types of Buy Sell Agreements and while there are some differences in the way they are handled, their purpose is the same — namely to ensure that equity in the business remains closely held.
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A secondary effort of a Buy Sell Agreement is to reduce the likelihood of members having to remain ‘in partnership’ with unwanted ‘partners’.
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1. Cross-Purchase Agreement
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Under this agreement, the surviving principles are to be the purchasers and are given the option, or are obliged, to purchase the outstanding interest of the departing principle.
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2. Corporate Entity Redemption Agreement
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This arrangement allows the entity to purchase back the interest of a departing principle. The principle, or their estate, would receive cash from the company for the sale and cancellation of the shares.
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Funding Options
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A Buy Sell Agreement is usually linked to insurance funding arrangements on each partner’s life.
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The insurance policy, once paid, will provide the surviving partners with the funds necessary to buy out the deceased, disabled and or departing partner’s interest without suffering financial hardship.
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Advantages of a Buy Sell Agreement
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Should a principal suffer a triggering event — in this case, death — the executor of their Will could exercise the option of forcing a sale of shares to the surviving principles.
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However, a Buy and Sell Agreement can take precedence over the provisions of a principal’s Will, ensuring the validation or price mechanism operates on a fair and reasonable basis pursuant to the contract.
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This provides certainty for the personal estate plans of each of the principles in partnership, and for the business as a whole.
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Reinforcing the Future of Your Business
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As the potential impacts and flow-on effects created by the unexpected exit of a principal are generally negative, the need to safeguard one’s business through a Buy and Sell Agreement becomes all the more important.
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Contact David Lewis, Partner at LBH on dlewis@lbandh.com.au if you would like more information or need a Buy Sell Agreement drafted for your jointly owned business.