Common Types of Business Continuation Agreements
Entity Purchase or Stock Redemption Agreement
The entity purchase of stock redemption agreement is an agreement between the stockholders and the corporation that usually provides for the sale of shares during the lifetime of a stockholder, and also upon the death or disability of a stockholder, at a predetermined price. If a stockholder wishes to sell stock during his/her lifetime, he or she must first offer it to the corporation. If a stockholder dies or becomes disabled, the corporation must purchase his or her stock at the agreed-upon price, if asked to do so.
Stock redemption agreements are generally funded by life insurance on the lives of the stockholders. The corporation pays the premiums and owns the policies. Upon the death of an insured stockholder, the corporation receives the insurance proceeds, which are then used to pay for the cash purchase of the shareholder’s stock. In turn, the full cash payment to the estate of the deceased stockholder provides both liquidity and flexibility for the heirs.
Cross-Purchase Agreement
The cross-purchase agreement is an agreement among stockholders, with no direct involvement by the corporation. It provides for the sale of shares during the lifetime of a stockholder and also upon the death or disability of a stockholder. Any share owner wishing to sell his/her shares is obligated to make the first offer to the other shareholders. Upon a death or disability, the remaining stockholders must purchase the deceased stockholder’s shares at a predetermined price.As with the stock redemption agreements, cross-purchase agreements are also generally funded by life insurance. The primary difference is in the ownership and number of insurance policies. In the cross-purchase agreement, each stockholder is the beneficiary of life insurance on the life of every other stockholder. This works best where the number of share owners is small, because it requires that each share owner own a policy on the life of every other share owner, and pay the premiums. Upon the death of a stockholder, the purchase of the stock with the life insurance proceeds provides liquidity to the estate of the deceased stockholder.
"Wait and See" Agreement
In the "wait and see" agreement the stockholders and the business can postpone the decision between a cross-purchase agreement and stock agreement until the death of a stockholder. The agreement gives the corporation the right of first refusal to purchase stock, with the individual stockholders obligated to purchase the stock if the corporation does refuse."Wait and see" agreements are usually funded by life insurance, with each stockholder owning policies on the lives of the other stockholders. If a stock redemption purchase is chosen, the surviving stockholders contribute the necessary cash to the corporation from the insurance proceeds as a capital contribution or as an interest-bearing loan.
Business continuation agreements are simply a form of contract, and usually exist within the structure of a corporation.
Continuation agreements can also be made between partners or business associates. The key is a well-drafted contract and a binding plan to provide funds to purchase the business share. The use of a life insurance trust may provide the necessary liquidity.
