There’s always a raft of legal matters that need careful consideration in any business succession process, among them shareholder agreements, ASIC whitewashing and buy/sell arrangements. However, the more valuable the business and the more stakeholders involved, the more complicated the process becomes.
There are always complications when buying and selling businesses, made even more complex when the company is extremely successful and valued in the multi-millions of dollars.
Suffice to say, there are many different and interacting issues both at the company and shareholder levels that must be considered and advised. However, for the purpose of this article I’ve narrowed it down to four key matters would-be successors and major shareholders should know about.
Shareholder agreements
It’s common for the business owners in mining and resources consultancies to offer their senior managers and key staff members shares in their company. As was the case for the consultancy behind our Successful Business Succession series, even minority shareholdings were valued in the millions of dollars.
Shareholder agreements are fundamental in these circumstances and in this case, they had been prepared some years ago. They had also been prepared primarily in relation to the situation that was in place at the time of preparation and catered predominantly to the original business owners and major shareholders. However, at the end of their tenure, those shareholder conditions were not entirely suitable or fair for the next generation of partners and incoming major shareholders or those with valuable minority shareholdings.
One of the key considerations of a shareholder’s agreement is a methodology for acquiring shares from exiting shareholders whether they are major shareholders or staff members as minor shareholder who wish to leave or cash in.
As the acquisition amount required by the incoming partners to buy out the outgoing major shareholders was in the multi-millions of dollars, significant finance was required to complete the transaction.
ASIC Whitewash
The senior management team as incoming major shareholders, had been part of a planned succession process for many years. As such, they were aware of the high value of the consultancy and the multi-million-dollar personal financial commitment required for acquiring their part of the major shareholding.
Given the large purchase price, the incoming principals’ financier required the company to provide security for their borrowings.
Where a company provides “financial assistance” for the acquisition of its own shares, which could be money in the form of loans or in this instance, the provision of assets as security, the company must undergo a formal approval process for the company to be able to provide financial assistance to the incoming major shareholders. This process is commonly known as an ASIC Whitewash.
This is made available under the Corporations Act, and it allows a company to financially assist individuals to acquire shares in their own company. The ASIC whitewash is aimed at ensuring the company can accommodate the provision of the financial assistance without adversely impacting itself, its shareholders and operations including its ability to pay creditors.
As you would expect, there are a number of steps involved just to apply for an ASIC whitewash that involve shareholder meetings, director resolutions and lodgement of the financial assistance documents, before the actual whitewash process can begin. It takes about a month for the entire process to be completed.
Buy/Sell Agreements
With the bank satisfied with the company’s ability to financially assist their incoming partners/major shareholders, attention turned to what would happen if one of the partners/major shareholders was unable to continue in the company due to an unforeseen and unfortunate event such as critical illness, disablement or death.
The solution involved implementing buy/sell agreements which generally speaking provide a two-fold benefit.
The first is the exiting partner has a guaranteed payout of the value of their shares and the other shareholders can be assured of maintaining control of the shareholding.
That is, in the absence of a buy/sell arrangement, a shareholding could be bequeathed to a beneficiary of a deceased partner. That beneficiary could then adversely affect the future management or financial position of the company as they probably would not be able to contribute to the business in the same manner as the outgoing principal.
For the partners, as major shareholders with significant financial interest in the company, the buy/sell agreements were insurance backed. Meaning, the insurance claim proceeds would fund the buy-out of exiting partners’ shareholding.
Working in collaboration with James Marshall, Financial Adviser who advised on the considerable complexity of buy/sell insurance requirements and coordinated the application and implementation process for each partner, I prepared the buy/sell agreement.
This legal document described the agreed process for managing trigger events, the terms and conditions for buying out and transferring the exiting partners shares to other shareholders. Further, this agreement must integrate seamlessly with the provisions of the Shareholders Agreement mentioned earlier.
Wills and estate planning
Individually each partner also required Wills and estate planning advice.
My colleague, Robert Lamb an Estate Planning Lawyer worked with a number of the incoming partners as major shareholders to review and update their Wills.
Generally speaking, Wills should be updated every two or three years to accommodate changes in personal circumstances such as marriage, divorce, the arrival of children or death of a spouse or in this case, a major business purchase and change of circumstances.
Working in collaboration with the partners’ accountants, our estate planning advice considered the parties and their family’s personal situation as well as tax effective and asset protection structures for superannuation, proceeds from the sale of shares generally and in a buy/sell trigger event.
Structures within the Wills such as discretionary testamentary and superannuation proceeds trusts and structures outside the Wills such as superannuation binding nomination and joint ownership of property were also considered and utilised.
Given the very high value of the company, the latter would involve a significant lump sum insurance payment and other monies that may fill a value gap as company shares continue to increase, and may not be covered by the insurance policy value.
As described here, business succession is complicated. It requires a clear understanding of a diverse range of legal, business and personal financial planning issues that must all come together to be clearly represented in legal contract of sale agreement.
It must consider the requirements of both exiting and incoming major shareholders, resolve any legacy issues such as pre-existing shareholder agreements, provide clear terms for financing the acquisition and find an insurer with capabilities for providing extremely high value buy/sell insurance cover.
In our next article, we explore the personal due diligence incoming partners as major shareholders need to consider, when committing to what can be the most significant personal financial commitment of their lives.
To learn more about shareholder agreements, ASIC whitewashing and buy/sell agreements for senior executives buying in as partners and major shareholders of their employer company, please contact Craig Hong on +61 (0) 7 3007 2000 or email contact@resourcesunearthed.com.au
To learn more about Craig Hong, visit this link.
You can read the other articles in our Successful Business Succession series here:
Business Succession – Exit Strategy
Resources Unearthed is a solutions hub that provides integrated financial, legal, property, accounting, tax and business advisory services for executives, professionals and business owners in the mining and resources sectors.
The information in this article is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate, we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.
