As a general rule, purchase-sale agreements are structured either in the form of « withdrawal » agreements or « cross purchase » contracts. The former authorize or require the corporation to acquire the shares of an outgoing owner, while the latter transfer that right or obligation to the remaining owners. Fortunately, there are several exceptions that allow a transfer of value without taxing the insurance proceeds. Exceptions applicable to a purchase-sale contract include the transfer of a policy to (1) the insured, (2) a partner of the insured, (3) a partnership in which the insured is a partner or (4) a company in which the insured is a shareholder or officer. Value transfer problems are less common for share repurchase contracts than for share transfer contracts, since an insurance policy may exceptionally be transferred to a company in which the insured is a shareholder. Book value. Book value allocates all shareholders` equity to the share to be valued, as reflected in the entity`s balance sheet. While book value is easy to calculate, it probably does not accurately reflect fair value, as it does not take into account current values and many intangible assets such as commercial assets or good-business. Nor should the book value determine the value of shares for inheritance tax purposes in purchase-sale contracts, in particular between related parties and persons. On the other hand, readmission agreements can lead to a large number of undesirable tax effects. Benefits of a Withdrawal Agreement. A stock withdrawal agreement is favourable in two respects.
Attention: the unilateral possibility of modifying a purchase/sale agreement makes it ineffective in determining the value of a company (Estate of Blount, T.C Memo. 2004-116, aff`d, 428 F.3d 1338 (11th Cir. 2005)). Careful analysis should be carried out at each proposed change to a buy/sell agreement prior to the formal adoption of the amendment. Agreed value. Shareholders who use an agreed value approach commit to exhausting an initial value per agreement and then updating the value, preferably once a year. The use of an agreed value may be appropriate for any type of business, provided that shareholders are a bit demanding or, at the very least, have competent professional advisors to help them assess the annual value. Sometimes I recommend that clients hire a qualified business expert to determine the initial assessment and give guidance on how to update the value each year. In addition, in the purchase-sale contract, I specify in detail the factors that shareholders can take into account each year. The seizure of shares. Shareholders may want to mortgage shares as collateral for loans.
While this seems like a benign use of shares, the borrowing shareholder may fall behind in the loan and other shareholders may end up in an undesirable bank as a partner. The issue is even more important in S companies, as non-individual owners usually drive to the end of S elections. It is advisable that a purchase and sale contract stipulates that no shareholder may mortgage shares without the explicit written consent of the company.. . . .