by Peter Lee
After 10 years of setting up a private limited Company distributing soft drinks to local and overseas markets, the four shareholders having equal holdings in the Company prepared a simple Shareholders’ Agreement. The agreement is to bind them to transfer the portion of their shares to the surviving shareholders equally if anyone of them passes away and, in return, the family members of the deceased shareholder receives RM500,000. Since all of the shareholders are in their early forties and healthy, each of them purchased an insurance policy with a sum assured of RM500,000 as this is the cheapest form of funding for this transaction. Each of the insurance policies was assigned to the Company and upon the death of the shareholder, the insurance money will be released to the Company. Subsequently, this money will be paid to the family of the deceased shareholder and the shares of the deceased will be transferred to the surviving shareholders by way of a share transfer form pre-signed together with the shareholder agreement.
After 5 years, one of the shareholders died and the sum assured of RM500,000 was released to the Company. However, when this money was supposed to be paid to the family of the deceased shareholder, the Company encountered financial difficulties and hence the money was withheld to finance its operation. Subsequently, the family of the deceased shareholder filed a suit against the surviving shareholders for breaching the agreement. The surviving shareholders were also ordered not to transfer out the shares of the deceased shareholder.
This can drag both parties into a long drawn legal battle. In the meantime, the family of the deceased will not be paid the RM500,000 and the business may not be able to move on. To avoid such problems, the shareholders should have set up a Business Value Protection Trust which utilises a Buy-Sell Agreement, a Power of Attorney and Trust and Life Insurance Policies. The concept of the Buy-Sell Agreement is something similar to the shareholders agreement as mentioned above but a trust company, like Rockwills Trustee Berhad, is appointed as trustee to carry out the transfer of shares and directly claim the insurance proceeds from the insurer (instead of the company itself getting involved). In the Buy-Sell Agreement, among others, it is important to agree on the price to buy and sell the shares as well as when to have the shares sold, for example, due to death and/or disability and/or retirement.
In addition, it is essential that the shareholders prearrange the funding to purchase the shares easily. The most practical and cheapest funding is to use Life Insurance. All that is required for the shareholders to pay is their insurance premium for the sum assured to be paid out in the future. The personal assets of the shareholders need not be liquidated or there is no need to borrow the money to make the purchase. The insurance policies are transferred to the trustee to hold until death or disability occurs to a particular shareholder where the trustee (instead of the company) will make a claim to pay for the purchase of the shares. When the trustee receives the money, it could immediately release the money to the family of the deceased shareholder. At the same time, the shares of the deceased shareholder will be transferred to the surviving shareholders using a Power of Attorney signed by all shareholders during their lifetime authorising Rockwills Trustee Bhd. to deal with this transaction. At least, with this arrangement breaking up is not hard to do.
Peter Lee is an Associate Estate Planning Practitioner (Wills & Trust) with Rockwills International Group. He is also an Islamic Estate Planner providing Wills & Trust services for Muslims. He is based in Ipoh and can be reached at: 012-5078825/05-2554853 or [email protected] Website: http://www.wills-trust.com.my.