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Business Buy-Sell Agreements

Master the transfer of ownership interests due to death, disability, retirement, or other contingencies.

Master the transfer of ownership interests due to death, disability, retirement, or other contingencies.

  • Purposes and benefits of buy-sell agreements
  • Estate planning considerations
  • Limiting family claims and structuring the buyout
  • Discussion of, and forms for, buy-sell agreements for corporations, partnerships, and LLCs
  • Business valuation
  • Life insurance funding
  • Review, amendment, and enforcement
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Master the transfer of ownership interests due to death, disability, retirement, or other contingencies.

  • Purposes and benefits of buy-sell agreements
  • Estate planning considerations
  • Limiting family claims and structuring the buyout
  • Discussion of, and forms for, buy-sell agreements for corporations, partnerships, and LLCs
  • Business valuation
  • Life insurance funding
  • Review, amendment, and enforcement

1

Preliminary Considerations

Weldon U. Howell, Jr.

Edward C. Thoits

  • I.  SCOPE OF BOOK  1.1
    • A.  Purpose of Buy-Sell Agreement  1.2
    • B.  Mandatory or Optional Buy-Out  1.2A
    • C.  Events Commonly Triggering Buy-Out  1.3
    • D.  Permitted Transfers  1.4
    • E.  Price Determination  1.5
    • F.  Preliminary Considerations
      • 1.  Family Relationships Among Owners  1.5A
      • 2.   Working Relationships Among Owners  1.5B
      • 3.  Relative Ownership Interests  1.5C
      • 4.  Ages of Owners  1.5D
      • 5.  Financial Condition of Owners  1.5E
      • 6.  Health and Insurability of Owners  1.5F
      • 7.  Commitment of Owners to Business; Importance of Participation in Business  1.5G
  • II.  CONFLICTS OF INTEREST AND OTHER ETHICAL CONSIDERATIONS  1.6
    • A.  Preliminary Considerations
      • 1.  Identifying the Client  1.7
        • a.  Form: Corporate Consent to Legal Services  1.8
        • b.  Form: Partnership or Limited Liability Company Letter Agreement Regarding Instruction of Legal Counsel  1.9
      • 2.  Obtaining Complete Information  1.10
    • B.  Joint Representation  1.11
      • 1.  Waiver of Conflict  1.12
      • 2.  Form: Conflict Disclosure Letter and Consent  1.13
      • 3.  When Joint Representation Inadvisable  1.14
      • 4.  Representing Only One Party  1.15
      • 5.  Form: Nonrepresentation Letter  1.16
    • C.  Other Ethical Considerations
      • 1.  Prior Representation  1.17
      • 2.  Form: Letter Requesting Consent From Adverse Client  1.18
      • 3.  Attorney as Witness  1.19
      • 4.  Investment in Enterprise  1.20
      • 5.  Form: Disclosure Letter (Equity Interest in Business Venture as Compensation for Legal Services)  1.21
      • 6.  Communications With the Client  1.21A
  • III.  PRACTICE HIGHLIGHTS  1.22
  • IV.  CHECKLIST: BUY-SELL AGREEMENT PROVISIONS  1.23

2

Estate Planning Considerations

Anne K. Hilker

Steven A. Ruben

Kelley Bannon Lashley

  • I.  INTRODUCTION TO BUY-SELL AGREEMENTS AND ESTATE PLANNING
    • A.  Estate Planning Considerations and Objectives  2.1
    • B.  Estate Planning Approach to Transfers of Business Interests  2.2
  • II.  ESTABLISHING THE PROPERTY NATURE OF THE BUSINESS INTEREST
    • A.  Reasons for Establishing Property Nature of Business Interest  2.3
    • B.  Determining Nature of Business Interest
      • 1.  Three Types of Property  2.4
      • 2.  Acquiring Community Interest in Separate Property Business Interest  2.5
      • 3.  Confirmation or Transmutation of Nature of Business Interest  2.6
  • III.  LIMITING FAMILY CLAIMS
    • A.  Protective Measures  2.7
    • B.  Confirmation Forms: Business Interest Is Entirely Separate Property
      • 1.  Buy-Sell Agreement Provisions
        • a.  Form: Buy-Sell Provision Confirming Separate Property Interest: Shareholder Has No Spouse or Registered Domestic Partner  2.8
        • b.  Form: Buy-Sell Provision Confirming Separate Property Interest: Partner Has No Spouse or Registered Domestic Partner  2.9
        • c.  Form: Buy-Sell Provision Confirming Separate Property Interest: Member of LLC Has No Spouse or Registered Domestic Partner  2.9A
        • d.  Form: Buy-Sell Provision Confirming Separate Property Interest: Shareholder With Spouse or Registered Domestic Partner  2.10
        • e.  Form: Buy-Sell Provision Confirming Separate Property Interest: Partner With Spouse or Registered Domestic Partner  2.11
        • f.  Form: Buy-Sell Provision Confirming Separate Property Interest: Member of LLC With Spouse or Registered Domestic Partner  2.11A
      • 2.  Form: Statement of Spouse or Registered Domestic Partner Confirming Separate Property Business Interest  2.12
      • 3.  Additional Precautions  2.12A
    • C.  Confirmation Forms: Business Interest Is Entirely Community Property
      • 1.  Buy-Sell Agreement Provisions
        • a.  Form: Buy-Sell Provision Confirming Community Property Interest: Shareholder  2.13
        • b.  Form: Buy-Sell Provision Confirming Community Property Interest: Partner  2.14
        • c.  Form: Buy-Sell Provision Confirming Community Property Interest: Member of LLC  2.14A
      • 2.  Form: Statement Confirming Community Property Business Interest  2.15
    • D.  Confirmation Forms: Business Interest Is Entirely Quasi-Community Property
      • 1.  Buy-Sell Agreement Provisions
        • a.  Form: Buy-Sell Provision Confirming Quasi-Community Property Interest: Shareholder  2.16
        • b.  Form: Buy-Sell Provision Confirming Quasi-Community Property Interest: Partner  2.17
        • c.  Form: Buy-Sell Provision Confirming Quasi-Community Property Interest: Member of LLC  2.17A
      • 2.  Form: Statement Confirming Quasi-Community Property Business Interest  2.18
    • E.  Confirmation Forms: Business Interest Is Both Separate and Community Property
      • 1.  Buy-Sell Agreement Provisions
        • a.  Form: Buy-Sell Provision Confirming Separate and Community Property Business Interests: Shareholder  2.19
        • b.  Form: Buy-Sell Provision Confirming Separate and Community Property Interests: Partner  2.20
        • c.  Form: Buy-Sell Provision Confirming Separate and Community Property Interests: Member of LLC  2.20A
      • 2.  Form: Statement of Spouse or Registered Domestic Partner Confirming Separate and Community Property Business Interests  2.21
    • F.  Confirmation Forms: Business Interest Is Both Quasi-Community and Community Property
      • 1.  Buy-Sell Agreement Provisions
        • a.  Form: Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Shareholder  2.22
        • b.  Form: Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Partner  2.23
        • c.  Form: Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Member of LLC  2.23A
      • 2.  Form: Statement of Spouse or Registered Domestic Partner Confirming Quasi-Community and Community Property Business Interests  2.24
  • IV.  INTEGRATING AGREEMENT WITH ESTATE PLANS
    • A.  Practical Concerns  2.25
    • B.  Will Provisions for Party and Party’s Spouse or Registered Domestic Partner
      • 1.  Form: Will Provision for Party With No Spouse or Registered Domestic Partner  2.26
      • 2.  Form: Will Provision for All or Part of Party’s Community Property Business Interest  2.27
      • 3.  Form: Will Provision for All or Part of Community Property Business Interest of Party’s Spouse or Registered Domestic Partner  2.28
      • 4.  Form: Will Provision for Party’s Separate or Quasi-Community Property Business Interest or Combination  2.29
      • 5.  Form: Will Provision for Separate or Quasi-Community Property Business Interest of Party’s Spouse or Registered Domestic Partner  2.30
    • C.  Trust Provisions for Parties
      • 1.  Form: Trust Provision for Party With No Spouse or Registered Domestic Partner  2.31
      • 2.  Form: Trust Provision for Party With Spouse or Registered Domestic Partner  2.32
    • D.  Gift Tax
      • 1.  Gift When Agreement Is Signed  2.33
      • 2.  Effect of Agreement on Gift Tax Values  2.34
  • V.  STRUCTURING THE BUYOUT
    • A.  Planning for Liquidity
      • 1.  Events Triggering Buy-Out  2.35
      • 2.  Identify Need for Liquidity  2.36
      • 3.  Mandatory or Optional Buy-Out  2.37
      • 4.  Terms of Payment  2.38
      • 5.  Funding the Buy-Out
        • a.  Insurance Policies  2.39
          • (1)  Planning for Alternative Minimum Tax in Corporate Redemption Agreements  2.39A
          • (2)  Special Problems of Pre-1987 Corporate Redemption Agreements  2.39B
        • b.  Accumulated Earnings  2.40
        • c.  Employee Stock Ownership Plans  2.41
        • d.  Property Other Than Cash  2.42
    • B.  Planning for Continuity
      • 1.  Goals  2.43
      • 2.  Restrictions on Transfer of Business Interest  2.44
    • C.  Selecting the Buy-Out Mechanism
      • 1.  Entity Repurchase
        • a.  Corporate Redemption  2.45
        • b.  Liquidation of Partnership or LLC Interest  2.46
      • 2.  Cross-Purchase by Shareholders, Partners, or Members  2.47
      • 3.  Combination Agreements  2.48
      • 4.  Insurance Trusts  2.49
      • 5.  Chart: Comparison of Redemption and Cross-Purchase Alternatives  2.50
  • VI.  OBTAINING VALUATION OF BUSINESS INTEREST AT AGREEMENT PRICE
    • A.  Valuation for Federal Transfer Taxes
      • 1.  Valuation at Agreement Price  2.51
      • 2.  Requirements: Agreements Among Family Members  2.52
        • a.  Bona Fide Business Arrangement  2.52A
        • b.  Not a Device to Transfer Property to Family Members for Inadequate Consideration  2.52B
        • c.  Evidence of Comparable Arm’s-Length Arrangements  2.52C
        • d.  Lifetime Restrictions  2.52D
        • e.  Obligation of Estate to Sell  2.52E
        • f.  Determinable Selling Price  2.52F
      • 3.  Requirements: Agreements Among Unrelated Parties  2.53
      • 4.  Valuation Under Agreements Made Before October 9, 1990  2.54
        • a.  Substantial Modification of Agreements  2.54A
        • b.  Conversion of Pre-1987 Corporate Redemption Agreements  2.54B
      • 5.  Effect of Buy-Sell Agreement on Estate Tax Deferral  2.55
      • 6.  Effect of Buy-Sell Agreement on Estate Tax Deduction for Qualified Family-Owned Business Interests [Deleted]  2.55A
    • B.  Valuation for California Estate Taxes  2.56
  • VII.  VALUATION AT OTHER THAN AGREEMENT PRICE
    • A.  Agreement as Factor in Determining Value  2.57
    • B.  Allocation of Liability for Transfer Taxes
      • 1.  Importance of Provision for Allocation  2.58
      • 2.  Form: Buy-Sell Provision: Purchaser Assumes Liability for Additional Transfer Taxes  2.59
      • 3.  Form: Buy-Sell Provision: Purchaser Does Not Assume Liability for Additional Transfer Taxes  2.60
    • C.  Effect on Marital and Charitable Deductions of Failure to Fix Estate Tax Value  2.61
    • D.  Effect on Credit for Previously Taxed Property  2.62
    • E.  Special Use Valuation  2.63
    • F.  Undervaluation Penalty  2.64
  • VIII.  REPORTING REQUIREMENT  2.65
  • IX.  USING DEFINED-VALUE CLAUSES  2.66
    • A.  Adjustment Clauses  2.67
      • 1.  Revenue Ruling 86–41  2.68
      • 2.  Procter Decision  2.69
      • 3.  Public Policy Against Adjustment Clauses  2.70
      • 4.  McLendon Decision  2.71
      • 5.  Other Court Decisions  2.72
      • 6.  IRS Letter Rulings 200225023, 200337012  2.73
      • 7.  Another Argument Against Adjustment Clauses  2.74
    • B.  Value Definition Clauses  2.75
      • 1.  Form: Value Definition Clause  2.75A
      • 2.  Charitable Remainder Annuity Trust Regulations  2.76
      • 3.  Section 2702 Regulations  2.77
      • 4.  Disclaimer Regulations  2.78
      • 5.  IRS Letter Ruling 8611004  2.79
      • 6.  McCord Decision  2.80
      • 7.  Satisfying Public Policy Objections  2.81
      • 8.  Form: Alternative Value Definition Clause  2.81A
  • X.  EFFECT OF CIRCULAR 230  2.82

3

Corporate Buy-Sell Agreements

Doron M. Tisser

Whitney M. Skala

  • I.  INTRODUCTION TO CORPORATE BUY-SELL AGREEMENTS
    • A.  Scope of Chapter  3.1
    • B.  Corporate Redemption Versus Shareholders’ Cross-Purchase  3.2
  • II.  PRELIMINARY CONSIDERATIONS: CORPORATION’S PURCHASE OF ITS SHARES
    • A.  Limitations on Corporate Purchase  3.3
      • 1.  Retained Earnings Test  3.4
      • 2.  Assets-Over-Liabilities Test  3.5
      • 3.  Solvency Test  3.6
      • 4.  Scope of Board’s Valuation Authority; Other Restrictions  3.7
      • 5.  Exception for Insurance-Funded Distributions  3.8
      • 6.  When Funds Must Be Present  3.9
      • 7.  Administrative Requirements  3.10
      • 8.  Curbs on Transfer Restrictions  3.11
    • B.  Changes in Capital Structure Related to Stock Purchase
      • 1.  Authorized But Unissued Shares  3.12
      • 2.  Accounting Treatment of Reacquired Shares  3.13
    • C.  Liability for Improper Distributions  3.14
      • 1.  Director Liability
        • a.  Violations of State Law  3.15
        • b.  Misrepresentations  3.16
        • c.  Breach of Fiduciary Relationship  3.17
      • 2.  Shareholder Liability
        • a.  Selling Shareholder  3.18
        • b.  Remaining Shareholders  3.19
        • c.  Liability of Professional Advisers  3.20
      • 3.  Liability of Corporation and Insiders Under Federal Securities Laws  3.21
    • D.  Purchase of Shares From Donee or Estate  3.22
    • E.  Tax Considerations for Corporation  3.23
      • 1.  Corporation’s Gain or Loss on Redemption Distribution of Property  3.24
      • 2.  Effect of Redemption on IRC §312(a) Earnings and Profits  3.25
    • F.  Tax Considerations for Selling Shareholder  3.26
      • 1.  Dividend or Capital Gains Treatment of Redemption Distributions  3.27
        • a.  Safe Harbors for Redemption Distributions  3.28
          • (1)  Termination of Shareholder’s Interest Under IRC §302(b)(3)  3.29
            • (a)  Constructive Stock Ownership Rules Under IRC §318  3.30
            • (b)  Waiver of Constructive Ownership Rules  3.31
          • (2)  Substantially Disproportionate Redemptions Under IRC §302(b)(2)  3.32
          • (3)  Redemptions Not Equivalent to Dividends Under IRC §302(b)(1)  3.33
          • (4)  Distributions in Redemption of Stock to Pay Death Taxes and Expenses Under IRC §303  3.34
        • b.  Section 306 Stock  3.35
      • 2.  Delaying Tax Payment by Installment Sale  3.36
      • 3.  Qualified Small Business Stock
        • a.  Partial Exclusion of 50 Percent of Gain From Sale of Qualified Small Business Stock  3.36A
        • b.  Rollover of Gain From Sale of Qualified Small Business Stock  3.36B
      • 4.  Deferring Payment of Estate Tax  3.37
      • 5.  Estate Tax Deduction for Qualified Family-Owned Business Interests [Deleted]  3.37A
      • 6.  California Estate Tax  3.38
    • G.  Tax Considerations for Remaining Shareholders  3.39
  • III.  PRELIMINARY CONSIDERATIONS: CROSS-PURCHASE OF SHARES BY OTHER SHAREHOLDERS
    • A.  Business Law Considerations  3.40
    • B.  Tax Considerations
      • 1.  Selling Shareholder: Ordinary Income Versus Capital Gain  3.41
        • a.  Collapsible Corporations [Deleted]  3.42
        • b.  Section 306 Stock  3.43
      • 2.  Tax Considerations for Remaining Shareholders  3.44
      • 3.  Combination Stock Redemption and Cross-Purchase  3.45
  • IV.  ENTERING INTO BUY-SELL AGREEMENT
    • A.  Checklist: Buy-Sell Procedures  3.46
    • B.  Form: Board of Directors’ Resolution Authorizing Execution of Buy-Sell Agreement  3.47
  • V.  FORM: BUY-SELL AGREEMENT FOR CORPORATION AND SHAREHOLDERS
    • A.  Form: Table of Contents  3.48
    • B.  Form: Preamble  3.49
    • C.  Form: Share Certificate Requirement  3.50
    • D.  Form: Legend on Share Certificates  3.51
    • E.  Form: Right of First Refusal  3.52
    • F.  Form: Pledge, Hypothecation, or Other Encumbrance  3.53
    • G.  Form: Permitted Transfers; Prior Rights of Original Transferor  3.54
    • H.  Form: Obligations of Transferees  3.55
    • I.  Purchase on Other Events  3.56
      • 1.  Bankruptcy  3.56A
      • 2.  Form: Optional Purchase on Bankruptcy  3.56B
      • 3.  Form: Optional Purchase on Breach of Agreement  3.56C
      • 4.  Form: Optional Purchase on Criminal Conviction or Willful Misconduct  3.56D
    • J.  Form: Purchase on Death  3.57
    • K.  Form: Optional Purchase on Termination of Employment  3.58
    • L.  Form: Purchase on Disability  3.59
    • M.  Valuation  3.60
      • 1.  Form: Book Value  3.60A
      • 2.  Form: Capitalized Earnings Formula  3.60B
      • 3.  Form: Appraisal Using “Baseball Arbitration”  3.60C
      • 4.  Form: Agreed Price With Arbitration  3.60D
    • N.  Form: Insurance Policies  3.61
    • O.  Form: Payment and Transfer of Shares  3.62
    • P.  Form: Notes and Security  3.63
    • Q.  Form: Administrative Approvals  3.64
    • R.  Form: Unneeded Insurance Policies  3.65
    • S.  Form: Mandatory Dissolution of Corporation  3.66
    • T.  Form: Termination of Agreement  3.67
    • U.  Form: Preserving S Corporation Election  3.68
    • V.  Form: Shareholder Wills and Revocable Trusts  3.69
    • W.  Form: Insurance Company or Trustee Provisions  3.70
    • X.  Form: Miscellaneous Matters  3.71
    • Y.  Form: Signatures  3.72
    • Z.  Form: Consent of Spouse or Registered Domestic Partner  3.73
  • VI.  CHECKLIST OF PROCEDURES AND FORMS OF DIRECTORS’ RESOLUTIONS AUTHORIZING PURCHASE
    • A.  Checklist: Procedures for Purchase  3.74
    • B.  Form: Board of Directors’ Resolutions Authorizing Purchase From Retained Earnings  3.75
    • C.  Purchase Based on Assets-Over-Liabilities Test  3.76
    • D.  Form: Board of Directors’ Resolution Authorizing Purchase of Shares Based on Assets-Over-Liabilities Test  3.77
    • E.  Purchase Funded by Insurance Proceeds  3.78
    • F.  Form: Board of Directors’ Resolution Authorizing Purchase of Shares From Insurance Proceeds  3.79

4

Partnership and LLC Buy-Sell Agreements

Doron M. Tisser

Christopher Chediak

Jack S. Johal

  • I.  INTRODUCTION TO PARTNERSHIP AND LLC BUY-SELL AGREEMENTS
    • A.  Scope of Chapter  4.1
    • B.  Comparison of Partnership and LLC Buy-Sell Agreements With Corporate Buy-Sell Agreement  4.2
    • C.  Liquidation of Partnership or LLC Interest Versus Cross-Purchase by Partners or LLC Members  4.3
  • II.  BUSINESS LAW CONSIDERATIONS IN DRAFTING AGREEMENT
    • A.  Consistency With Partnership or LLC Operating Agreement  4.4
    • B.  Statutory and Administrative Requirements  4.5
      • 1.  Licensing Requirements  4.5A
      • 2.  Securities Regulations  4.5B
      • 3.  Statutory Buy-Out Provisions for General Partnerships  4.5C
    • C.  Events Triggering Partnership Buy-Out  4.6
      • 1.  Death  4.7
      • 2.  Retirement  4.8
      • 3.  Attempt to Sell  4.9
        • a.  Selling Partner’s Notice  4.10
        • b.  Remaining Partners’ Acceptance  4.11
      • 4.  Expulsion  4.12
    • D.  Table: Events Triggering Entity Dissolution—General and Limited Partnerships, Limited Liability Companies  4.13
    • E.  Valuation Problems  4.14
    • F.  Funding the Buy-Out  4.15
    • G.  Post-Buy-Out Considerations
      • 1.  Withdrawn General Partner’s Right to Interest  4.16
      • 2.  General Partnership Liabilities and Indemnification  4.17
  • III.  TAX CONSIDERATIONS IN DRAFTING AGREEMENT  4.17A
    • A.  Sale Versus Liquidation  4.18
    • B.  Income Tax on Sale of Interest During Partner’s or Member’s Life
      • 1.  Selling Partner’s or Member’s Distributive Share of Income  4.19
      • 2.  Selling Partner’s or Member’s Gain or Loss  4.20
      • 3.  Unrealized Receivables and Inventory Items  4.21
      • 4.  Purchaser’s Basis  4.22
      • 5.  Risk of Termination  4.23
    • C.  Income Tax on Liquidation of Interest During Partner’s or Member’s Life
      • 1.  IRC §736 Payments  4.24
      • 2.  Valuation of Partner’s or Member’s Interest in Partnership or LLC Property  4.25
      • 3.  IRC §736(b) Payments
        • a.  Distribution of Cash  4.26
        • b.  Distribution of Property  4.27
        • c.  Partner’s or Member’s Election Under IRC §732(d)  4.28
        • d.  Optional Adjustment to Basis on Distribution  4.29
        • e.  Inventory Items  4.30
        • f.  Disposition of Receivables and Inventory  4.31
      • 4.  IRC §736(a) Payments  4.32
        • a.  Partner’s or Member’s Distributive Share  4.33
        • b.  Guaranteed Payments  4.34
      • 5.  Allocation of Liquidation Payments  4.35
      • 6.  Goodwill  4.36
      • 7.  Retention of Partner or Member Status for Tax Purposes  4.37
      • 8.  Death of Retired Partner or Member Before Interest Completely Liquidated  4.38
    • D.  Family Partnership Rules  4.39
    • E.  Buy-Out of Partnership or LLC Interest on Partner’s or Member’s Death
      • 1.  Estate Tax Treatment  4.40
      • 2.  Income Tax Treatment  4.41
        • a.  Close of Entity’s Taxable Year on Death  4.42
        • b.  Income in Respect of Decedent  4.43
        • c.  Basis to Successor of Deceased Partner or Member  4.44
        • d.  Optional Adjustment to Basis on Death  4.45
        • e.  Tax Audits and Adjustments
          • (1)  Governing Laws  4.45A
          • (2)  Impact on Resale to Third Parties   4.45B
          • (3)  Drafting Considerations in Buy-Sell Agreements  4.45C
  • IV.  FORM: BUY-SELL AGREEMENT FOR GENERAL PARTNERSHIP
    • A.  Form: Table of Contents  4.46
    • B.  Form: Preamble to Partnership Agreement  4.47
    • C.  Transfer Restrictions
      • 1.  Form: Prohibition Against Tax Termination  4.48
      • 2.  Form: Right of First Refusal  4.49
      • 3.  Form: Acceptance  4.50
      • 4.  Form: Allocation of Purchased Interest  4.51
      • 5.  Form: Additional Terms and Conditions  4.52
      • 6.  Form: Closing  4.53
      • 7.  Form: Release of Offered Interest  4.54
    • D.  Other Events Causing Buy-Out
      • 1.  Form: Retirement of Partner  4.55
      • 2.  Form: Death of Partner  4.56
      • 3.  Form: Bankruptcy, Expulsion, and Other Events  4.57
    • E.  Valuation of Partnership Interest  4.58
      • 1.  Form: Agreed Purchase Price  4.58A
      • 2.  Form: Book Value  4.58B
      • 3.  Form: Baseball Arbitration  4.58C
    • F.  Form: Life Insurance  4.59
    • G.  Form: Liquidation by Partnership  4.60
    • H.  Form: Conversion to Limited Partnership  4.61
    • I.  Form: Partner Wills and Revocable Trusts  4.61A
    • J.  Form: Miscellaneous Matters  4.62
    • K.  Form: Signatures  4.63
    • L.  Form: Consent of Spouse or Registered Domestic Partner  4.64
  • V.  LIMITED PARTNERSHIP BUY-SELL AGREEMENT
    • A.  Basic Considerations  4.65
    • B.  Transfer Restrictions on Limited Partnership Interests  4.65A
      • 1.  Form: General Partners’ Interests: No Transfer  4.66
      • 2.  Form: Limited Partners’ Interests: Right of First Refusal  4.67
      • 3.  Form: Limited Partners’ Interests: Acceptance  4.68
      • 4.  Form: Limited Partners’ Interests: Permitted Transfers; Prior Rights of Original Transferors  4.69
  • VI.  LIMITED LIABILITY PARTNERSHIPS
    • A.  Governing Laws  4.69A
    • B.  Available Only to Architecture, Public Accountancy, Engineering, Land Surveying, and Law Partnerships, and Certain Affiliates  4.69B
    • C.  Ownership Requirements  4.69C
    • D.  Partnership Buy-Sell Agreement  4.69D
  • VII.  LIMITED LIABILITY COMPANY BUY-SELL AGREEMENT
    • A.  Drafting Considerations  4.70
    • B.  Form: Preamble to LLC Agreement  4.71
    • C.  Definitions
      • 1.  Form: Introduction  4.72
      • 2.  Form: Encumber  4.73
      • 3.  Form: Encumbrance  4.74
      • 4.  Form: Involuntary Transfer  4.75
      • 5.  Form: Membership Interest  4.76
      • 6.  Form: Notice  4.77
      • 7.  Form: Transfer  4.78
      • 8.  Form: Transferable Interest  4.79
      • 9.  Form: Transferee  4.80
      • 10.  Form: Vote  4.81
      • 11.  Form: Voting Interest  4.82
    • D.  Transfers of Membership Interests
      • 1.  Form: Dissociation of Members  4.83
      • 2.  Form: Restrictions on Transfer  4.84
        • a.  Form: Permitted Transfers; Prior Rights of Original Transferor  4.85
        • b.  Form: Obligations of Transferees  4.86
      • 3.  Form: Right of First Refusal  4.87
      • 4.  Form: Triggering Events  4.88
      • 5.  Form: Death of Member  4.89
      • 6.  Form: Dissolution or Death of Spouse or Registered Domestic Partner  4.90
      • 7.  Form: Option Periods  4.91
      • 8.  Form: Nonparticipation of Interested Member  4.92
      • 9.  Form: Option Purchase Price  4.93
      • 10.  Form: Substituted Member  4.94
      • 11.  Form: Duties of Substituted Member  4.95
      • 12.  Form: Securities Laws  4.96
    • E.  Form: Life Insurance  4.97
    • F.  Form: Liquidation of Membership Interest by Company  4.98
    • G.  Form: Member Wills and Revocable Trusts  4.99
    • H.  General Provisions
      • 1.  Form: Entire Agreement  4.100
      • 2.  Form: Counterpart Executions  4.101
      • 3.  Form: Governing Law; Severability  4.102
      • 4.  Form: Benefit of Agreement  4.103
      • 5.  Form: Further Assurances  4.104
      • 6.  Form: Amendment  4.105
      • 7.  Form: Time of the Essence  4.106
      • 8.  Execution and Signatures
        • a.  Form: Execution  4.107
        • b.  Form: Signatures of Individual Members  4.108
    • I.  Form: Consent of Spouse or Registered Domestic Partner  4.109

5

Valuation of Interest

James H. Schilt

Charles Schug

  • I.  INTRODUCTION TO VALUATION OF INTEREST  5.1
  • II.  VALUATION TERMINOLOGY  5.2
    • A.  Value  5.3
      • 1.  Net Book Value  5.4
      • 2.  Fair Market Value  5.5
      • 3.  Going-Concern Value  5.6
      • 4.  Liquidation Value  5.7
    • B.  Business Enterprise  5.8
    • C.  Capitalization  5.9
    • D.  Capital Stock  5.10
    • E.  Minority and Majority Holdings  5.11
    • F.  Goodwill  5.12
    • G.  Capitalization Rate  5.13
    • H.  Discount Rate  5.14
    • I.  Generally Accepted Accounting Principles  5.15
    • J.  Valuation Discounts or Premiums  5.16
    • K.  Valuation Experts  5.17
  • III.  VALUATION TECHNIQUES
    • A.  Methods of Valuation  5.18
      • 1.  Appraisal  5.19
      • 2.  Periodic Review  5.20
      • 3.  Specific Valuation Approaches
        • a.  Book Value  5.21
        • b.  Adjusted Book Value  5.22
        • c.  Liquidation Value  5.23
        • d.  Capitalization of Earnings  5.24
        • e.  Discounted Future Income or Cash Flow  5.25
        • f.  Comparison With Publicly Held Companies  5.26
        • g.  Recent Common Stock Transactions  5.27
        • h.  Effect of Minority-Interest and Marketability Discounts
          • (1)  Minority-Interest Discount  5.27A
          • (2)  Discount for Lack of Marketability  5.27B
          • (3)  Control Premium  5.27C
          • (4)  Market Absorption Discount  5.27D
        • i.  IRS Attack on Family Limited Partnerships  5.27E
        • j.  Dividend-Paying Capacity  5.28
        • k.  Excess Earnings  5.29
        • l.  Rules of Thumb  5.30
    • B.  Table: Comparison of Valuation Methods  5.31
  • IV.  FACTORS IN SELECTING VALUATION METHODS
    • A.  Preliminary Considerations  5.32
    • B.  Information Needed
      • 1.  The Owners  5.33
      • 2.  Nature of Business  5.34
        • a.  Legal Structure  5.35
        • b.  Accounting Matters  5.36
        • c.  Financial History  5.37
        • d.  Insurance Policies  5.38
      • 3.  Events Occurring After Valuation  5.39
      • 4.  Legal and Administrative Requirements  5.40
  • V.  DRAFTING VALUATION CLAUSES FOR BUY-SELL AGREEMENTS
    • A.  Objectives of Valuation Clause
      • 1.  General Considerations  5.41
      • 2.  Adjustable Valuation Clauses  5.42
      • 3.  Payout Over Time  5.43
    • B.  Form Clauses
      • 1.  Valuation by Appraisal
        • a.  Form: Valuation by Appraisal: Corporation  5.44
        • b.  Form: Valuation by Appraisal: Partnership  5.45
      • 2.  Valuation by Agreement
        • a.  Form: Valuation by Agreement: Corporation or Partnership  5.46
        • b.  Form: Initial Agreement: Corporation  5.47
        • c.  Form: Initial Agreement: Partnership  5.48
        • d.  Agreed Purchase Price With Periodic Revisions Based on Earnings: Corporation
          • (1)  Form: Buy-Sell Agreement Provision for Agreed Purchase Price With Periodic Revisions Based on Earnings  5.49
          • (2)  Form: Certificate of Purchase Price (Appendix to Buy-Sell Agreement)  5.50
        • e.  Form: Agreed Purchase Price With Periodic Revisions Based on Prior Agreed Prices: Corporation  5.51
      • 3.  Valuation by Formula
        • a.  Book Value
          • (1)  Form: Book Value: Corporation  5.52
          • (2)  Form: Book Value: Partnership  5.53
        • b.  Book Value With Percentage Adjustment
          • (1)  Form: Book Value With Percentage Adjustment: Corporation  5.54
          • (2)  Form: Book Value With Percentage Adjustment: Partnership  5.55
        • c.  Book Value With Account Adjustments
          • (1)  Form: Book Value With Account Adjustments: Corporation  5.56
          • (2)  Form: Book Value With Account Adjustments: Partnership  5.57
        • d.  Book Value Plus Capitalization of Earnings
          • (1)  Form: Book Value Plus Capitalization of Earnings: Corporation  5.58
          • (2)  Form: Book Value Plus Capitalization of Earnings: Partnership  5.59
        • e.  Book Value Plus Goodwill
          • (1)  Form: Book Value Plus Goodwill: Corporation  5.60
          • (2)  Form: Book Value Plus Goodwill: Partnership  5.61
        • f.  Capitalization of Earnings
          • (1)  Form: Capitalization of Earnings: Corporation  5.62
          • (2)  Form: Capitalization of Earnings: Partnership  5.63
      • 4.  Form: Negotiation With Arbitration  5.64
  • VI.  APPRAISAL PROCEDURES
    • A.  Purpose of Appraisal  5.65
    • B.  Appraisal Guidelines  5.66
    • C.  Appraisal Techniques  5.67
    • D.  Scope of Appraiser’s Investigation  5.68
    • E.  Appraisal Report  5.69
    • F.  Need for Qualified Appraisal  5.70

6

Life Insurance Funding

Robert D. Bannon

Robert F. Miller

  • I.  LIFE INSURANCE FUNDING OF BUY-SELL AGREEMENTS: BASIC CONSIDERATIONS  6.1
    • A.  Cost of Insurance Versus Other Funding  6.2
    • B.  Business Needs
      • 1.  Continuity  6.3
      • 2.  Preserving Business Capital  6.4
      • 3.  Key Executive Insurance  6.5
      • 4.  Buy-Out of Business Owned by One Person  6.6
      • 5.  Insurance Investment Marketplace, Senior Settlements  6.6A
    • C.  Owners’ and Survivors’ Needs  6.7
      • 1.  Checklist: Insurance for the Estate  6.8
      • 2.  Uninsurability Problem  6.9
        • a.  Previously Existing Policy  6.10
        • b.  Guaranteed Issue Insurance  6.11
        • c.  Group Life Insurance  6.12
        • d.  Sinking Fund  6.13
        • e.  Installment Payments  6.14
        • f.  Other Funding Methods  6.15
    • D.  Effect of Insurance on Valuation  6.16
  • II.  SELECTING INSURANCE FOR BUY-SELL AGREEMENT
    • A.  Nature of Insurance Policy  6.17
    • B.  Table: Comparison of Term and Permanent Insurance  6.18
    • C.  Term Insurance  6.19
      • 1.  Kinds of Term Insurance  6.20
      • 2.  Features of Term Insurance Policy  6.21
      • 3.  Adapting Term Insurance to Create Cash Value Buildup  6.22
    • D.  Permanent Insurance
      • 1.  Nature  6.23
      • 2.  Optional Special Features  6.24
      • 3.  Policy Evaluation Considerations  6.25
  • III.  INSURANCE FUNDING OF CORPORATE BUY-SELL AGREEMENT  6.26
    • A.  Ownership of Policy  6.27
    • B.  Payment of Premiums  6.28
    • C.  Receipt of Insurance Proceeds
      • 1.  Taxation Under Pension Protection Act of 2006  6.29
      • 2.  Alternative Minimum Tax  6.29A
      • 3.  Constructive Dividend Issue  6.29B
    • D.  Accumulated Earnings  6.30
    • E.  Effect on Earnings and Profits  6.31
    • F.  Estate Taxes  6.32
    • G.  Income Taxation of Shareholder’s Estate  6.32A
  • IV.  INSURANCE FUNDING OF SHAREHOLDER CROSS-PURCHASE AGREEMENT  6.33
    • A.  Ownership of Policy  6.34
    • B.  Payment of Premiums  6.35
    • C.  Effect of Proceeds on Valuation of Business  6.36
    • D.  Receipt of Insurance Proceeds  6.37
    • E.  Estate Taxes  6.38
    • F.  Transfer-for-Value Rule  6.39
    • G.  Income Taxation of Shareholder’s Estate  6.39A
  • V.  INSURANCE FUNDING OF PARTNERSHIP OR LLC BUY-SELL AGREEMENT  6.40
    • A.  Payment of Premiums  6.41
    • B.  Transfer-for-Value Rule  6.42
    • C.  Jointly Owned Policies  6.43
    • D.  Tax Basis of Partnership or LLC Interest  6.44
    • E.  Receipt of Insurance Proceeds  6.45
    • F.  Estate Taxes  6.46
    • G.  Income Taxation of Partner’s Estate  6.46A
  • VI.  TABLE: SUMMARY OF TAX CONSIDERATIONS IN LIFE INSURANCE FUNDING OF BUY-SELL AGREEMENTS  6.47
  • VII.  TRUSTEE FOR INSURANCE FUNDING OF BUY-SELL AGREEMENTS  6.48
    • A.  S Corporation Planning  6.49
    • B.  Ownership of Policy by Trustee  6.50

7

Review, Amendment, and Enforcement

David V. Otterson

M. Danton Richardson

  • I.  INTRODUCTION TO REVIEWING, AMENDING, AND ENFORCING THE AGREEMENT  7.1
  • II.  REVIEWING AND AMENDING BUY-SELL AGREEMENT
    • A.  When Agreement Should Be Reviewed
      • 1.  Changes in Personal Circumstances of Shareholder, Partner, or LLC Member  7.2
      • 2.  Events Affecting Business Entity  7.3
    • B.  Review of Agreement  7.4
    • C.  Amendment of Agreement
      • 1.  General Principles  7.4A
      • 2.  Consider Tax Effects of Amendment  7.5
      • 3.  Requirements for Amendment  7.6
      • 4.  Form: Amendment to Buy-Sell Agreement  7.7
      • 5.  Supplemental Agreements  7.7A
  • III.  ENFORCING AGREEMENT  7.8
    • A.  Specific Performance  7.9
      • 1.  Procedural Guide to Specific Performance of Buy-Sell Agreement  7.10
      • 2.  Determining the Parties
        • a.  Who Can Maintain Action  7.11
        • b.  Who Can Be Required to Perform  7.12
      • 3.  Conditions to Obtaining Specific Performance  7.13
        • a.  Remedy at Law Is Inadequate  7.14
          • (1)  Real Property  7.15
          • (2)  Buy-Sell Provision for Sale of Personal Property  7.16
        • b.  Relief Is Obtainable From Single Judgment  7.17
        • c.  Performance Sought Is Possible  7.18
        • d.  Performance Sought Is Certain  7.19
        • e.  Contract Is Fair and Consideration Adequate  7.20
        • f.  Plaintiff Performs or Tenders Performance  7.21
        • g.  Statute of Frauds  7.22
        • h.  Mutuality Not Required  7.23
    • B.  Equitable Defenses in Action for Specific Performance  7.24
      • 1.  Unclean Hands  7.25
      • 2.  Laches  7.26
      • 3.  Action Seeks to Enforce Penalty or Forfeiture  7.27
      • 4.  Fraud, Mistake, or Unfair Practices  7.28
    • C.  Money Award Incidental to Specific Performance  7.29
    • D.  Grant of Specific Performance Is Discretionary  7.30
  • IV.  OTHER METHODS OF OBTAINING RELIEF
    • A.  Arbitration  7.31
      • 1.  Advantages  7.32
      • 2.  Disadvantages  7.33
    • B.  Mediation  7.33A
    • C.  Action for Damages  7.34

BUSINESS BUY-SELL AGREEMENTS

(1st Edition)

June 2018

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH01

Chapter 1

Preliminary Considerations

01-008

§1.8

Corporate Consent to Legal Services

01-009

§1.9

Partnership or Limited Liability Company Letter Agreement Regarding Instruction of Legal Counsel

01-013

§1.13

Conflict Disclosure Letter and Consent

01-016

§1.16

Nonrepresentation Letter

01-018

§1.18

Letter Requesting Consent From Adverse Client

01-021

§1.21

Disclosure Letter (Equity Interest in Business Venture as Compensation for Legal Services)

01-023

§1.23

CHECKLIST: BUY-SELL AGREEMENT PROVISIONS

CH02

Chapter 2

Estate Planning Considerations

02-008

§§2.8-2.32

Buy-Sell Provision Confirming Separate Property Interest: Shareholder Has No Spouse or Registered Domestic Partner

 

§2.9

Buy-Sell Provision Confirming Separate Property Interest: Partner Has No Spouse or Registered Domestic Partner

 

§2.9A

Buy-Sell Provision Confirming Separate Property Interest: Member of LLC Has No Spouse or Registered Domestic Partner

 

§2.10

Buy-Sell Provision Confirming Separate Property Interest: Shareholder With Spouse or Registered Domestic Partner

 

§2.11

Buy-Sell Provision Confirming Separate Property Interest: Partner With Spouse or Registered Domestic Partner

 

§2.11A

Buy-Sell Provision Confirming Separate Property Interest: Member of LLC With Spouse or Registered Domestic Partner

 

§2.12

Statement of Spouse or Registered Domestic Partner Confirming Separate Property Business Interest

 

§2.13

Buy-Sell Provision Confirming Community Property Interest: Shareholder

 

§2.14

Buy-Sell Provision Confirming Community Property Interest: Partner

 

§2.14A

Buy-Sell Provision Confirming Community Property Interest: Member of LLC

 

§2.15

Statement Confirming Community Property Business Interest

 

§2.16

Buy-Sell Provision Confirming Quasi-Community Property Interest: Shareholder

 

§2.17

Buy-Sell Provision Confirming Quasi-Community Property Interest: Partner

 

§2.17A

Buy-Sell Provision Confirming Quasi-Community Property Interest: Member of LLC

 

§2.18

Statement Confirming Quasi-Community Property Business Interest

 

§2.19

Buy-Sell Provision Confirming Separate and Community Property Business Interests: Shareholder

 

§2.20

Buy-Sell Provision Confirming Separate and Community Property Interests: Partner

 

§2.20A

Buy-Sell Provision Confirming Separate and Community Property Interests: Member of LLC

 

§2.21

Statement of Spouse or Registered Domestic Partner Confirming Separate and Community Property Business Interests

 

§2.22

Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Shareholder

 

§2.23

Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Partner

 

§2.23A

Buy-Sell Provision Confirming Quasi-Community and Community Property Interests: Member of LLC

 

§2.24

Statement of Spouse or Registered Domestic Partner Confirming Quasi-Community and Community Property Business Interests

 

§2.26

Will Provision for Party With No Spouse or Registered Domestic Partner

 

§2.27

Will Provision for All or Part of Party’s Community Property Business Interest

 

§2.28

Will Provision for All or Part of Community Property Business Interest of Party’s Spouse or Registered Domestic Partner

 

§2.29

Will Provision for Party’s Separate or Quasi-Community Property Business Interest or Combination

 

§2.30

Will Provision for Separate or Quasi-Community Property Business Interest of Party’s Spouse or Registered Domestic Partner

 

§2.31

Trust Provision for Party With No Spouse or Registered Domestic Partner

 

§2.32

Trust Provision for Party With Spouse or Registered Domestic Partner

02-059

§2.59

Buy-Sell Provision: Purchaser Assumes Liability for Additional Transfer Taxes

02-060

§2.60

Buy-Sell Provision: Purchaser Does Not Assume Liability for Additional Transfer Taxes

02-075A

§2.75A

Value Definition Clause

02-081A

§2.81A

Alternative Value Definition Clause

CH03

Chapter 3

Corporate Buy-Sell Agreements

03-046

§3.46

Checklist: Buy-Sell Procedures

03-047

§§3.47-3.73

Board of Directors’ Resolution Authorizing Execution of Buy-Sell Agreement

 

§3.48

Table of Contents

 

§3.49

Preamble

 

§3.50

Share Certificate Requirement

 

§3.51

Legend on Share Certificates

 

§3.52

Right of First Refusal

 

§3.53

Pledge, Hypothecation, or Other Encumbrance

 

§3.54

Permitted Transfers; Prior Rights of Original Transferor

 

§3.55

Obligations of Transferees

 

§3.56B

Optional Purchase on Bankruptcy

 

§3.56C

Optional Purchase on Breach of Agreement

 

§3.56D

Optional Purchase on Criminal Conviction or Willful Misconduct

 

§3.57

Purchase on Death

 

§3.58

Optional Purchase on Termination of Employment

 

§3.59

Purchase on Disability

 

§3.60A

Book Value

 

§3.60B

Capitalized Earnings Formula

 

§3.60C

Appraisal Using “Baseball Arbitration”

 

§3.60D

Agreed Price With Arbitration

 

§3.61

Insurance Policies

 

§3.62

Payment and Transfer of Shares

 

§3.63

Notes and Security

 

§3.64

Administrative Approvals

 

§3.65

Unneeded Insurance Policies

 

§3.66

Mandatory Dissolution of Corporation

 

§3.67

Termination of Agreement

 

§3.68

Preserving S Corporation Election

 

§3.69

Shareholder Wills and Revocable Trusts

 

§3.70

Insurance Company or Trustee Provisions

 

§3.71

Miscellaneous Matters

 

§3.72

Signatures

 

§3.73

Consent of Spouse or Registered Domestic Partner

03-074

§3.74

Checklist: Procedures for Purchase

03-075

§3.75

Board of Directors’ Resolutions Authorizing Purchase From Retained Earnings

03-077

§3.77

Board of Directors’ Resolution Authorizing Purchase of Shares Based on Assets-Over-Liabilities Test

03-079

§3.79

Board of Directors’ Resolution Authorizing Purchase of Shares From Insurance Proceeds

CH04

Chapter 4

Partnership and LLC Buy-Sell Agreements

04-046

§§4.46-4.64

Table of Contents

 

§4.47

Preamble to Partnership Agreement

 

§4.48

Prohibition Against Tax Termination

 

§4.49

Right of First Refusal

 

§4.50

Acceptance

 

§4.51

Allocation of Purchased Interest

 

§4.52

Additional Terms and Conditions

 

§4.53

Closing

 

§4.54

Release of Offered Interest

 

§4.55

Retirement of Partner

 

§4.56

Death of Partner

 

§4.57

Bankruptcy, Expulsion, and Other Events

 

§4.58A

Agreed Purchase Price

 

§4.58B

Book Value

 

§4.58C

Baseball Arbitration

 

§4.59

Life Insurance

 

§4.60

Liquidation by Partnership

 

§4.61

Conversion to Limited Partnership

 

§4.61A

Partner Wills and Revocable Trusts

 

§4.62

Miscellaneous Matters

 

§4.63

Signatures

 

§4.64

Consent of Spouse or Registered Domestic Partner

04-066

§§4.66-4.69

General Partners’ Interests: No Transfer

 

§4.67

Limited Partners’ Interests: Right of First Refusal

 

§4.68

Limited Partners’ Interests: Acceptance

 

§4.69

Limited Partners’ Interests: Permitted Transfers; Prior Rights of Original Transferors

04-071

§§4.71-4.108

Preamble to LLC Agreement

 

§4.72

Introduction

 

§4.73

Encumber

 

§4.74

Encumbrance

 

§4.75

Involuntary Transfer

 

§4.76

Membership Interest

 

§4.77

Notice

 

§4.78

Transfer

 

§4.79

Transferable Interest

 

§4.80

Transferee

 

§4.81

Vote

 

§4.82

Voting Interest

 

§4.83

Dissociation of Members

 

§4.84

Restrictions on Transfer

 

§4.85

Permitted Transfers; Prior Rights of Original Transferor

 

§4.86

Obligations of Transferees

 

§4.87

Right of First Refusal

 

§4.88

Triggering Events

 

§4.89

Death of Member

 

§4.90

Dissolution or Death of Spouse or Registered Domestic Partner

 

§4.91

Option Periods

 

§4.92

Nonparticipation of Interested Member

 

§4.93

Option Purchase Price

 

§4.94

Substituted Member

 

§4.95

Duties of Substituted Member

 

§4.96

Securities Laws

 

§4.97

Life Insurance

 

§4.98

Liquidation of Membership Interest by Company

 

§4.99

Member Wills and Revocable Trusts

 

§4.100

Entire Agreement

 

§4.101

Counterpart Executions

 

§4.102

Governing Law; Severability

 

§4.103

Benefit of Agreement

 

§4.104

Further Assurances

 

§4.105

Amendment

 

§4.106

Time of the Essence

 

§4.107

Execution

 

§4.108

Signatures of Individual Members

04-109

§4.109

Consent of Spouse or Registered Domestic Partner

CH05

Chapter 5

Valuation of Interest

05-044

§§5.44-5.64

Valuation by Appraisal: Corporation

 

§5.45

Valuation by Appraisal: Partnership

 

§5.46

Valuation by Agreement: Corporation or Partnership

 

§5.47

Initial Agreement: Corporation

 

§5.48

Initial Agreement: Partnership

 

§5.49

Buy-Sell Agreement Provision for Agreed Purchase Price With Periodic Revisions Based on Earnings

 

§5.50

Certificate of Purchase Price (Appendix to Buy-Sell Agreement)

 

§5.51

Agreed Purchase Price With Periodic Revisions Based on Prior Agreed Prices: Corporation

 

§5.52

Book Value: Corporation

 

§5.53

Book Value: Partnership

 

§5.54

Book Value With Percentage Adjustment: Corporation

 

§5.55

Book Value With Percentage Adjustment: Partnership

 

§5.56

Book Value With Account Adjustments: Corporation

 

§5.57

Book Value With Account Adjustments: Partnership

 

§5.58

Book Value Plus Capitalization of Earnings: Corporation

 

§5.59

Book Value Plus Capitalization of Earnings: Partnership

 

§5.60

Book Value Plus Goodwill: Corporation

 

§5.61

Book Value Plus Goodwill: Partnership

 

§5.62

Capitalization of Earnings: Corporation

 

§5.63

Capitalization of Earnings: Partnership

 

§5.64

Negotiation With Arbitration

CH06

Chapter 6

Life Insurance Funding

06-008

§6.8

Checklist: Insurance for the Estate

CH07

Chapter 7

Review, Amendment, and Enforcement

07-007

§7.7

Amendment to Buy-Sell Agreement

07-010

§7.10

Procedural Guide to Specific Performance of Buy-Sell Agreement

 

Selected Developments

June 2018 Update

Unless there’s a “contrary provision in the articles of incorporation,” in any suit for involuntary dissolution of a corporation, or in any proceeding for voluntary dissolution that’s initiated by shareholder vote, the corporation or the holders of 50 percent or more of its voting power may avoid dissolution by purchasing for cash at fair value the shares owned by the plaintiffs or shareholders seeking dissolution. An amendment to Corp C §2000(a) effective January 1, 2018, clarifies that the “contrary provision in the articles” need only be a reference in the articles to a separate written agreement between two or more shareholders for the purchase of shares; it isn’t necessary for the articles to set out the terms relating to the purchase of those shares. See §1.3.

In Brace v Speier (In re Brace) (9th Cir BAP 2017) 566 BR 13, the Ninth Circuit’s Bankruptcy Appellate Panel held that the bankruptcy court did not err when it permitted the bankruptcy trustee to avoid transfers of real property a Chapter 7 debtor made to a trust for the benefit of his wife, because the transfers were fraudulent. Although the debtor owned the properties as a joint tenant when he transferred them to the trust, Fam C §760 created a presumption that the properties were community property, and that presumption prevailed over the record title presumption that was created by Evid C §662. See §2.6.

The Tax Cuts and Jobs Act (Pub L 115–97, 131 Stat 2054) repealed the alternative minimum tax for corporations, effective for taxable years beginning after December 31, 2017. IRC §55. See §§2.39A, 2.39B, 2.54B.

Under the Tax Cuts and Jobs Act, the highest marginal tax rate on ordinary income has been reduced from 39.6 to 37 percent. See IRC §1; §2.45.

The Tax Cuts and Jobs Act doubles the estate and gift tax exemption, effective for estates of decedents and gifts made after December 31, 2017, and before January 1, 2026, from $5 million (indexed for inflation occurring after 2011) to $10 million. IRC §2010(c)(3). See §2.61.

On October 26, 2016, the Securities and Exchange Commission adopted final rules that modernize how issuers can raise money to fund their businesses through intrastate offerings while maintaining investor protections. The final rules amended Securities Act Rule 147 to modernize the safe harbor under Securities Act §3(a)(11) so issuers may continue to use state law exemptions that are conditioned on compliance with both §3(a)(11) and Rule 147. The final rules also established a new intrastate offering exemption, Securities Act Rule 147A, that further facilitates intrastate offerings by allowing offers to be accessible to out-of-state residents and making the exemption available to issuers that are incorporated or organized out-of-state. See §4.5B.

Section 4.23 and the related form provision in §4.48 have been deleted. These sections previously dealt with the “technical” termination of a partnership for federal income tax purposes when 50 percent or more of the total interest in its capital and profits is sold or exchanged within any 12-month period. IRC §708(b)(1)(B). The Tax Cuts and Jobs Act repealed that provision. The repeal applies to partnership taxable years beginning after December 31, 2017.

The Bipartisan Budget Act of 2015 (BBA) (Pub L 114–74, 129 Stat 584) has repealed and replaced the partnership audit rules enacted under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub L 97–248, 96 Stat 324). Under the BBA, entities who have elected to be treated as partnerships under federal tax law are, as of January 1, 2018, subject to new rules and procedures for the way tax examinations and controversies are managed and the resulting allocation of any tax adjustments on current and former members. See new §§4.45A–4.45C.

Under the “proportionality” test of Estate of Wayne C. Bongard (2005) 124 TC 95, a transfer of assets to a family limited partnership can be treated as having been made for adequate and full consideration even if discounts for such factors as lack of control or lack of marketability cause the value of the partnership interest received by a decedent to be less than the value of the assets transferred to the partnership. Thus a transfer by a decedent to a family limited partnership that depletes the decedent’s estate to the extent of any applicable discounts allowed in valuing the partnership interest can satisfy the bona fide sale exception from IRC §2036(a) but only if the partnership was created for a legitimate and significant nontax reason. Estate of Nancy H. Powell (2017) 148 TC No. 18. See §5.27E.

Under the Tax Cuts and Jobs Act, the maximum tax rate for C corporations was reduced from 35 percent to 21 percent. IRC §11. In addition, a 20 percent deduction for pass-through income was made available to members of LLCs, partners in partnerships, and shareholders of S corporations. IRC §199A. These changes should prompt a reevaluation of interests under all buy-sell agreements. See §7.3.

Arbitration awards are almost always final and not subject to effective judicial review unless the parties specifically provide so in their agreement. Thus if an arbitrator ignores a legal principle that should be controlling, the losing party has no recourse. Stated another way, the arbitrator’s decision may be conclusive even if it is incorrect. In Heimlich v Shivji (2017) 12 CA5th 152, however, the court of appeal partially vacated an arbitration award because the arbitrator refused to hear material evidence. See §7.33.

About the Authors

ROBERT D. BANNON received his A.B. degree in 1949 from the University of California, Berkeley, and his J.D. degree in 1952 from the University of Southern California Law Center. Mr. Bannon, of the firm of Anglea & Bannon, practices law in Pasadena.

CHRISTOPHER CHEDIAK received his B.S. degree in 1980 from the University of California, Davis, and his J.D. in 1983 from the University of Southern California Law Center. Mr. Chediak, of the firm of Weintraub Tobin, a Law Corporation, practices law in Sacramento.

ANNE K. HILKER received her B.S.J. degree in 1975 from Northwestern University and her J.D. degree in 1978 from the University of Southern California Law Center. Ms. Hilker, of the firm of Rosenman & Colin LLP, practices law in New York City.

WELDON U. HOWELL, JR., graduated from the University of Texas School of Law in 1973 and, following graduation, served as a law clerk for the Supreme Court of Texas. He has been a business and transactions attorney in Santa Barbara since 1974 and was a founding partner of the law firm of Howell Moore & Gough, LLP, in 1996. He counsels a broad array of business organizations and groups in various professions, with an ongoing focus on merger, acquisition, and sale of business enterprises. He has held leadership positions in numerous community and education-oriented organizations, including the Santa Barbara County Bar Association and the Santa Barbara County Board of Education.

JACK S. JOHAL received his B.A. degree in 1978 from Occidental College; his J.D. degree in 1981 from Duquesne University School of Law; and his LL.M. (Taxation) in 1983 from New York University. Mr. Johal, of the firm of Hanson, Bridgett, Marcus, Vlahos and Rudy, LLP, practices law in Sacramento.

KELLEY BANNON LASHLEY graduated from California Polytechnic State University in 1995 and Santa Clara University School of Law in 1999. She is a partner at Calleton, Merritt, De Francisco & Bannon, LLP, in Pasadena, where she practices in the area of estate planning and administration. Ms. Lashley speaks regularly on legal and tax issues relating to estate planning and administration, and she is a guest lecturer for the Advanced Wills and Trusts course at Pepperdine University School of Law and the Certified Financial Planner course at Cal Lutheran University.

ROBERT F. MILLER, C.L.U., ChFC, CFP®, MSFS, is a Financial Consultant with the Greater Los Angeles office of Sagemark Consulting™, a member of Lincoln Financial Group.

DAVID V. OTTERSON received his B.A. degree in 1977 from California State University, Chico, and his J.D. degree in 1980 from the University of California, Hastings College of the Law. Mr. Otterson, of the firm of Helms Mulliss & Wicker, practices law in Raleigh, North Carolina.

M. DANTON RICHARDSON received his B.A. degree in 1983 from Southeastern Louisiana University and his J.D. degree in 1986 from Louisiana State University. He is a member of The Soni Law Firm, Pasadena, where he practices in the areas of intellectual property counseling and litigation in both state and federal courts throughout the country as well as general business matters for clients in various fields. In addition to his work handling traditional intellectual property matters, Mr. Richardson is an expert on insurance coverage matters involving intellectual property claims.

STEVEN A. RUBEN received his B.S. degree in 1983 from California State University, Northridge, and his J.D. degree from the University of California, Los Angeles, School of Law. Mr. Ruben, with the firm of Newmeyer & Dillion LLP, practices law in Los Angeles.

JAMES H. SCHILT, A.S.A., C.F.A., received his B.A. in 1951 from Stanford University. Mr. Schilt is an Accredited Senior Appraiser in San Francisco.

CHARLES SCHUG received his B.A. degree in 1967 from City College of New York and his J.D. degree in 1981 from the University of California, Hastings College of the Law. Mr. Schug is General Counsel for Imagine Media, Inc., in Brisbane.

WHITNEY M. SKALA received his B.A. degree in 1980 from the University of California, Berkeley, and his J.D. degree in 1983 from Georgetown University. Mr. Skala is the founder of Whitney M. Skala, A P.C., San Diego, and practices in the areas of corporate and real property acquisitions and financings as well as corporate and partnership formation and operating matters.

EDWARD C. THOITS received his B.A. degree in 1980 from Stanford University and his J.D. degree in 1984 from the University of California, Los Angeles, School of Law. Mr. Thoits, of the firm of Howell Moore & Gough, LLP, practices law in Santa Barbara.

DORON M. TISSER received his B.A. degree in 1978 from the University of California, Los Angeles; his J.D. degree in 1981 from Southwestern Law School; and his LL.M. (Taxation) in 1982 from New York University. Mr. Tisser, a Certified Tax Specialist, practices law in Woodland Hills.

About the 2018 Update Authors

CHRISTOPHER CHEDIAK is the update author of chapter 4 (Partnership and LLC Buy-Sell Agreements). See the About the Authors section for his biography.

WELDON U. HOWELL, JR., is the update author of chapter 1 (Preliminary Considerations). See the About the Authors section for his biography.

KELLEY BANNON LASHLEY is the update author of chapter 2 (Estate Planning Considerations). See the About the Authors section for her biography.

M. DANTON RICHARDSON is the update author of chapter 7 (Review, Amendment, and Enforcement). See the About the Authors section for his biography.

WHITNEY M. SKALA is the update author of chapter 3 (Corporate Buy-Sell Agreements). See the About the Authors section for his biography.

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