Mandatory Retirement Age
Many shareholder agreements set a definitive retirement date to provide for a smooth and predictable transition between senior and junior ownership interests in a family context. Even in non-family contexts, this provision has many advantages. In many cases, it takes many years of lead time to plan and provide for this momentous transition.
Continued Service After the Sale of Ownership Interest: Consulting Agreement
The parties must determine whether services will be performed by the departing owner after the sale of his interest in the business. This senior member of the firm may possess special skills, expertise, knowledge and contacts that may be very valuable and in some cases imperative to effectuate a smooth and successful transition.
The parties need to negotiate an acceptable contractual arrangement for the departing owner if it is desirable for this senior member to continue working for the organization. This will require an employment or consulting agreement that provides for services to be performed for a contractually agreed amount of compensation for an amount of years to be determined by the parties.
Personal Liability of Remaining Owners For Retired Owner's Full Payout and Methods To Ensure Full Payment
The retiring partner must be given adequate financial security and protection to insure that all deferred payouts will be made. The following are some of the legal provisions used to ensure payment for any deferred payout under the sale agreement:
- Promissory note from all remaining partners or shareholders
- Escrow of stock to be sold by the retiring shareholder
- Security interests in property, plant and equipment or real estate,
- Letters of credit
- Personal guarantees of remaining partners or shareholders
In addition to these provisions, there may be other protections built into a comprehensive sale agreement to protect the owner if not paid in full.
Ability To Block Mergers or Other Corporate Changes By Retired Owner
Often times the retired owner is given the right to block mergers or a total sale of the business or other changes to the business until full payment is made on any installment sale. Usually such transactions can take place if the sale and any retirement payment obligation is paid in full prior or at the time of such sale or contemplated change.
Ability To Block Sale of a Line of Business
Often times the retired owner is given the right to block the sale of a line of business unless the sale and retirement obligations are paid in full prior to the contemplated transaction.
Protections Afforded Remaining or Acquiring Owners
Agreements may provide the remaining or acquiring partners with the right to change the payout to a retiring partner due to certain behavior that jeopardizes or harms the financial well being of the organization such as improper client contact or interference with business operations, malfeasance, fraud or misrepresentation.
Limits On Activities and Contact With Clients After Retirement
At some point in time, limits need to be placed on allowable activities and contact with clients after retirement to ensure retention of valuable clients or customers. The use of a covenant not to compete provision is generally required to protect the business and its remaining principals.
Key Man Or Other Life Insurance
The selling partner may insist on key man or other insurance on the key remaining partners to ensure payment of the outstanding obligations under the buy out contract.
Illegal Activities As a Trigger For Forced Retirement and Buyout
Well drafted shareholder or partnership agreements provide for a buyout trigger and often at a lower amount of money than the normal buyout figure if the owner engages in various illegal or immoral activities including but not limited to sexual harassment or public embarrassment to the organization.
Poor Performance or Violation of Agreement
Some agreements contain provisions that require forced retirement for lack of performance. In addition, sometimes transitional employment agreements can be terminated early due to lack of performance or violation of the terms of such agreement.
The above discussion just touches the surface of the legal considerations involved in any exit strategy concerning a change in control and stewardship of an organization. For more on succession planning see Succession Planning for Family & Small Businesses.
Tax implications must be considered and can have a dramatic impact on the planning, structuring and documentation of any exit strategy and on the ultimate legal agreements.
Every situation is unique so having experienced tax and corporate counsel is essential to effectuate a comprehensive agreement that can give each party what they need while simultaneously insure the continued existence, vitality and success of the business.
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