Corporate / Commercial Law

What is Key Person Insurance or Buy/Sell Insurance?

What is Key Person Insurance or Buy/Sell Insurance?

Key Person Insurance or Buy/Sell Insurance (or in the case of a Partnership Agreement, Partnership Buyout Insurance) provides the funds needed for the remaining owners of a business/trust to:

✅ Takeover or purchase the exiting owners share; and/or

✅ Have access to the required funds to replace the Key Person or recover from the loss of the Key Person from the business …

In the event of their death, total and permanent disability, or severe illness/trauma such as heart attack, stroke, cancer and/or paraplegia.

This type of insurance cover helps the business continue running with minimal disruption.

For the departing person or their estate, this insurance assists them to receive the agreed (normally market value) of their shareholding in return for transferring their business share to the remaining owners of the business/trust, or terminating their Employment / Independent Contractor Agreement.

Best Practice in a Shareholders' or Unitholders' Agreement

The Best practice within a Shareholders' or Unitholders' Agreement is to include terms that ensure life, permanent disability + trauma insurance is taken out in relation to all of the Securityholders.

The company or unit trust pays the annual insurance premiums.

Then, if a Securityholder is required to offer its securities for sale to the remaining Securityholders as a result of death, permanent disability + trauma sufficient to be covered by the insurance policy, the proceeds of the insurance policy are used to assist the remaining Securityholders in buying those securities.

The directors or trustee/s determine the amounts for the insurance policy from time to time, with the consent of Key (that is the majority or controlling) Securityholders.

Death or Incapacity of a Securityholder

In our Shareholders' or Unitholders' Agreement, by default, the death or incapacity of a Securityholder will not trigger a right for the other parties to buy out that Securityholder.

If you choose to add our Best Practice Buy/Sell Insurance provisions to the  Shareholders' or Unitholders' Agreement, then death/incapacity will be added as a trigger event requiring the affected party to offer its securities for sale to the remaining Securityholders.

Professional Tax/Accounting/Legal Advice is always Recommended

The potential for future ownership changes, and triggered tax implications {including income tax, capital gains tax, and fringe benefits tax) should be considered before final arrangements are made.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

Does our company need to have a Constitution?

Which companies need a Constitution?

The following companies must be governed by a Constitution:

⚖️ 'No Liability' public companies; and

⚖️ 'Special Purpose Companies' seeking a reduced Annual ASIC Review Fee.

A proprietary company (that is also a Special Purpose Company) must have a Constitution.  

Public Company Constitution Changes

A Public Company must lodge a special resolution adopting, modifying or repealing its Constitution with ASIC within 14 days after it is passed, together with:

(a) if the company adopts a Constitution – a copy of the constitution; or

(b) if the company modifies its Constitution – a copy of the modification.

The penalty for failure to lodge with ASIC

The maximum penalty for the offence of failing to lodge the above with ASIC is:

❌ 20 penalty units (a Commonwealth penalty unit is currently $210).

Note: Maximum penalties are reserved for the most serious cases.

What is a special purpose company?

A 'special purpose company' is generally one that's created for a set reason, not just general business.

Special purpose companies are usually one of the following:

Superannuation Trustee Company

A superannuation trustee company acts solely as a trustee of a regulated superannuation fund.

Refer to s19 of the Superannuation Industry (Supervision) Act 1993 for more information.

The company's Constitution must prohibit the company from distributing income or property to its members.

Home Unit Company

This type involves a group of people (directors or members) who own or live in a block of flats or units.

The company exists as a body corporate to administer the property.

Only proprietary companies can be home unit companies.

Not-for-profit Company

This company is for charitable purposes only.

The Constitution requires the company to:

✅ Apply its income in promoting charitable purposes;

❌ Prohibit distributions to its members and paying fees to its directors, and

✅ Make its directors approve all other payments the company makes to them.

In each case, the company's Constitution must meet the requirements under the Corporations (Review Fees) Regulations 2003.

Does the special purpose company constitution need to be lodged with ASIC?

The special purpose company Constitution does not need to be lodged with ASIC, but a copy must be kept with the company's records.

How can shareholders obtain a copy of the constitution?

A company must provide a current copy of the Constitution to any member who requests it within 7 days.

If a fee is charged, the Constitution must be provided within 7 days of payment.

Replaceable rules

Replaceable rules are in the Corporations Act and are a basic set of rules for managing your company.

If a company doesn't want to have a Constitution, they can use the replaceable rules instead.

It is also possible for a company to be governed by a combination of a Constitution supplemented by the replaceable rules.

Replaceable rules do not apply to a proprietary company if the same person is the sole director as well as the sole shareholder.

Replaceable rules provide for the rules outlined in the Corporations Act and which section they're in.

The content in each of those sections applies as the replaceable rule. 

If a company wants to change or remove a replaceable rule, they will need to adopt a Constitution that outlines the changes.

Credits:

This FAQ was written by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.

How do Drag-Along + Tag-Along Rights work?

What are Tag-Along Rights?

Tag-along rights give non-selling securityholders the right to sell alongside the selling securityholder (ie, the selling securityholder can't complete its sale unless the proposed purchaser also offers to buy out the tagging securityholders).

What are Drag-Along Rights?

Drag-along rights give the selling securityholder the right to force the non-selling securityholders to also sell to the proposed purchaser.  

This is particularly important where the proposed purchaser will only complete if it gets 100% ownership.

Check you Shareholders' / Unitholders' Agreement

Depending upon the terms of your Shareholders' / Unitholders' Agreement, generally both Tag-along and/or Drag-along rights apply in the event of a proposed sale of shares by a securityholder.

Generally tag/drag rights will only apply:

✅ After the transfer pre-emption provisions have been followed;

✅ If the remaining securityholders do not offer to purchase all of the sale securities;

✅ If the seller then elects to sell all of the sale securities to a bona fide third party; and

✅ If the size of the proposed sale exceeds specified thresholds.

What if there is no Shareholders' / Unitholders' Agreement?

If there is no Shareholders' / Unitholders' Agreement, then the above tag-along / drag-along rights will not be able to be exercised.

Once there are multiple Shareholders / Unitholders it is often too late to get them all to unanimously agree to enter upon agreed terms of a Shareholders' / Unitholders' Agreement.

The ideal time to establish these important rights is in a Shareholders' / Unitholders' Agreement entered at establishment.

That is, before more than 1 Shareholders / Unitholders subscribe for securities.

If you would like the tag/drag rights to apply in the above and/or any other circumstances, we recommend you obtain legal advice at the time the Shareholders' / Unitholders' Agreement is being drafted.

Typical Thresholds Triggering Tag-along rights

Tag-along rights will apply if a proposed sale would result in a third party acquiring a certain level of voting power or more.  

Please note that, since the threshold is linked to voting power, a choice of 100% can make sense where the intention is to permit the holders of non-voting securities to tag along in an exit by the holders of all voting securities.  

Voting power threshold for tag-along rights is typically 80-90%.

This is a percentage of the total securityholder voting rights.

The tag-along rights will only apply if the sale would result in a third party acquiring this level of voting power or more.

Typical Thresholds Triggering Drag-along rights

Voting power threshold for drag-along rights is typically 80-90%:

This is a percentage of the total securityholder voting rights.

The drag-along rights will only apply if the sale securities carry in total this level of voting power or more.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.