Hybrid agreements are generally used when there is no insurance to finance the purchase of goods, for example. B if an owner cannot be insured. A hybrid agreement gives shareholders the flexibility to decide who concludes the purchase of shares in the event of a triggering event. Some hybrid agreements provide that the shares are offered first to the company and then to other shareholders if the group does not buy the shares. In other agreements, shareholders may have the first opportunity to acquire the shares with the company, which is necessary to cash in the shares if the shareholders refuse to proceed with the purchase. Or a portion of the shares may first be offered to the company and the rest to other shareholders. Section 302 (b) problems can be avoided if the death of a shareholder triggers the sale agreement, if the proceeds of the withdrawal are limited to the amount of the shareholder`s inheritance tax and deductible funeral and administrative expenses. In this case, Section 303 treats the transaction as a sale or exchange, regardless of the percentage of ownership retained by the heirs or other related parties. Other requirements must also be met. New shareholders. New stakeholders may be required to participate in existing sales contracts before becoming shareholders.
Make sure that valuation rules do not encourage them to trigger a trigger event and get redeemed (see „Warning: Don`t encourage shareholders to sell“). TYPICALS ACHAT AGREEMENTS will indicate the type of agreement, the triggers that trigger a mandatory or optional buyout, a provision of the appropriate valuation date imposed by the agreement, the terms of payment of the purchase-sale commitment, the methods of financing the agreement, the non-competition obligations between the parties and the transfer of interest from the owner authorized and prohibited by the agreement. In fact, there is a way . . . by purchasing life insurance through a company-sponsored incentive plan. If properly structured, financing a cross-purchase plan thus has all the benefits of a traditional buy-and-sell contract, with the added benefit of the income tax effect, in order to reduce the out-of-pocket cost of homeowners. The disadvantages of this type of agreement. If a company is the beneficiary of buy-back insurance, the proceeds of the policy may be subject to the alternative minimum tax. A savings account within a business in anticipation of such an event can lead to cumulative income tax problems and, if the business is not a business, it can be difficult to save. In the event of a divorce that triggers the contract, the ownership interest of the other owners changes.
A buy-back contract is a legally binding document between key people in a company (i.e. counterparties). Financing a cross-purchase contract through an incentive plan in this way can work best for small businesses closely managed with two or three owners. But it can also work in large companies, and this approach can offer an inexpensive way to buy life insurance. This is an important consideration for any business that would otherwise not be able to finance the sales plan. Value based on insurance income. In a purchase-sale contract, it is not uncommon for the purchase price of a stake in a closely owned business to be the amount of an owner`s life insurance or disability product. Although this is a simple method, it may or may not bring fair value closer together. This deviation can cause problems for the cashed-in owner. Cross-purchase agreements avoid the risk of paying dividends for shareholder purchases.
However, if the company buys the shares on the basis of an ancillary agreement under the purchase/sale agreement (although other shareholders were obliged to do so), the purchase could be considered a constructive dividend to the remaining shareholders.