
Randel Law, Inc., Your Business and Succession Planning Lawyer
Corporate and Securities Law Attorney Focusing on Helping Businesses Obtain Liquidity and Transition to New Ownership Through Exit and Succession Planning
By Rick Randel
By Rick Randel
As many of you know, buy-sell agreements restrict ownership to a small group of owners who know each other and have decided they can do business together. They allow the other owners to buy the shares of an owner who experiences a “triggering event” such as death or divorce.
As many of you also know, many business owners put their shares into their revocable living trust. Which raises the question, what happens upon a triggering event to an owner whose shares are held in a trust?
The typical buy-sell agreement fails to address this situation. I have long suspected the other owners may find themselves unable to buy him or her out.
A recent court decision confirmed my suspicion. A partner whose shares were held in a trust died. The other partners invoked their buy-out rights, but the successor trustee refused to sell. The other partners sued. The court held that the actual partner was the trust, not the trustee. Therefore, even though the individual had died, the partner itself (the trust) didn’t die, and the buy-out rights of the other partners were not triggered. The successor trustee was allowed to continue owning the deceased partner’s shares, despite the other partners’ desire to buy him out. (Han v. Hallberg, 35 Cal.App.5th 621 (2019))
While Han v. Hallberg dealt with a partnership and not an LLC or corporation, a court would likely reach the same result in the corporate or LLC context. The vast majority of buy-sell agreements I have seen do not address what happens when shares or membership interests are held in a trust. A good buy-sell agreement should say that for the purpose of triggering events, the term “shareholder” (or member or partner) refers to the person who is the true underlying owner of the shares, i.e. the person who is active in the business and who the other owners consider to be their “partner”, even if the shares are held in a trust. So a triggering event that happens to that actual person triggers the others’ buy-out rights.
Feel free to contact me if you would like me to take a look at your own or a client’s buy-sell agreement and see if it adequately addresses what happens when shares are held in a trust. If it doesn’t, adding that coverage is a simple fix.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.
By Rick Randel
This is a true story. Only the names have been changed. My client (let’s call her Karina) had negotiated a deal with the owner of another company (lets call him Phil) to acquire Phil’s company. During due diligence we discovered that Phil’s company didn’t own the code to its own website. Considering the business was an online store, the code to the website (a form of intellectual property or IP) was a vital assets.
When we pointed this out to Phil, his reaction was “That’s crazy. Of course we own it. We paid for it.” But he had neglected to put a “work for hire” clause in the contract with the developer. So he didn’t own the code. This nearly killed the deal. There was no way we were going to complete the purchase without getting ownership of the core IP. The deal was put on hold for a month while Phil negotiated with the developer to acquire ownership of the code. Lord knows how much more he had to pay the guy. And he almost lost the deal. He was lucky Karina didn’t walk.
The same thing would’ve happened if Karina were an angel or VC about to invest in the company. One of the main things they do is confirm the company owns the IP.
The lesson is, when you or your client hire service providers to create any intellectual property (basically any work product or deliverable), make sure the contract states that the company owns any IP the person creates. Of course the contract should also require them to keep company information confidential. This should be part of the standard onboarding process for all employees and contractors.
That way when the company receives a due diligence list from a potential buyer or investor, it’s an easy matter to just send them copies of the contracts all the service providers signed, so the buyer/investor can see they own their IP (and that they are well organized and professional).
Feel free to contact me if you have any questions.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.
By Rick Randel
You may remember my recent post about the Hit by a Bus Plan. The Hit by a Bus Plan helps owners stop worrying whether their business will continue and their family will be protected if something should suddenly take them out of the picture.
Well, business owners have to plan for other contingencies as well, such as earthquakes, fires, power outages, or worse. That’s not what I do, but I just came across an excellent tool developed by Ready.gov to help businesses of all sizes develop plans for such contingencies. I thought it might be helpful for my readers and their clients who haven’t yet developed a contingency plan. Here is a link to the tool:
https://www.ready.gov/business-continuity-planning-suite
You will be prompted to download and extract a zip file which contains a suite of tools including some business continuity planning videos, a business continuity plan generator, and a business continuity plan training exercise to test your plan. I started the process myself and it seems pretty painless. I hope you find this tool makes it easy to write your own contingency plan and worry less about what will happen to your business in the event of a fire, earthquake, or other disaster.
And if you want to worry less about what will happen to your business and family if you get “hit by a bus”, click here to contact me about developing your own Hit by a Bus Plan.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.
By Rick Randel
What happens when the owner of a business suddenly dies or is incapacitated? Businesses without a plan can quickly go down the tubes. Employees leave, customers desert, and before you know it, the company is forced to shut down. The owner’s family gets no value from the business he or she spent so much time and effort building.
Companies with two or more owners can at least partially address this scenario through the buy-sell agreement. But what about companies with only one owner? Sole owner businesses need the equivalent of a buy-sell agreement. I call it the Hit by a Bus Plan. The Hit by a Bus Plan includes the following elements:
It may seem like a lot, but the Hit by a Bus Plan can be put together with less time and effort than you may think. Business owners owe it to their families, their employees, and their customers to have a plan in place. Trusted advisors, consultants, and others who advise sole owner businesses should talk to their clients about the importance of planning for such contingencies. Feel free to contact Randel Law, Inc., if you have any questions or would like some guidance on developing a Hit by a Bus Plan.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.
Randel Law, Inc.
111 Deerwood Road, Suite 200
San Ramon, CA 94583
ph: (925) 855-3215
fax: (925) 855-3216