How the “Wait and See Buy And Sell” Works !

The Wait and See Buy and Sell arrangement is a combination of using a Stock Redemption and a Cross Purchase arrangement.  It affords both the company and the continuing owners the option to purchase an owner’s interest with great flexibility when a buyout situation presents itself .  Usually the company gets the first opportunity to purchase any  or all of the transferring owner’s interest.  Any balance of interest not purchased by the company, can be purchased by the continuing owners.  If the owners don’t buy the  remaining interests, the corporation must purchase them!

The “Wait and See” agreement gives flexibility to the owners in areas of:

  • Financing the purchase of interest
  • Cost basis positioning
  • Estate planning
  • Other planning areas
  • Changing the percentage of ownership

The biggest advantage however, is the ability of not having to make a decision until there is a trigger event. 

The Scenario

When a notice is received by the company of an option to purchase, whether it’s by a Notice of Intent To Transfer, right of first Referral, or notice of a business-disrupting event such as the retirement, divorce, disability, or death of an owner, the procedure for the option to purchase an Owner’s Interest in an agreement is triggered.  No matter how informally the notice may be given, it’s important to understand that the amount of time the company has to decide whether to purchase (the option period) starts to tick only after the company knows that the triggering event has occurred.  For example, if the company does not receive a formal notice that an owner has filed for bankruptcy.  Only when the company becomes aware of the bankruptcy does the buyback right get triggered, and the option period starts to run.

Company’s Option to Purchase

After the company receives notice, the company’s owners should meet with their tax advisors and each other to decide if it’s in their best interest for the company itself to buy the available interest.  The agreement will normally have a period of time in the agreement which stipulates the period of time the parties have to decide individually whether they want to purchase the available interest or not.  If the owners decide the company should buy all of the available interest, the company must exercise its option by delivery a written Notice of Intent to Purchase to the transferring owner within the designated time period.

 Notice of Intent Contents (THE NOTICE):

If the company or anyone of the continuing owners exercise their option to buy the available interest, the company sends out a collective notice to the transferring owner, or the current holder of the interest, regarding the company’s and /or continuing owner’s intent to purchase a part, or all of the available interest (called a Notice of Intent to Purchase).

Generally, the Notice is sent to the person who provided the original notice to the company of a proposed transfer, or the occurrence of any of the triggering events that give rise to a buyback.  Example:  NOTICE is sent to the interest of a deceased owner will go to the representative of the estate.

 THE NOTICE CONTENTS;

The name and address of the company and the name, title of the officer or employee who can be contacted at the company regarding the NOTICE.  A description and the amount of ownership interest to be purchased by the company/party, along with name and address of each party.  The total amount of interests to be purchased by the parties. The terms of the purchase are based on the agreement Copy of the buy and sell agreement. If the interest to be purchased is represented by certificates, such as share certificates, a request for surrender of the share certificates is made to the company.

 If the company does not purchase

The company must immediately let each of the continuing owners know that some or all of the interest is available for purchase by the continuing owners.  The continuing owners are given another time period (30-60 days) following the expiration of the company’s option period to decide individually whether they want to purchase any of the interest not purchased by the company. (In large companies, usually more time is given for the decision to purchase.)  Within this time period, each individual owner who wishes to purchase any of the available interest must submit to the company a notice of how much of the interest he wants to buy.

 Splitting the interest Among the Owner

If only one person wishes to purchase the available shares, the transaction is normally straight forward.  However, if there is more than one person that wants to purchase shares, it will be split based on the agreement terms.  Usually, the percentage of purchase may be relative to their ownership percentage within the group of owners who elect to buy the interest of available interests.

 How the Right of First Refusal Works?

When an outsider makes an offer to purchase an interest, the Right-of-First-Refusal Clause, is triggered.  The owner of the interest must first make the offer of there interest to the company and the co-owners for purchase.   Under this situation, the remaining stockholders and the company must buy all the transferring shares or the shareholder, or the owner is free to sell to the outside offer.   If all the offering shares are purchased by the company and remaining shareholders, the outsider is essentially shut out of the company.

 The Right To Force A Sale

This right forces the company to ultimately purchase the departing owners interest.  The company will be given the first offer.  If it declines, the remaining owners have the option to purchase the departing owner.  If the owners don’t purchase the shares, the company must purchase the shares.   This provision is important because it can create a market for owners.  However, attention should be given to the price of the shares and the funding of the purchase.

 

 

 

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