ESTATE PLANNING
FOR THE
CLOSELY HELD BUSINESS
COMMUNITY FOUNDATION OF BROWARD
September 30, 2014
James B. Davis, Esq.
Gunster
450 E. Las Olas Blvd., Ste 1400
Fort Lauderdale, FL 33301
954-462-2000
FTL_ACTIVE 1264907.3
Estate Planning for the Closely Held Business
James B. Davis, Esq.
Estate Planning for the Closely Held Business
I.
Initial Considerations/Determinations
A.
What is it that the client wishes to accomplish as to the Family Business
(FB)? Remember: Who, what, where, when, why, and how…
B.
Who do you represent? See Attachment E for illustrations of potential conflicts
of interest in representing closely held businesses and their owners. How can you
represent the controlling shareholder and the FB simultaneously, especially if
there are future disagreements among shareholders? What about after the
Shareholder’s death?
C.
What are the subjective intentions of the parties who are involved? Do Key
Employees (KEE) or family members (FM) manage, control or add primary value
to the business? Are FM involved in business management and operations? All
or less than all?
D.
What is the Nature of the Business? Is this a service business or capital
intensive business? Can a service business survive transition from first to second
generation?
1.
Service entity. Is there personal goodwill? Is there business goodwill?
Are there non-compete agreements in place?
2.
Capital intensive entity.
E.
Where is the business located? Which state law control? Where is it physically
located? Where is it’s primary market?
F.
Why is the FB plan needed? Is it for the benefit of the controlling owner, FM or
KEE? Who prevails?
G.
How is the FB Formed? How Does it Operate? How do you keep it together
and with what business plan and documents?
1.
Is the entity already in operation or is it to be formed?
2.
Choice of entity
a)
b)
c)
State law operations
Federal income tax considerations
Sample list of Operational Documents
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H.
3.
(1)
Buy-sell agreement
(2)
Employment agreements
(3)
Employee benefits
(4)
Testamentary documents
Management vs. control
4.
What agreements are already in place, if any? Infra.
Are There Exit Strategies Intended or to be put into Place During Lifetime?
1.
Merger
2.
Sale of Stock to
3.
a)
KEEs
b)
FM
c)
Third parties
d)
ESOP
Sale of Substantially all assets
4.
Private offering or venture capital investor
5.
Liquidation
6.
Is there an Intention to retain the FB or to transfer the FB during lifetime
and/or at death? Three important considerations:
a)
b)
Control, management and ownership during lifetime. What
documents will control?
Gift and estate taxation issues: How to transfer control and/or
ownership?
(1)
Determination of the liquidity and/or profitability of the
business are critical for recommendation. Is it a “cash
cow” or is cash flow limited? Is it seasonal? Is the
business cyclical? The ability to purchase an ownership
interest by an IDGT, ESOP or FM is largely dependent on
cash flow availability subsequent to transfer.
(2)
Gift and estate taxation. Objective is to transfer the
“control premium” to FM or KEEs using “valuation
discounts.”
(3)
Caveat: Chapter 14 IRC §2701 and §2703Rules –
disregard retained interests and agreements affecting
valuation among FM: Exception in 2 if:
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(a)
(b)
I.
Bona fide business arrangement
Not a device to transfer property to family at less
than FMV
(c)
Similar to agreements made by persons in arm’s
length arrangements
(d)
[Judicial] Must be involved with and foster an
active involvement in the business, i.e., cannot be
part of a passive investment
c)
Transfer documents. What documents will control the lifetime or
testamentary transfer?
Team Approach is required!
1.
Required Attorney legal specialties
a)
b)
c)
Corporate/Business law
Tax law
(1)
Transactional tax
(2)
State taxation
(3)
Employee benefits law - §280G if there are KEEs???
(4)
Mergers and acquisitions
(5)
International tax
Securities law
d)
2.
Trust and estate law
(1)
Estate administration
(2)
Estate and Gift taxation
CPA (Duh!)
3.
CFP/CLU (Remember “Love and Death”?).
4.
Trust company. Will a Trust Company be willing to hold interests in a
closely held business within a trust as trustee? Voting? Nonvoting?
Indemnification?
5.
Business appraiser (or psychic). (Maybe) Who should be appraiser – the
CPA who prepares the tax return of the FB and/or who performs the audit?
What about FIN 48 and Circular 230 standards?
6.
Business advisor/psychologist. For you and/or your clients . . . A
“facilitator” who is more of a mediator in a FB context involving FM.
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II.
Purposes of Closely Held Business Planning
A.
“Family Business” and retention of ownership within family
1.
2.
Management vs. ownership considerations
Equalization of family assets in the estate plan. How do you provide for an
“equal” division of family assets if the FMV of the FB is more than a per
capita share?
a)
b)
c)
3.
III.
Life Insurance
Non prorata allocation of FB to FM involved in FB
Formula devise of residuary estate. See Attachment D.
Lifetime buyout with delayed allocation of purchase price when parents’
estate(s) mature.
B.
“Closely Held Business” and intra-business retention by KEE
C.
Appreciation and exit strategy
Business Formation/Choice of Entity
A.
Existing vs. new business
B.
State law considerations – Common characteristics for consideration
C.
1.
Inside liabilities. General partnerships should always file as RLLPs.
2.
Outside liabilities. See Olmstead v. FTC, SC01-109 (Fla. June 24, 2010)
3.
Transferability of ownership interests
4.
Protection of management from derivative lawsuits
5.
Historical case precedent
Tax law Considerations
1.
Operational
a)
b)
2.
Federal income tax
Multi-State
(1)
Operational – Income Tax
(2)
State estate tax
Exit strategy considerations
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D.
E.
IV.
1.
Corporation
2.
a)
C Corporation
b)
S Corporation
Limited liability company
3.
General partnership
4.
Limited partnership
Conversion of entities. Most entities can be converted under state laws to another
entity, e.g., partnership to corporation, corporation to LLC, etc., but tax laws do
not conform to state entity conversion rules.
Management and Control
A.
Control defined
1.
Majority
2.
Supernumerary
B.
Voting vs. non-voting interests
C.
Agreement defined control
D.
V.
Types of entities
1.
Chapter 14 issues
2.
Post mortem control
Management vs. ownership
1.
Children active in business
2.
Inactive children
3.
Business as part of testamentary estate
a)
Testamentary document. Will or Trust.
b)
c)
d)
Equalization formula in devise
Incorporate buy-sell agreement
Sale or liquidation of business
Transfer of Equity and Ownership Structure
A.
Consideration: Retention by KEE or FM vs. sale to third persons
B.
Tax Considerations of non-gift Transfer
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C.
D.
E.
1.
After-tax
2.
a)
Equity purchase or transfer
b)
Tax Considerations
c)
Incentive Stock Options (ISO)
Pre-tax
a)
Nonstatutory Stock Options (NSO)
b)
ESOP
c)
Termination Benefits as equity substitute
Voting vs. non-voting equity interests. Use of non-voting equity interests is very
common in order to bifurcate control vs. ownership interests. Non-voting
interests are often sold to IDGTs in order to “freeze” the value of an entity in an
estate and then funded with insurance.
Basic Agreements among equity owners for retention of control. Treat FB
agreements and FM as arms’ length third parties!
1.
Employment Agreement (EA)
2.
Shareholder Agreement (SHAG)
Employment Agreement
1.
Purposes
2.
a)
Standards for services rendered
b)
Protection of entity
c)
“Triggering” event for SHAG
Contents
a)
b)
c)
Recitation clauses. Important for new employee who is a lateral
hire to confirm no pre-existing non-compete, no licensing
problems, etc.
Exclusive duties and devotion of effort. Can the KEE work
elsewhere? What about expert testimony, service on non-for-profit
boards, royalties and patents?
Compensation methods.
(1)
Formula.
(2)
Discretionary. Who determines and are there any standards
to be used?
(3)
Fixed.
(4)
Combined. Probably the best alternative where trust is
present.
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Comment: “Wage account” protection from creditors
under FS 222.11 generally is not applicable to owners who
control small, closely held businesses under case law in
Southern District Florida federal district courts. See In Re
Manning, 163 B.R. 380 (S.D. Fla. 1994), In Re Zamora,
187 B.R. 783, (S.D. Fla. 1995) and In Re Harrison, 216
B.R. 451 (S.D. Fla. 1997)
Term or duration. Specify in 365 periods but a 90-day “without
cause” clause makes EA a 90-day rollover contract. Use days, not
months or years for duration.
Files and Records. Always should be property of the employer,
and not to be disclosed unless (i) required by service of process or
(ii) statute, e.g., Medical Practice Act and HIPAA for health care
providers or Rules of Professional Conduct for lawyers.
(5)
d)
e)
f)
g)
h)
Leave of Absence. Combine sick time with vacation days and
education time off to eliminate need to differentiate. Accumulate
pro rata throughout the year and no payment if carryover.
Payment of Expenses
(1)
What is to be paid by EE? Required if employee is going
to file Form 2106, Employee Business Expense deduction
for Form 1040.
(2)
What is to be paid by ER? Possible IRC §162 requirement
but contractually important.
(3)
E&O insurance. Who pays for it? Is it claims made or
occurrence coverage? If “retro” or “tail” coverage is
involved, what is the duration of the “tail” and is “notice of
claim” or “notice of incident” required for coverage?
Termination Events
(1)
For cause. Need list and method to determine when occurs.
Usually no notice or immediate notice. Opportunity to
correct where possible within a specified period of time.
Need to be able to terminate if allegation of wrongdoing
even before adjudication.
(2)
Without cause. With advance notice or immediate
termination with compensation in lieu of notice. Always
needed by the employer for protection.
(3)
Good reason by employee. Gives KEE opportunity to
terminate where employer breaches EA and typically
nullifies non-compete.
(4)
Death.
(5)
Disability defined. Use definition of employer-provided
insurance or if none, “inability to perform ordinary and
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F.
customary duties” for presumably permanent period or
specific duration. What about Americans with Disabilities
Act and ipso facto termination of employment per
definition in an EA.
(a)
Who determines?
(i)
Board of Directors
(ii)
Shareholders.
But exclude vote of
shareholder who is being terminated.
Majority or supernumerary vote, e.g., 66
2/3%.
i)
Noncompetition clause: FS §542.335 governs and must conform.
Period of non-competition should be during the period
employment and continue for __ days after separation from
service and NOT beginning after the term of the EA ends. Use
covenant duration (or any duration for notices, etc.) in days not
months or years.
j)
Change of Control Clause - §280G. KEEs who are concerned
about a sale to third parties or a change in control among FM will
normally negotiate a “parachute payment provision.” §409A will
control and independent outside counsel will need to represent
management.
k)
Termination Benefits and Releases: IRC §409A requires General
Releases not be condition precedent to payment of termination
benefits because of the KEE’s ability to defer benefits by not
signing the General Release.
l)
Waiver of Jury Trial clause.
m)
Miscellaneous clauses. See Attachment C.
Shareholders’/Operating/Partnership
Agreement:
“Financial
Prenuptial
Agreement”
1.
Purposes:
a)
Control during lifetime among FM.
b)
c)
2.
Retention of ownership among FM.
Vehicle to transfer control of FB to new owners, which may be
KEE or FM. The shareholder agreement can provide preferential
right of first refusal (ROFR) to KEE or FMs in order to perpetuate
control among limited persons.
d)
Valuation certainty. Discussed infra.
Parties to SHAG or Operating Agreement. Owners and entity are both
parties.
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3.
Types of Shareholders’ Agreements
a)
b)
4.
Redemption.
Cross buy-sell. Note that this type of agreement does not work
well with an S corp if insurance is used to fund redemption.
c)
Combination.
d)
When to use?
Contents of SHAG
a)
b)
c)
Recitation clause. Same importance as with EA. Cross reference
EA and other agreements to standardize same terms and definitions
and to clarify part of one “transaction” where appropriate. Discuss
what you are doing and what you wish to accomplish here –
similar to a voir dire.
Right of First Refusal (ROFR)
(1)
Rule Against Restraint of Alienation. Cannot flatly
prohibit a transfer as against public policy. Allen v.
Biltmore Tissue Corp., 2 NY2d 534 (1957). Cases have
also extended this Rule to interests in LLCs.
(2)
Retention of ownership. Use to retain control and
economic benefit among family, current owners or KEEs.
(3)
Triggering Events
(a)
Bankruptcy
(b)
Attempted transfer or encumbrance
(c)
Divorce
(d)
Death
(e)
Disability
(f)
Termination of employment
(4)
Redemption is not mandatory absent a SHAG providing to
the contrary. See Corlett, Killian, Hardeman, McIntosh &
Levi, P.A. v. Merritt, 478 So2d 828 [Florida].
Procedure for exercise
(1)
Redemption. Option to corporation should be to purchase
“all but not less than all” of the shareholder interests being
sold.
(2)
Cross purchase. This is more complicated than a
redemption procedure. Typically, unless there is a
preferential purchase right to a shareholder, the rights are to
all shareholders pro rata. If not all the interests are
purchased pro rata, the remaining shareholders may
purchase pro rata inter alia until all shares all purchased.
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d)
e)
f)
If not all shares are purchased, the corporation should be
required to redeem the balance.
(3)
Preferential ROFR to certain shareholders/KEEs. The
SHAG may include a clause that allows certain KEEs to
have a preferential right to purchase stock that becomes
available for purchase.
(4)
Use of Trust to purchase stock. Some commentators
suggest using nonvoting stock and an ILIT to purchase
stock that becomes available to purchase. Control (voting)
interests then are transferred to individual FM or KEEs.
This provision is either not in the SHAG or the ILIT is a
permissive transferee if it is in it.
(5)
“Put” option to terminating owner. The option to force a
sale should be limited to a finite period of time and not
indefinitely.
(6)
“Call” option to corporation. Same comment for the “put”
option limited period to exercise.
Drag along clause. Protects majority shareholders in requiring that
minority interests be mandatorily sold as well.
Perhaps
superfluous if a “cash merger” is used.
Tag along clause. Protects minority shareholders if the control
vote is sold without a corresponding offer to purchase minority
interest.
Valuation and methods
(1)
Date of Valuation (“Determination Date”). Important that
the date of the valuation and the date of the redemption be
specifically designated in the agreement.
(a)
Cash basis vs. accrual considerations. Use end of
year/month immediately preceding or
corresponding to the “determination date.”
(b)
S corporation year end. IRC §1377. Failure to
designate the method of determining profit could
lead to “phantom income” for the redeeming
shareholder.
(c)
Prorata method
(d)
Termination of taxable year for pass through
entities.
(e)
Stub year profit distribution. Should this be
mandated if the entity is a “pass through” entity?
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(2)
g)
Valuation methods
(a)
“Shotgun” a/k/a “Up Against the Wall” a/k/a
Reverse buyout.” These benefit the deep-pocket
shareholder and work against the “services”
shareholder
(b)
“Fair market value” Rev. Proc. 59-60
(i)
With valuation discounts
(ii)
Without valuation discounts
(c)
Stipulated value. Easy to use but often obsolete
without shareholder change. Need to add ADR to
determine value if no revision within a period of
time and a “trigger” event occurs.
(d)
Formula value. Typically based on EDITA or some
variation approximating net cash flow after cash
basis expenses.
(e)
Combination of above. Often used were RE is
owned by entity and not germane to valuation of
business, e.g., a service business. Question: How
to separate RE from a business with significant
internal liability risk? Answer: Create a drop down
subsidiary and distribute operating business into it.
(3)
Who values? Independent appraiser(s). Note there are
variations on use of one appraiser that may involve two or
possibly three if the first or first two valuations differ by
10% or more. Suggest that one appraiser be agreed upon
and use ADR if no agreement or if disagreement with
value. Then award costs and fees to prevailing party to
discourage litigation. NOTE: Reported Tax Court cases
generally do not give significant credence to appraiser who
is/whose firm is the accountant for the entity being valued.
Funding events and methods
(1)
Death and life insurance See Attachment B
(a)
Cross buy-sell. Who owns the insurance and how
many policies? If 5 shareholders, then 20 policies
are required. Use trust or partnership to own one
policy on each shareholder.
(b)
Redemption. Entity owns the insurance.
(c)
Who pays for the insurance premiums with multiple
shareholders and policies? Allocate cost to the
prospective purchaser, not the insured.
(2)
Disability insurance. Is this worthless or what? Why is
this never mentioned by insurance agents in their insurance
illustrations?
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(3)
h)
i)
j)
Use of Insurance: death vs. disability
(a)
Who owns the insurance?
(i)
S corp.
(ii)
C corp.
(iii)
Partnership
(b)
What if death follows disability?
(c)
Post mortem policy proceed retention
(d)
Transfer of policy ownership
(i)
No death
(ii)
Disability
(iii)
Timing of policy transfer
(iv)
“Transfer for value” rules. IRC §101.
(4)
Remember that “notice” must be given to insured if COLI
is used! IRC §101(j)(4). Consequences are that a portion of
the policy proceeds become taxable as income to the
corporation, owner or beneficiary.
(5)
Ownership. Use of trust or partnership to own and pay for
insurance premiums in a cross buy-sell agreement.
Requirement for premium payment as contribution to
partnership capital by shareholders should be part of the
SHAG, EA and partnership agreements. Failure to make
payment “for cause” termination event or require that
corporation make premium payment and “charge” against
shareholder’s compensation or distributions.
“Free cash flow from operations.” This is the net after-tax cash
flow that becomes available to use in connection with a redemption
when a KEE terminates and salary, bonus and benefits cease to be
paid and become available for redemption of equity interests. This
should be anticipated if insurance proceeds are unavailable or
insufficient to purchase the equity interests of a former
shareholder.
Severance from service. Free cash flow from operations is the
only source of funding. What about retention or transfer of
existing life insurance policies by the corporation or to the
terminating shareholder?
Terms of Payment. IRC §453 controls for income tax purposes.
(1)
Primary Obligor
(2)
Guarantee by other shareholders or entity. What if business
becomes insolvent and other shareholder(s) have
guaranteed?
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Security and Security Agreement – Is this really needed if
the entity itself becomes insolvent??
(4)
Insurance proceeds or if unfunded or underfunded
(5)
Self-help foreclosure for secured assets with perfected
security interest under FS §679.610(2). Plan on the entity
either holding certificated shares (to perfect security
interest in intangible personal property) or use
uncertificated shares. This permits the entity to “self-help”
in foreclosing on ownership interests that become available
for redemption or if there is a default in payment of the
purchase price.
(6)
Retention of excess insurance proceeds. Entity should be
entitled
(7)
Consider directing the terms of payment, e.g. equal
monthly installments over 10 years or as set forth in the
bona fide offer at the selection of the Corporation
especially if a ROFR is triggered. This may give extended
payment time to a corporation from a hostile takeover offer
Maximum aggregate monthly payment limitation for redemption
payments. See Attachment A.
Special provisions for S Corporations
(1)
Prohibition against any action that would terminate S Corp.
status
(2)
Termination and closure of taxable year at the
“determination date”
(3)
Required minimum distributions to pay federal and state
income taxes on S Corp. income.
Closing. When does it occur? When is title to stock exchanged?
At Closing or when payment is made?
Alternate dispute resolution.
(1)
Arbitration. Who will be the arbitrator? AAA Rules and
costs of complex commercial litigation? How many
arbitrators to use? Confidentiality. Note the Inability to
appeal if law or facts contrary to those presented.
Discovery process can be very limited. Note that if only
arbitration is used and a non-competition clause is used, no
equitable relief may be available.
(2)
Waiver of Jury Trial. Of the methods available, I believe
this provides the most expeditious, objective and most
reliable method to resolve disputes.
(3)
Miscellaneous clauses. Be consistent in each document
used for a single employer. See Attachment C.
(3)
k)
l)
m)
n)
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VI.
Transfers of FB During Lifetime and/or at Death
A.
Transfers of FB interests during lifetime vs. at death
1.
What is the objective(s) of the client?
2.
a)
Maintain control of FB during lifetime?
b)
Transfer and reduce values/transfer taxes of FB?
c)
Combination of the above?
Lifetime transfer objectives:
a)
3.
B.
C.
Transfer as soon as possible
(1)
Be certain to separate gift v. sale of equity interests. Pierre
v. Commissioner, TC Memo 2010-106.
(2)
Be aware that the annual exclusion gift may be unavailable
for gifts of FB equity interests. See Fisher v. Comm., 105
AFTR 2d 2010-1347.
(3)
See also Holman v. Comm, F3d No. No. 08-3774, 105
AFTR 2d ¶ 2010-721 (8th Cir. April 7, 2010). No gift on
formation but §2703 applied. Note that valuation discounts
were available but not taking into consideration the Limited
Partnership Agreement provisions. Assets were shares of
publically traded Dell stock.
b)
Transfer as much as possible. Question: Is 2010 a good time to
make a taxable gift transfer at low gift tax rates. And after three
years the gift taxes paid are not brought back into the taxable estate
of the donor if the donor survives the three year period.
c)
Transfer using as low values as possible
(1)
Remember §2703!
(2)
Built-in gain discounts allowed. Jensen v. Commissioner,
T.C. Memo 2010-182 (August 10, 2010)
Ordinary devise by Will or Trust? Many clients do not care about gift or
estate tax savings and simply wish to retain the FB and transfer at death.
Transfer “devices” to FM (not third party sales)
1.
Recapitalization into voting and non-voting shares followed by a sale to an
IDGT.
2.
Recapitalization into voting and non-voting interests followed by a sale or
gift of non-voting shares to FM or KEEs.
Section 6166 (Deferral of Estate Tax) and Section 6161 (Extension of Time for
Payment of Tax)
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1.
Who is eligible?
a)
b)
c)
2.
Closely held business interest in taxable estate
Interest exceeds 35% of “adjusted gross estate”
At the time of decedent’s death, decedent was a citizen or resident
of the U.S.
Payment Schedule:
a)
b)
c)
Ten equal annual installments
Fifth anniversary of the due date of the return
Interest payable during the first five years and after the first five
years interest payable with annual installments
3.
Deferral Not Available For Passive Assets:
4.
a)
Stock in another corporation
b)
Cash reserves
6166 Security:
a)
5.
Problems associated with interests in certain types of assets, i.e.
Charitable Remainder Unit rust
b)
IRS cannot abuse discretion in granting Deferral
c)
IRS cannot obtain interest on underlying asset owned by FB
Loss of Election/Acceleration:
6.
a)
Disposition of asset
b)
Default in payments
6161 Protective Election:
a)
b)
c)
Time
Reasonable Cause
Undue Hardship
VII. Who Is Your Client? – Case Illustrations.
A.
Parties and representation
1.
Entity. Pre and post formation.
2.
Who prepares and negotiates agreements among the owners and entity?
3.
Estate planning. Who represents the owners in connection with estate
planning?
4.
Post formation conflict. Who represents whom?
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5.
Bankruptcy. Note that trustee in bankruptcy accedes to ownership and
control of entity and has ability to review past representations and
conflicts.
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Attachment A
(SAMPLE) MAXIMUM AGGREGATE MONTHLY PAYMENT
Notwithstanding anything herein to the contrary, if the aggregate obligation of the
Purchasing Shareholders for the purchase of Shares in any one (1) twelve month period
(“Year”) exceeds ten percent (10%) of the Net Fees (as defined in the Employment
Agreements of the Shareholders) collected by the Corporation in any Year (“Ceiling
Percentage”), then all amounts payable in the succeeding Year shall be reduced
proportionately, and the payment period to a selling Shareholder(s) (or his estate) shall be
extended accordingly, without interest, such that payment of all purchases of Shares in
the succeeding Year does not exceed the Ceiling Percentage. If the Ceiling Percentage is
exceeded due to the aggregate Shareholders’ obligation to pay for purchases of Shares to
more than one (1) Shareholder, then the reduction of the amount owed to each
Shareholder payable in such succeeding year(s) shall be prorated between the two (2) (or
more) payees based upon the total amount of the Purchase Price payable in the Year
succeeding the Ceiling Percentage is reached. The period for payments of the Purchase
Price shall be extended accordingly without additional interest.
EXAMPLE: Assume that former Shareholder A and former Shareholder B have
$10 and $20 of estimated payments for the sale of Shares payable hereunder in
Year one. Assume further that the Ceiling Percentage in Year 1 is $18. $30 of
the Purchase Price would be payable in Year 1; however, the Yearly Purchase
Price to A and B in Year 2 would be reduced to $6 and $12, respectively, and the
duration of the payments would be increased until paid in full. If the Ceiling
percentage in any subsequent Year increased to $30 or more, the Purchase Price
to A and B of $10 and $20, respectively, would resume in the succeeding Year
subject however, to the Ceiling Percentage in any subsequent Year.
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James B. Davis, Esq.
Attachment B
(SAMPLE) DISABILITY AND LIFE INSURANCE CLAUSE
(a)
Acquisition. If the Corporation elects to purchase life and/or disability
insurance (or elects for the Shareholders to purchase such insurance on a cross purchase basis)
on the Shareholders, each Shareholder to be insured hereunder shall consent to undergo a
reasonably non invasive physical examination as provided by the insurance company. A failure
to submit to such physical examination shall constitute a material breach of this Shareholder
Agreement and of the Shareholder’s Employment Agreement.
(b)
Maintenance. If the Corporation or any Shareholder(s) shall be the owner
of any disability and life insurance policies the Corporation and/or the Shareholder’s shall
maintain such policies in full force and effect and pay all premiums on the disability and life
insurance policies and shall provide proof of payment of premiums to the Corporation whenever
reasonably requested in writing. The Corporation and/or the Shareholders further agree that they
will not cancel any such policy, change the named beneficiary, assign ownership, or otherwise
change the nature or value of the policies without the prior written consent of all Shareholders
and the Corporation. The owner of such policy in its discretion may apply any dividends
declared on the policies to the payment of premiums.
(c)
Death or Disability. Upon the death or Disability of a Shareholder, the
owner of the policy (is) shall collect the insurance proceeds under the policy on the deceased or
Disabled Shareholder and shall pay from same the Purchase Price for the deceased or Deceased
Shareholder’s Shares as established by and in accordance with this Agreement.
(d)
Termination of Employment. If a Shareholder terminates as an
employee of the Corporation, such Shareholder shall have the right to purchase the disability
and/or life insurance policies from the owner for the policy on which he is the insured for the
interpolated terminal reserve value of the subject policy. Thereafter, the Shareholder purchasing
Shares has the obligation to pay further premiums and neither the Corporation nor any
Shareholder shall have any obligation for the payment of future premiums as to such purchased
policy. This right shall lapse if not exercised within ninety (90) days after the date of
termination.
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Attachment C
MISCELLANEOUS CLAUSES
MISCELLANEOUS PROVISIONS.
A.
Florida Law and Venue. This Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State of Florida. If any
action, suit or proceeding is instituted as a result of any matter or thing affecting this
Agreement, the parties hereby designate Broward County, Florida, as the proper
jurisdiction and the venue in which same is to be instituted.
B.
Construction; Representation.
The parties hereto recognize and
understand that this Agreement has been prepared by Gunster, Yoakley & Stewart, P.A.,
counsel for the Corporation, as a result of negotiations between the Corporation and the
_______and that the ____________ has been advised to retain legal counsel for the
review and negotiation of this Agreement and has been given an opportunity to secure
legal counsel. The fact that legal counsel for the Corporation has drafted this Agreement
shall not cause any provision to be construed against the Corporation.
C.
Headings. The Section headings contained herein are for reference
purposes only and shall not in any way affect the meaning and interpretation of this
Agreement.
D.
Binding Effect. This Agreement shall be legally binding upon and shall
operate for the benefit of the parties hereto, their respective heirs, personal and legal
representatives, transferees, successors and assigns.
E.
Entire Agreement. This Agreement contains the entire agreement of the
parties hereto with respect to the subject matter addressed herein, and all prior
understandings and agreements, whether written or oral, between and among the parties
hereto relating to the subject matter of this Agreement are merged in this Agreement.
Each party specifically acknowledges, represents and warrants that they have not been
enticed to sign this Agreement by any belief that the other will waive or modify the
provisions of this Agreement in the future.
F.
Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or unenforceable
provisions were omitted.
G.
Counterparts. This Agreement may be signed and executed in one or
more counterparts, each of which shall be deemed an original and all of which together
shall constitute one agreement.
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H.
Nonassignability. This Agreement, or any provision thereof, may not be
assigned to any other person or entity unless expressly contemplated by any of the
provisions of this Agreement.
I.
Modification. This Agreement may only be modified in writing and
signed by each of the parties hereto.
J.
Plural and Gender. Whenever used herein, the singular number shall
include the plural, the plural the singular, and the use of any gender shall be applicable to
all genders.
K.
Survival. All representations and other relevant provisions herein,
including, but not limited to, the provisions set forth in Sections __, __ and __ of this
Agreement, shall survive, and thereby continue in full force and effect, upon termination
of this Agreement, except as may be expressly provided otherwise therein.
L.
No Waiver of Breach. The waiver or inaction by the either party hereto
of a breach of any condition of this Agreement by the other party shall not be construed
as a waiver of any subsequent breach by such party, nor shall it constitute a waiver of that
party’s, rights, actual or inherent. The failure of any party hereto in any instance to insist
upon a strict performance of the terms of this Agreement or to exercise any option herein
shall not be construed as a waiver or a relinquishment in the future of such term or
option, but that the same shall continue in full force and effect.
M.
Notices. All notices or communications provided for herein or incidental
to the transactions contemplated hereby shall be in writing and shall be deemed duly
given if delivered personally or sent by certified mail or registered mail, return receipt
requested, to the parties at their respective addresses as reflected on the records of the
Corporation or at such other address as a party may have specified by prior written notice
to the other party.
N.
WAIVER OF JURY TRIAL. EACH PARTY EXPRESSLY WAIVES
ALL RIGHTS TO ANY TRIAL BY JURY IN ALL LITIGATION RELATING TO
OR ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT
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Attachment D
SAMPLE DEVISE OF BUSINESS CLAUSE FOR WILL
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Attachment E
LESSONS LEARNED
Fred approached Gunster’s Key West office about forming a company to acquire another
company. Fred was to be an officer of the company, and his wife Felicity’s trust the sole
shareholder. The engagement letter read:
Fred
Key West, FL 33040
Dear Fred:
Thank you for selecting GY&S to represent you in the formation of an entity to acquire another
business.
Our standard Terms & Conditions are attached . . . etc.
Very truly yours,
Gunster Lawyer Extraordinaire
Fred signed the engagement letter and enclosed a $10,000 retainer check from his wife’s trust.
After the company was successfully formed, a new matter was opened in the name of the
company, ABC Inc., for the purpose of acquiring XYZ Corp. The engagement letter read:
Fred
Key West, FL 33040
Dear Fred:
Thank you for selecting GY&S to represent ABC Inc. as legal counsel.
Our standard Terms & Conditions are attached . . . etc.
Very truly yours,
Gunster Lawyer Extraordinaire (“GLE”)
The acquisition of XYZ Corp. by ABC Inc. never closed, allegedly because something was
missed in the due diligence during the acquisition negotiations. After the formation of ABC,
GLE sometimes billed his time to Fred’s matter and sometimes to ABC’s.
Fred, Felicity’s trust, and ABC are all threatening to sue GYS because the deal never closed,
each claiming to be an “Aggrieved Client” and seeking return of all legal fees plus unspecified
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James B. Davis, Esq.
compensatory damages. If all 3 file suit over the failed acquisition, how many “clients” will the
court likely find that GYS had for purposes of proceeding with the suit . . . 1, 2 or 3? If more
than 1, will fees from both matters be at issue?
LESSONS LEARNED
Once upon a time, long, long ago, Gunster Lawyer Extraordinaire (GLE) opened an estate
planning file for John Smith. In conjunction with the estate planning, many entities were
formed. For the past 15 years (up to this very day), GLE has continued to do all the corporate
work for the entities under this same file, including transferring ownership interests to various
companies and individuals, and doing opinion letters to various lenders. The names of the
corporate entities, the transferees, and the lenders have never been added to the matter and
included in a conflicts check.
John died 4 years ago and GLE handled his estate administration . . . but his estate planning file
remains very active. Recently, the oldest of John’s grandchildren, Mike, turned 18 and asked for
an accounting of his interests in the various corporate entities. Upon review of this information,
Mike believes he has received less than he is entitled to and has notified Gunster that he plans to
seek damages plus disgorgement of legal fees based on multiple conflicts of interest. GLE
always believed that John was his client, not any of the entities for which he did corporate work
at John’s request, and that John’s son became the client upon John’s death, at whose request
GLE provided legal services for the “family corporate entities” managed by the son.
GLE comes to you and asks your advice as to whether he has anything to worry about.
LESSONS LEARNED
Attorney B (not a Gunster lawyer, fortunately) represented Moe and his 2 sons, Larry and
Curley, on various individual matters. He also represented all 3 concerning their wholly owned
companies ABC, Inc. and XYZ, Inc.
A dispute arose when Larry disagreed with the others about the management of XYZ. Attorney
B represented Moe and Curley in negotiations with Larry on this issue. Another dispute later
arose over the use of proceeds from the sale of XYZ.
Attorney B subsequently terminated his representation of Moe. After Larry and Curley sued
Moe over the proceeds from the sale of XYZ, Attorney B provided Larry’s lawyer with
information he requested concerning Moe’s business affairs.
Moe filed a Bar Complaint against Attorney B. The state supreme court ultimately held that
Attorney B had violated 2 ethics rules: (1) the concurrent client conflicts rule by failing to obtain
informed consent from all three clients before representing them in various business
arrangements that had the potential for conflicts; and (2) the confidentiality rule by revealing
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James B. Davis, Esq.
information about Moe to Larry’s attorney. Attorney B had tried to argue on this last point that
Moe had waived attorney-client privilege, with which the court agreed, but to no avail since
Attorney B revealed confidential information in addition to privileged information. B was
suspended from the practice of law for six months.
Practice reminders:
This case demonstrates two common pitfalls of joint representation: the potential for conflicts
between co-clients, and issues of confidentiality between co-clients. Both pitfalls are easily
addressed by using a Joint Representation Letter. If a conflict arises, you cannot represent one
client against another (as Attorney B did, for example, in negotiating with Larry on behalf of
Moe and Curley) unless you’ve covered this in the joint rep letter or get a conflict waiver.
Remember “The Golden Hour” and how easy it is to protect yourself and Gunster up-front
before any disputes begin to arise.
Rule 4-1.6 (Confidentiality) . . . ALL information relating to the representation is protected from
disclosure, not just privileged information.
Rule 4-1.7, subsection (a) . . . you may not represent one client adverse to another client;
negotiating (whether a dispute or an agreement) is an “adverse” activity.
Subsection (c) . . . when representing multiple clients in a single matter, you must provide
sufficient information about the risks and benefits of joint representation.
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