The problems associated with designing a purchase-sale contract are complex and difficult. This article analyzes some of the main concerns, for example. B the purpose of the agreement, the types of agreements and methods for determining the share price. In most cases, the member`s spouse knows much more about the business and the likely financial outcome if the approval provision is enforced. Therefore, in most cases, the spouse is not able to successfully assert that the non-member spouse only had to read the agreement to be fully informed. A „Just read the document“ defense doesn`t work if the member`s spouse has financial, business, or other essential business information that is not known to the non-member`s spouse. One of the most important points that the spouse must disclose to the non-member spouse is the specific value/amount that the non-member spouse will likely receive from the corporation if the consent provision is triggered at the time of divorce. If A has life insurance and B has life insurance, A might want to transfer his policy to B (and vice versa) to fund the cross purchase commitment. Upon A`s death, B would collect the proceeds of A`s life insurance and then distribute the proceeds to A`s estate in exchange for A`s shares.
While this strategy may seem like a good idea, the parties have transposed politics to their worth. B would have to pay income tax on receipt of the proceeds of death, less the amount it subsequently paid as premiums. Typically, there are two potential buyers in a buy-sell contract. The business entity itself may purchase the shares under a „share repurchase agreement“, or the remaining shareholders may purchase the shares under a „Cross Purchase“ contract. As already mentioned, the family court has, in divorce proceedings, a margin of appreciation necessary to establish a fair and equitable division of the couple`s marital property, including their shares in private enterprises. A consent provision, which gives a dramatically different financial outcome to a spouse at the time of divorce, therefore faces a high degree of skepticism in a divorce court and can be seen as ruthless. . .
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