Often parties enter into a business arrangement or partnership without a formal agreement in place or, if they do have a formal agreement in place, it does not cover off all the provisions relating to a party leaving the business arrangement or partnership. Commercially, many parties take the position that a formal agreement is not needed when they start their business arrangement or partnership. However, it is never too late to document the arrangements between the parties to the business arrangement or the partners that will apply in the “worst case scenario” or when something unexpected happens.
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A Consolidated Agreement is an agreement that essentially brings together a number of key components to a business arrangement or partnership (but typically after the arrangement has commenced or has already been in place for some time). The key components of the agreement cover include:
(a) the relevant provisions relating to both the voluntary and forced exit of a party to a business or a partner by covering the “who, what, when, where, how” of arrangements for a party either wanting to exit a business arrangement or being forced to exit a business arrangement;
(b) the funding arrangements for insurance policies sitting under the business and that respond to a party leaving the business arrangement due to the unfortunate event of that party’s death or total and permanent disability; and
(c) the arrangements to value the business that typically do not apply to death or total and permanent disability but only to a voluntary and forced exit of a party to a business or a partner.
In this article, the terms “business” and “business relationship” each have a broad meaning and each refer to basically any business or commercial arrangement, relationship and even covers a partnership.
Each Consolidated Agreement is different and depends on the instructions of the parties for whom the Consolidated Agreement is prepared. This article details the typical provisions for a Consolidated Agreement.
You might need a Consolidated Agreement if you have entered into a business relationship or a partnership, but you do not have a formal agreement (or any agreement) in place for that arrangement, relationship or partnership. A Consolidated Agreement is also helpful if you do have a formal agreement in place for your business relationship or partnership, but that formal agreement does not specify, for example, what will happen if one (or more) of the parties:
(a) voluntarily wishes to leave the business arrangement, relationship or partnership; or
(b) essentially behaves poorly and needs to be forced to leave the business arrangement, relationship or partnership.
A Consolidated Agreement is also helpful if parties to a business relationship or partnership want to put in place provisions to fund the departure of any party in the unfortunate event that a party dies or suffers from a total permanent disability. In that case, the Consolidated Agreement responds to the death or total permanent disability by ensuring the proceeds of insurance policies held under the Consolidated Agreement respond to pay the estate or representative of that person.
How does the Consolidated Agreement work?
As noted above, a Consolidated Agreement covers a range of things including both a voluntary departure of a party from the business arrangement or partnership, together with a forced departure of a party from the business arrangement or partnership.
Above all, it is important that the Consolidated Agreement works from a practical perspective and that it works commercially.
The voluntary departure provisions in the Consolidated Agreement are relevant where a party to the business or partnership wishes to leave the business or partnership for whatever reason. (A “put option” more generally responds to the voluntary departure of a party. A “put option” is exercised by the party leaving the business and obliges the parties remaining in the business to essentially obtain the interests of the party that is leaving the business).
The "voluntary departure events” are usually described simply and cover retirement, the departure by a party due to change in personal circumstances, the departure by a party no longer wishing to be a part of the business.
The forced departure provisions in the Consolidated Agreement are typically used where something unexpected occurs in relation to a party or partner or where the business relationship is starting to “turn sour”. (A “call option” more generally responds to the forced departure of a party. This is an option granted by the person leaving the business and that is exercised by the person who is continuing in the business.
The “forced departure events” can be very broad and wide ranging depending on the needs of the parties when the Consolidated Agreement is prepared. However, typically the forced departure events include a wide range of events such as a party to the business or a partner:
(a) breaching the Consolidated Agreement and failing to fix that breach after being given notice to do so;
(b) being declared bankrupt or insolvent;
(c) being unable to work in the business for whatever reason, with little chance of resuming work within a specified time period;
(d) being guilty of conduct that is prejudicial to the business such as being charged with a criminal offence involving dishonesty or fraud or stealing from the partnership;
(e) not working in the business for a specified period without sick leave or without the prior permission of the other parties to the business;
(f) having a physical inability or lacking mental capacity to work in the business (for a specified period) and being unable to continue to perform the required duties in the business.
The funding arrangement provisions of the Consolidated Agreement set out the life insurance policies, payment of premiums and how the life insurance policies respond to the death or total permanent disability of one of the parties to the business arrangement or partnership. Essentially, the insurance policies will respond to the death or total permanent disability of a party by having the proceeds of the policy go to the outgoing party or their estate or personal representative.
The “business valuation” provisions of the Consolidated Agreement set out how the business will be valued and usually provide for some form of independent valuation. The provisions also deal with what happens if a party disputes the valuation of the business once it is conducted and provide the next steps in relation to this. Importantly, the Consolidated Agreement provides for discounts to the value of the business that apply to certain departure events.
At Coutts, we work with clients whether face to face or over the phone to understand their commercial needs and prepare agreements and documents that are commercial, responsive and that use plain language. For more information on a Consolidated Agreement please do not hesitate to contact us.