April 2005 Issue

FDH Newsletter |

Article 1: So What's Binding You?

Article 2: Young People as Beneficiaries of Life Insurance Proceeds

This is the first in a series of articles dealing with the legal aspects of the buying and selling of a business. The focus of these articles will be on privately held companies, ones that do not offer their shares to the public.

Commonly, the first step in the legal process associated with the buying or selling of a business is the preparation of a Letter of Intent (“LOI”). The purpose of an LOI is to reduce to writing the essential terms of the proposed transaction. Attempts to negotiate the purchase and sale of a business through the presentation and revision of fully drafted agreements of purchase and sale is impractical, costly and time consuming.

It is of value to clarify the basic terms of a transaction as early as possible in the process. Notwithstanding that a proposed vendor and purchaser may have had numerous preliminary discussions regarding a proposed transaction, the lines of communication may not always be clear and many matters which had been discussed can be misunderstood and viewed completely different by the parties. Using an LOI to flush out the core elements of the transaction can successfully expedite the negotiation process, or alternatively, make it obvious that a deal is not to be had.

Contracts generally bind all elements. However, the one consistent binding provision in an LOI is that the business terms of the proposed transaction, as set out in the LOI, are not to be binding on the parties. The LOI does not bind the parties in any way but does encourage the parties to negotiate in good faith a definitive agreement of purchase and sale incorporating the essential terms as set out in the LOI.

The purpose of the LOI is two-fold. It requires the parties to address their minds to the essential terms upon which they are prepared to pursue a transaction. It also forms the basis upon which the parties can negotiate a definitive agreement of purchase and sale.

Preparation of the LOI usually starts with the purchaser as a logical response to the vendor’s indication that it is prepared to sell its business. It is an excellent way to raise and clarify points that may be problematic for either of them. One aspect often not appreciated in the preparation of an LOI is the “moral persuasion” available when one party seeks to vary or move away from the transaction as set out in the LOI. Pressure can be brought to bear on a party if it tries to alter significantly the transaction as proposed in the LOI – most business people wish to avoid the perception that they are not bargaining in good faith.

For clarity, the LOI can be divided into at least two principal sections, the binding and the non-binding elements. The non-binding portion will deal with the proposed business terms and will vary depending upon the nature of the business. In essence, however, the essential business terms revolve around what is being purchased, how it is being paid for and under what conditions the transaction will proceed.

The binding portion of the LOI can include provisions pertaining to some or all of the following:

Confidentiality and Publicity – the parties will want each other to maintain in confidence all confidential or proprietary information;
“Stand-still” Arrangements – a purchaser is often reluctant to bear the time and expense involved in negotiations if the vendor is actively soliciting offers from others;
Due Diligence – the parties will want to specify the information that will be made available for review by the purchaser;
Deposit and Costs – at what stage and on what terms will a deposit be paid and will either party be compensating the other in the event of termination of negotiations.

A well conceived and properly drafted LOI will form the basis of a final agreement of purchase and sale and will more than justify the effort expended in its preparation. Negotiating the purchase and sale of a business can be a confusing process for the parties – an early effort to focus on the issues through the preparation of an LOI may well serve as the catalyst to a successful business transaction.

Young People as Beneficiaries of Life Insurance Proceeds

What you can do to protect them

By Lori K. Brown

Most people would shudder at the thought of their children inheriting large sums of money early in life. Education and career plans can be drastically altered if a young person comes into a significant amount of money. For this reason, many people establish trusts for their children in their Wills. These trusts generally provide for the support and education needs to be paid out of the fund established by the trust, with a distribution of remaining funds when the child attains a certain age, usually 25 or older.

How many of us do the same with our insurance policies? Most of us have life insurance policies and most of us have made beneficiary designations – often a partner or spouse. Other times, however, we name children as beneficiaries of the insurance proceeds, whether as an alternate choice to our spouse or as the primary beneficiary in those situations where there either is no spouse or where we specifically wish to provide for our children.

One of the main benefits of naming a beneficiary under an insurance policy is to provide for payment of insurance proceeds directly to the beneficiary, thereby bypassing the deceased’s estate and avoiding the payment of probate fees (estate administration tax) and the potential claims of creditors. However, insurance proceeds payable to a minor must be paid into Court and are not payable to the beneficiary until he or she reaches the age of majority. While these funds are in Court, there are limited investment opportunities and they are difficult to access for the care and support of the beneficiary or if the estate trustee chooses to make a partial distribution to the beneficiary. To avoid this result it is recommended that an insured establish an insurance trust. An insurance trust can be arranged by way of an insurance declaration or within the insured’s Will. When such documents are properly prepared, the insurance proceeds payable upon death are paid into a trust, the terms of which will govern periodic payments to the beneficiaries and the final distribution of the proceeds. The trust is not considered part of the deceased’s estate and accordingly, the insurance proceeds bypass the estate and are subject to payment of probate fees. The trustee of the insurance trust will be designated in the insurance declaration and can be the same person(s) named as the executor.

While children and young adults are the most common reason for setting up an insurance trust, there are other reasons where these types of trust are beneficial. Insurance trusts can be very practical, for example, for funding support obligations with insurance proceeds, to provide for a beneficiary with special needs or as a means of dividing insurance proceeds between a current spouse and children from a former marriage.

It is recommended that everyone review from time to time their beneficiary designations on all life insurance policies as well as the terms of their Wills. If named beneficiaries under your insurance policies are not old enough to handle the responsibility of a large sum of money, an insurance trust may be a mechanism which should be considered.

FDH News

Debi Sutin will be a panel member during the Legal Session at the Annual Convention of the Canadian Franchise Association to be held in May. The panel will discuss whether the Balance of Power in Franchisor/Franchisee Relations has Changed.
On February 8th, Lori Brown participated in an Estate Planning for Women seminar hosted by CIBC and Aim Trimark at the Mississauga Convention Centre.
Our Real Estate Group, Fulvio Delibato, Ron Weston, James Tuck and Steve Follett hosted an interactive seminar for Sutton Group Results Realty Inc. on February 23rd. Topics included Condo Certificates, Issues to Watch For and Day of Closing Under e-Reg.
Markus Cohen, Q.C. will present a seminar on March 24th at a Luncheon Meeting of the Licensing Executive Society on the topic "The Unintentional Franchise: When is a Trade-mark License a Franchise?"
Brian Heagle attended the B’nai Brith 54th Annual Sports Celebrity Dinner at the Hamilton Convention Centre on February 7th, an event we were proud to have supported
Feltmate Delibato Heagle LLP is proud to be a “hole” sponsor of the Oakville Chamber of Commerce 51st Annual Golf Tournament taking place Thursday, May 26th at Carlisle Golf & Country Club.
FDH lawyers are regular contributors to “Legal News & Views”, a weekly feature of the Oakville Beaver newspaper. Lori Brown, Dan Caldarone and Cam Neil have recently contributed articles.
Our Burlington office has been given a face-lift. New exterior signs have been erected, including one proudly bearing the name Feltmate Delibato Heagle LLP.