Written by Henry Smith · Reviewed by Smiths Insurance & KiwiSaver — licensed Financial Advice Provider (FSP712931) · Last updated 2026-08-15

Buy-Sell Agreement Funding in NZ: Who Pays for the Shares

A buy-sell agreement is a contract between the shareholders of a New Zealand company setting out who must buy a departing owner's shares, at what price and on what timetable, if that owner dies, becomes permanently disabled or is diagnosed with a serious illness. It is funded when life, TPD and trauma policies are written over each owner for the agreed value of their shareholding, so the money to complete the purchase arrives at the same moment as the obligation to pay it. An unfunded agreement still binds the survivors to buy, but leaves them raising the cash from retained earnings, personal borrowing, or a bank that has just watched a key owner leave. That gap between the promise and the money is where co-owned businesses come unstuck.

What the agreement obliges each side to do

A workable buy-sell agreement is a matched pair of options, not a single promise. The departing owner or their estate holds a put option that forces the survivors to buy, and the survivors hold a call option that forces the estate to sell. With only one of the two, either side can decline to transact.

Five clauses around those options do the real work: trigger events, valuation method, funding and policy ownership, settlement timetable, and the treatment of shareholder current accounts and personal guarantees. The last is the most commonly missed. A departing owner is usually owed money through their current account and often personally guarantees the bank facility and the lease, and buying their shares releases neither. It must also match the constitution, since a share is transferable only subject to any restriction on transfer set out there (Companies Act 1993, s 39).

Why an unfunded agreement is a promise nobody can keep

When a shareholder dies the shares do not disappear and do not revert to the survivors. Shares may pass by operation of law regardless of what the constitution says (Companies Act 1993, s 86), and the deceased owner's personal representative may transfer them even though that representative is not a shareholder (s 39(3)). First the executor must prove their authority: probate is a High Court order confirming the will is valid and the executor may manage the estate, and without it many organisations will not release the deceased's property (Ministry of Justice).

So the survivors spend the weeks after a funeral negotiating with an executor whose duty runs to the beneficiaries, not the business. Nor can the board stall: it may refuse or delay registering a transfer only if it resolves to do so within 30 working days of receiving it, states its reasons in full, notifies both parties within 5 working days, and the Act or the constitution expressly permits refusal on those grounds (s 84(4)).

If the standoff hardens, the remaining route is court. A shareholder who considers the company's affairs oppressive, unfairly discriminatory or unfairly prejudicial may apply to the court, which can order the company or any other person to acquire the shares, or order liquidation (s 174).

How the cover funds the purchase

Each owner is insured for the agreed value of their own shares. Life cover answers death, TPD cover answers permanent disability, and trauma cover answers the serious-illness case where the owner survives but may not return. Whether you can insure a co-owner was settled decades ago: a contract of assurance on the life of a person is not void or illegal by reason only that the insured does not have an interest in that life (Insurance Law Reform Act 1985, s 6). Expect heavier underwriting than personal cover: the sum insured must be justified with the valuation, financial statements and an accountant's letter.

Who should own the policies

Three structures are used in New Zealand, and the choice changes the tax position and who controls the policy.

Self-ownership. Each owner owns the policy on their own life and the agreement obliges their estate to sell. It survives an owner leaving and works at any number of shareholders. The trade-off is that the money lands in the estate first, and estate debts must be paid before anything is distributed (Ministry of Justice).

Cross-ownership. Each owner holds a policy on the others, so the claim pays directly to the person who has to buy. Clean with two owners, unwieldy past three, since each extra owner adds a policy on every other life. The control point is the one most often missed: the policy owner, not the life assured, keeps the policy in force, decides on changes and decides who claim payments go to, and the life assured cannot cancel cover on their own life without the owner's agreement (Partners Life).

Company ownership. The company owns and pays, and the claim lands in the company. Simplest to administer, most complicated in law. Inland Revenue's published position is that where an employer takes out a policy on behalf of its shareholders to buy out a shareholder's estate, the premiums are not deductible, because the benefit accrues to the shareholders rather than the company and the general permission is not satisfied (Inland Revenue, QB 17/06). The same item confirms a claim amount replacing capital rather than lost profits is not taxable income (QB 17/06), the mirror image of key person cover.

If the company then buys the shares back itself instead of funding the survivors, it is acquiring its own shares, and the Act prescribes the route. A company may purchase its own shares only if expressly permitted by its constitution (s 59(1)). An offer to one shareholder rather than all needs either the written consent of every shareholder or express constitutional permission plus the special-offer procedure (s 60(1)(b)). The board must first resolve that the acquisition benefits the remaining shareholders and the terms are fair and reasonable to them, and sign a certificate saying so (s 61(1) and (3)). A disclosure document goes to every shareholder, and the offer must follow not less than 10 working days and not more than 12 months after it is sent (s 61(5) and (6)). The company must satisfy the solvency test (s 52): able to pay its debts as they become due, with assets exceeding liabilities including contingent liabilities (s 4). Notice reaches the Registrar within 10 working days (s 58(3)), and the shares are deemed cancelled on acquisition (s 66(1)) unless the constitution expressly permits the company to hold its own shares, the board resolves not to cancel them, and the holding stays within 5% of that class (s 67A).

That cancellation is the control trade-off: a buyback lifts every remaining shareholder's percentage in proportion to what they already held, while a cross-owned or self-owned purchase lets the survivors decide who buys how much, which matters when one is being groomed to take over and another is nearing retirement.

Valuation clauses, and why a fixed figure ages badly

Writing a number or a formula into the agreement feels efficient and usually is not. Findex's corporate finance team puts it plainly: agreements that hard-code an equity value methodology risk an answer that is nonsense or obsolete, because the multiple applied to maintainable earnings tracks the underlying risk of the business, and that risk moves as customer concentration, key-person dependence and industry conditions change (Findex, 19 March 2021). A figure agreed when one client supplied half the revenue is wrong once the client base has broadened.

Better: name the method and the referee, not the number. State the basis, provide for an independent valuer, fix a review date, and re-check the sums insured against the new valuation the same day.

A worked example

Two engineers own a Tauranga consultancy 50/50. Their agreement names capitalisation of maintainable earnings as the basis, requires an independent valuer and sets a review each March. At the last review the business was valued at $1,800,000, so each 50% parcel was worth $900,000, and each owner holds $900,000 of cover on the other under cross-ownership.

Owner B dies in September. B's shares pass to the estate, the executor applies for probate, and the estate serves its put notice. A's policy pays $900,000 straight to A, A pays the estate, the transfer is registered, and A owns the company outright. B's family gets cash, not a shareholding they cannot sell.

Now change one fact: the firm won a large contract, was worth $2,400,000 by September, and nobody re-ran the valuation. The agreement still obliges A to pay $1,200,000 while the policy delivers $900,000. A funds the $300,000 gap personally, borrows it, or asks a grieving family to accept instalments: the exact negotiation the agreement existed to prevent.

Putting it in place

Work in this order. Read the constitution and any existing shareholders' agreement first: the transfer and pre-emptive rights clauses set the boundaries. Agree the valuation basis with your accountant. Have a lawyer draft or update the buy-sell agreement, including the current-account and personal-guarantee clauses. Only then set the sums insured and choose the ownership structure, so the cover matches the document. Which structure suits depends on the number of owners, their tax positions and what the constitution permits: settle that with your lawyer, accountant and adviser together.

To see how life, TPD and trauma cover would sit across your shareholding, start a comparison and talk it through with an adviser. Our business protection and shareholder protection insurance guides cover the neighbouring ground.

Disclaimer: General information only, not personalised financial, legal or tax advice. Buy-sell agreements should be drafted by a lawyer and the tax treatment confirmed with your accountant. Financial advice is provided by Craig Smith Business Services Limited, trading as Smiths Insurance & KiwiSaver, a licensed Financial Advice Provider (FSP712931).

References

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