Shareholder Buy-Sell Agreement - What to Include

Shareholders of closely held corporations generally want at least some control over who might become shareholders. A Shareholder Buy-Sell Agreement can help you avoid difficult situations down the road.

A number of situations can lead to sometimes undesired changes in ownership - unless they have been anticipated and planned for in advance. It’s a good idea to address these possibilities before they arise, to avoid unpleasant disagreements or even ugly lawsuits. Here are some of the issues you may want to include in your corporation’s Shareholder Buy-Sell Agreement.

Death of a Shareholder

Shareholders may want surviving shareholders to have an option, or perhaps be required, to purchase a deceased shareholder’s shares.

A Disabled Shareholder

Provisions for determining if/when a shareholder is disabled and the terms under which that shareholder’s shares are to be transferred.

Departure of a Shareholder

Possible disposition of the shares of an employee shareholder who leaves the company can be addressed. The departing shareholder may have either the right or obligation to sell their shares, while the company or remaining shareholders may either be required or have an option to buy the shares.

Divorce of a Shareholder

Provisions for buying shares should they end up in the hands of an ex-spouse may be established.

A Dissatisfied Shareholder

Provisions under which one shareholder can force another shareholder to either “buy or sell” ownership may be a last resort way to resolve irreconcilable differences.

Bankruptcy of a Shareholder

The corporation could, under certain conditions, be required to purchase the shares of a shareholder filing for personal bankruptcy should they end up in the hands of a bankruptcy trustee.

Selling Shares to Others

The corporation and/or shareholders may be given the right to buy shares before they can be sold to others.

Giving Shares to Others

Restrictions can be set forth governing how much and/or to whom a shareholder may give or transfer shares.

Price of Shares

Establishing the price (or formula to be used to determine the price) at which shares are to be sold/purchased under the corporation’s buy-sell agreement is by far the most important and difficult task required. You may even want to provide for different prices/formulas for different situations.

Payment Terms

Specific payment terms such as method, timing, and rate of interest should be specified in the payment terms that will apply when shares are purchased under the corporation’s buy-sell agreement.

Life Insurance

The proceeds from life insurance purchased by shareholders and/or the corporation are one way shares purchased from a deceased shareholder can be paid for. You may want to include provisions for this in your Shareholder Buy-Sell Agreement.

While this is not a definitive list of items that may be included, you can see it’s prudent to take steps now to anticipate and address the most common issues that may arise regarding ownership of the organization through your Shareholder Buy-Sell Agreement. We recommend you consult your attorney for more information regarding your specific situation.

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