Hi folks, thanks for stopping by. My name is Greg Robinson and today I would like to talk with you about Buy-Sell agreements. Buy Sell agreements are employed when there are two or more shareholders of a business and the shareholders want to provide for continuity in the business in the event that one of the shareholders wants to retire, becomes disabled or passes away. The buy sell agreement provides an orderly method in which the selling shareholder will be compensated and allows the remaining shareholder the certainty that the business will be controlled by shareholders that he or she knows and trusts and hopefully provides for the future viability of the business.
There are typically two ways of drafting a buy-sell. One method is to have the corporation purchase or redeem the shares upon one of the triggering events in the document. This type of an arrangement is typically called a redemption agreement. The second way of drafting a buy sell is to have the remaining shareholders purchase the exiting shareholder’s shares. This type of an arrangement is typically called a cross purchase agreement. Some documents provide for a hybrid approach giving the corporation the option to redeem the shares and if declined by the corporation, the remaining shareholders can purchase the exiting shareholders shares.
In a typical buy-sell agreement, the shares are restricted from being sold by one of the shareholders to a third party. If a shareholder receives an offer from a third party, the buy-sell agreement typically requires the shareholder to tender that offer to the corporation and the other shareholders and allow the corporation, or the other shareholders to match the offer from the third party, thus ensuring that the shares stay within the control of the original shareholders.
A buy-sell agreement will also typically have a requirement to purchase the shares of a shareholder who is disabled. The definition of disabled is a negotiated term in the document. Sometimes the definition will refer to a period of time in which the shareholder cannot perform his or her normal and customary duties. Sometime the term disabled is tied to receiving benefits under a disability policy. In any event, upon a disability, the buy-sell agreement will require that the disabled shareholders shares be purchased, either by the corporation or the remaining shareholders.
Additionally, the buy-sell agreement will also require the shares to be purchased upon the retirement of a shareholder or the death of a shareholder.
Once the purchase price for the shares has been ascertained, the buy-sell agreement will set forth the time period over which the purchase price will be paid. Sometimes the obligation to purchase the shares will also include the use of life insurance and or disability insurance to meet these obligations.
Many times the buy-sell agreement will also include a non-compete covenant by the selling shareholder to protect the corporation’s trade secrets and customer contacts.
If you have any questions regarding a buy-sell agreement, please feel free to contact our office. Thanks for stopping by.