Shareholder Buyout Agreements: Plan Ahead for Changes in Corporate Ownership
by Attorney Bethany K. Laurence
Buyout, or buy-sell, agreements cover what happens when an owner wants out.
Buyout, or buy-sell, agreements are often overlooked, even by shareholders who have diligently filed their articles of incorporation and adopted their corporate bylaws. But this can be a costly mistake: Without a buyout agreement, if a shareholder wants to leave the company, there's no contract that says whether the remaining shareholders or the corporation must buy him out, or for how much.
By creating a buyout agreement, the owners of a small, privately held corporation can be prepared when a shareholder wants to be bought out, or worse, dies, goes bankrupt, or gets divorced.
What Are Buyout, or Buy-Sell, Agreements?
Contrary to popular belief, buy-sell agreements don't have anything to do with buying and selling companies. Instead, they control when and how shares in a corporation can be bought and sold. Buy-sell agreements are also sometimes called shareholders' agreements or stock agreements. Because of this confusion over terminology, we will stick to the term buyout agreement from now on.
Typically, a buyout agreement controls the following decisions:
- whether a departing shareholder must be bought out
- who can buy a departing shareholder's stock (this may include outsiders or be limited to other shareholders)
- what price will be paid for a shareholder's interest in the corporation, and
- what other events will trigger a buyout.
It may help to think of a buyout agreement as a sort of "premarital agreement" between co-owners: It determines what will happen if your corporation's owners decide not to stay together 'til death do they part.
What Events Should Be Covered in a Buyout Agreement?
Typically, the events that trigger the buyout of a shareholder's interest are:
- the retirement or resignation of a shareholder
- an attractive offer from an outsider to purchase a shareholder's interest in the corporation
- a divorce settlement in which a shareholder's ex-spouse stands to receive all or part of a shareholder's stock of the corporation
- the foreclosure of a debt secured by a shareholder's stock
- the personal bankruptcy of a shareholder, or
- the disability, death, or incapacity of a shareholder.
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