Buyout agreements, also referred to as a buy-sell agreements, are used in many types of business structures, including corporations, limited liability companies, S corporations, limited partnerships, and general partnerships. In a small, privately held company, a buyout agreement can limit or restrict a shareholder's ability to sell or transfer shares when leaving a company.
Reasons for Buyout Agreements
A buyout agreement does not define the terms of the sale or purchase of a company. A buyout agreement is a contract between the shareholders of a company. The agreement determines whether a company must buyout a departing shareholder or whether a company has the right to buyout a shareholder when a certain event, such as a shareholder's death, occurs. A buyout agreement protects shareholders from complications that arise when a shareholder decides to leave a company. A buyout agreement determines:
A buyout agreement ensures that a company can prohibit an unwanted buyer from gaining an interest in the company and determines how a shareholder can dispose of an ownership interest in a company. Shareholders of a corporation usually include buyout agreements in the articles of incorporation, the by-laws, or in a separate written agreement.
Buyouts when Certain Events Occur
Buyout agreements determine what events will initiate a buyout. Most agreements identify the following events:
How to Fund a Buyout
To buyout a shareholder, a company must be able to pay for the value of the ownership interest. A company can fund the purchase of a shareholder's interest by using:
Get Professional Legal Help When Drafting a Shareholder Buyout Agreement
One thing that is constant with any business is change. Market conditions, trends, demand for certain goods, pricing, and even global events can impact the direction of a corporation. In addition, the sudden departure of a key officer can potentially throw a business into chaos. Talk to a business and commercial law attorney to learn more about how a shareholder buyout agreement can help your business weather such changes.
See Types of Business Structures for a general overview.