4 Reasons you need a Shareholder Buyout Agreement
Shareholder Buyout Agreements or Sell-Buy agreements are contracts that determine how shares can be sold and bought within the organisation. A buyout agreement regulates whether a departing shareholder’s stocks can be bought, the mode of its purchase, the representative responsible for making the purchase and other conditions that can trigger a similar situation.
These agreements are crucial documents for avoiding shareholders’ conflicts and a situation of crisis in the case a majority shareholder goes bankrupt. However, despite their significance, many companies overlook the filing and amendment of the sell-buy agreements, leading to legal troubles in the future.
Here are a few reasons that help you comprehend the importance of shareholder buyout agreements:
1) Provides an Exit Strategy
This is the key importance of shareholder buyout agreements. A well-drafted buyout agreement serves to protect the interests of other investors, in the case a major investor decides to leave. This contract defines the terms that could initiate a buyout. It also determines the shareholder who can purchase these shares and the system on whose basis the stocks will be evaluated. The events that can initiate the agreement include:
- Long term injury
- Individual Bankruptcy
- Marital Breakdown
- Business dispute
The proceedings for each of these events are separate and entail different details that need to be kept in mind while buying out the shareholder. An experienced business lawyer can help you understand them better and make sure the agreement is enforced positively.
2) Settles Disputes
A Buy-Sell agreement provides the framework to resolve conflicts between shareholders. It also allows minor investors to have an equivalent say in the operations of the business as major investors. Absence of shareholder buyout agreements can lead to small differences to develop into lengthy litigations for the company. This not only leads to unnecessary expenditure in litigation but also tarnishes your company’s reputation.
3) Protects Tax Benefits
A buyout agreement essentially includes clauses for evaluating the stakes of a shareholder in the case of his demise case or if he wants to leave the corporation. This method is usually pre-determined or arbitrated by a third party. This evaluation helps investors determine a standard value of their shares, protecting their tax benefits despite the departure of a stockholder.
4) Creates a Market for Closely Held Interests
A shareholder buyout agreement is of crucial importance for S-corporations operating in Canada or small family run businesses. Most closely held interests need extra work for finding a viable market. Inclusion of a buyout agreement allows shareholders to invest in the corporation with a certainty about the terms of the investment. It also allows initial investors to restrict the transaction of shares, making sure the sale and purchase of stocks remains within the corporation.
Shareholder buyout agreements also determine the methods of payment for the remaining investors. Depending on the terms of initiation, a shareholder’s stock can be purchased using assets of the business or the insurance policy engaged. A skilled law firm can help you navigate through the alternations in your shareholder policies and make the process of buyout stress-free.