Understanding Shareholder Buyout Agreements
A shareholder buyout agreement is a contract that determines how shares can be sold and bought within the organisation. These agreements are imperative for many types of businesses including corporations and limited liability companies.
Despite being aware of their importance and diligently filing their articles of incorporation, many young business owners overlook including the buyout agreement in their corporate bylaws. However, it is crucial to include this provision in the bylaws as it protects your shareholders from legal complications and financial losses that occur when a majority stockholder decides to leave the company.
Here’s a closer look at the importance of a shareholder buyout agreement:
What is a Shareholder Buyout Agreement?
A shareholder buyout agreement or a buy-sell agreement controls when and how shares in a corporation can be purchased and sold. These contracts are responsible for determining the following stipulations:
- Whether the company can buy out a shareholder
- The terms of payment for the buyout
- The person responsible for purchasing the shareholder’s stocks
- Events that trigger a buyout
Including a buy-sell agreement prepares the shareholders for emergency situations like the sudden death of a shareholder, his personal bankruptcy or divorce. Consult an experienced lawyer while drafting these agreements to ensure its successful implementation.
Events that Trigger a Buyout Agreement
A buy-sell agreement can be implemented under specific conditions. The most common conditions that initiate this contract are:
- When a shareholder dies - The buyout may be initiated to enable the descendant’s family to sell his inherited shares back to the company.
- When a shareholder becomes bankrupt - The company can initiate this contract to acquire the interest of a bankrupt shareholder.
- When the shareholder is divorced - The ex-spouse of the shareholder can initiate this agreement to sell the acquired ownership interest back to the company.
- When the shareholder becomes disable - Once a shareholder is determined to have a permanent disability, the buyout agreement can compel the sale of his share.
- When the shareholder retires - If the shareholder has reached a certain age, the agreement can allow for acquisition of the retiree’s interest.
Apart from these mentions, there are many other reasons why you may need a shareholder buyout agreement. Refer an experienced lawyer to learn more about their utility.
Funding a Buyout
A company usually funds a shareholder buyout using the following resources:
- Business’ assets - Company can fund a buyout with the help of the income earned from the business.
- Insurance policy proceeds - Company can use the proceeds of the insurance policy to purchase a shareholder's interest in the case of his death or bankruptcy.
A skilled law firm can help you draft and implement a shareholder buyout agreement successfully. Contact our legal experts today to learn more about this process and how it helps your business.