Buy-sell agreements, which are also called buyout agreements, are used in business structures with multiple shareholders as a means of passing shares from one shareholder to another. Depending on the size of the company and the type of corporation, buyout agreements may be more limiting or restrictive. These business planning agreements generally go into effect when events, such as the death of a shareholder, occur. The purpose of the agreement is to protect other shareholders from complications and to deal with the disbursement of assets held by the departing shareholder.
Broadly speaking, the events that may trigger a shareholder agreement include death, divorce, retirement, personal bankruptcy, incapacitation or disability, and termination of employment with a company. They determine a wide range of details, including whether the company must buy out the shareholder’s stock, who may buy it, how to measure its value and how payment will be made.
One of the most important parts of a shareholder buyout agreement is how funding will be acquired by the company for the buyout. There are two main ways that this may be accomplished. First, the company may pay directly from business assets, such as income earned via a down payment and installments. Second, the company may take out a life insurance or disability policy on each shareholder prior to the buyout agreement, and proceeds from the policy may be used to fund the buyout.
Business and corporate law often involves dealing with large sums of money and many moving parts, and it is important to get all of the details set in a way that keeps a company’s financial operations running smoothly. A lawyer may be able to help establish a plan that tries to protect all shareholders and the company.
Source: Findlaw, “Shareholder Buyout Agreements“, November 19, 2014