Richard D. Boyle, Esq. of Sheats & Bailey, PLLC
Have you ever thought about what your business partner might do with his or her ownership? A Buy/Sell Agreement helps to alleviate those concerns. A Buy/Sell Agreement is a binding agreement specifying how a shareholder’s shares in a corporation shall be disposed of upon a “triggering event”. The “triggering event” usually being a shareholder’s:
• Death
• Disability
• The desire to transfer ownership aka “walkaway”
• Termination of employment “for cause” and/or
• Retirement.
Having a Buy/Sell Agreement in place helps to smooth the transition of ownership upon predefined triggering event(s). For example, if a shareholder passes away, the remaining shareholder(s) will know who the successor shareholder(s) will be (if any) and the deceased shareholder’s estate will have comfort in knowing who will purchase the deceased shareholder’s shares. Likewise, a Buy/Sell Agreement provides shareholders with a level of comfort in knowing that if a shareholder wants to transfer his or her shares to an outside party, he or she first must at the very least get approval from the remaining shareholder(s) and/or give a first option to the remaining shareholders to purchase.
So how does a Buy / Sell Agreement work? As stated above, the Buy/Sell Agreement sets forth a triggering event upon which a shareholder’s shares are transitioned to new ownership.
For example, if a shareholder passes away, the Buy/Sell Agreement will set forth who must purchase the deceased shareholder’s shares from his or her estate. The purchase price for the deceased shareholder’s shares is a predetermined price as set forth in the Buy/Sell Agreement. To fund the purchase price, there often is life insurance in place on the lives of each shareholder, which is paid for by the corporation; the proceeds of which are used to purchase the deceased shareholder’s shares. This is similar to an instance whereby a shareholder is determined to be disabled and unable to work for the corporation anymore; the remaining shareholders can purchase the disabled shareholder’s shares using disability insurance. Not only is this a great vehicle to provide a shareholder’s loved ones with cash, but also provides a mechanism for the corporation to have succession.
Similarly, in an instance where a shareholder wishes to retire or sell his or her shares to an outside third party, the Buy/Sell Agreement can set forth a restriction so that the remaining shareholder(s) are not in business with an outside party. For example, if a shareholder no longer wanted to be part of the business and wanted to sell his or her shares to a third party, the Buy/Sell Agreement could say that he or she first must offer the shares to the remaining shareholder(s) and/or to the corporation for a predetermined set price payable over a certain period of time.
In addition, Buy/Sell Agreements are great vehicles to put in place when transitioning ownership in a corporation to key employees. Many times, when shares are gifted to the younger generation, the gifting shareholder will want the younger generation to work many years to show his or her dedication to the corporation before he or she is fully vested in the gifted shares. In such a case, the Buy/Sell Agreement can set forth a vesting schedule whereby a percentage of the gifted shares become vested each year.
When drafting a Buy/Sell Agreement, there are many factors to consider. In my experience, conversations take time and evolve. Therefore, it is important to start having those crucial conversations with shareholders and successors before it’s too late.
For more information on Buy/Sell Agreements and all other corporate and litigation needs, please contact Sheats & Bailey, PLLC, a law firm dedicated to servicing the construction industry.