Do you really want to be in business with your partner's ex-spouse? Or maybe have a competitor sitting at your board meeting?
Every business with shareholders, partners, members or two or more owners then should consider a buy-sell agreement.
As a general rule, shares of stock are freely transferable. Shareholders can sell them, estates can distribute them to heirs in the probate of a deceased's shareholder's estate, and judges can award them to a spouse in a divorce action. However, shareholders can agree among themselves to restrict ownership only to the original shareholders and to those people they may later want to become shareholders of the company.
A shareholder buy-sell agreement is a very effective mechanism for controlling who can and cannot become a shareholder of a company.
Kentucky Issues in a Buy-Sell:
Restrict the Transfer of Shares
A shareholder agreement restricts the transfer of shares, and provides a procedure for the shareholders to follow if a shareholder wants to sell his or her shares, dies, leaves the employment of the company, becomes disabled, gets divorced, or if his or her spouse dies.
General Sale Procedure
The Agreement will typically provide a general sale procedure to be used in each triggering event. For example, if a shareholder wants to sell his or her shares, the agreement might require that he or she first offer his or her shares to the company. If the company does not agree to purchase his or her shares within a certain period of time, then he or she offers the shares to the other shareholders. If neither the company nor the other shareholders purchase his or her shares within a certain period of time, then he or she can sell his or her shares to an outside party.
The same procedure is followed if a shareholder dies. In that case, the estate will be bound by the Agreement and will become the offering party.
Divorce of a Shareholder
Upon the divorce of a shareholder, it is possible for a family court to award shares of stock to the non-shareholder spouse. The shareholder agreement typically provides that the divorcing shareholder has the first right to purchase the former spouse's marital shares and the company and remaining shareholders have the right to purchase them if the divorcing spouse doesn't.
Sometimes shareholders are employees of the company. If an employee-shareholder becomes disabled or otherwise discontinues employment with the company, the company may want to get those shares back.
Purchase price is an important issue in every shareholder agreement and there are various methods by which the purchase price is calculated. Some agreements require the shareholders to meet once a year to set the purchase price. Other agreements require the purchase price be set by a business appraiser. Still others use book value as a purchase price. While there are many ways to determine purchase price, every agreement should be very specific about how the price will be determined so as to avoid price disputes when a triggering event happens.
Funding Purchase and Sale
Shareholders should consider how the purchase and sale will be funded. In some cases it may be appropriate to fund sale upon death with life insurance and sale upon disability with disability insurance. It may also be appropriate to specify an initial cash payment with the remaining amount of the purchase price being paid in installments over time.
Closing on the Sale or Transfer
The stock certificates are transferred to the buyer and the cash and/or promissory note is transferred to the seller. If the purchase price is paid in installments, the buyer typically requires a stock pledge to secure payment.
Terms of the Shareholder Agreement
All shareholders and their spouses and the company must agree to be bound by the terms of the shareholder agreement and each stock certificate should state that the stock is subject to a shareholder agreement that restricts the transfer of shares and that any stock sale in violation of the agreement is void.
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