Typically, when a corporation is initially organized, it is common to elect Directors and Officers as well as issue shares of stock to those persons actually funding, and thus owning, the business. However, what is all too often not addressed is the preparation of a shareholder buy – sell agreement.
Such an agreement (which is totally distinct from corporate bylaws) should be prepared well prior to it even being needed and should address, at a minimum, the following issues:
- What stock transfers a shareholder is permitted to make (for example, to the shareholder’s living trust) before having to first offer such shares to the other shareholders?
- Before the sale of one’s shares to an outside third party, are there rights of first refusal that must first be afforded to either the other shareholders or the corporation itself?
- What happens to the shares of a shareholder who divorces? Must the non-shareholder spouse give up any marital rights in the stock, and if so, upon what terms?
- What if a shareholder dies? Must his or her estate relinquish the shares, and if so, upon what terms?
- What happens if a shareholder becomes mentally or physically disabled or incapacitated? Is the corporation required to carry disability or life insurance for the benefit of a shareholder, and if so, can any part of such insurance be used by the corporation to acquire the shares of the disabled or deceased stockholder?
- How is the purchase price to be determined for one’s shares? Further, must the price be paid in full or possibly with just a minimum down payment and installments over time?
- What if a shareholder violates its agreements under the buy – sell agreement? What are the rights and remedies of the company and/or the other shareholders?
These are only some of the many questions and problems that may result and can be resolved with a well-drafted shareholder buy – sell agreement. Please call us to discuss these matters further.