Consider a Shareholders' Buy/Sell Agreement
BY TOM L. PETERSON
Entrepreneurs beginning a new business often attend only to such legal matters as incorporation, the assignment of officer positions and the issuance of stock. Nonetheless, the experienced corporate lawyer will advise the founders AT THE OUTSET to sign an agreement covering some or all of the following in the event that a founder leaves the business or dies:
- Should the Company have to buy a founder's stock? If not, should the surviving founders have to share management decisions with and divert dividends to the deceased founder's heirs?
- In the event of a repurchase of founders' stock by the Company, should the Company pay fair market value? How shall value be established, and where should the Company obtain cash for the purchase? Should there be installment payments, or should the Company obtain funding through an insurance payment? What if the Company finds itself unable to pay under the agreed upon terms? Who gets to vote the stock until it has been paid for?
- What if a founder quits the employ of the Company or is forced out? Should his ownership continue?
- What if a departing founder joins a competitor? What happens to intellectual property or other proprietary information of the Company that was created by that founder?
- What happens to the stock of a founder who becomes disabled or retires? How should the Company respond if a founder seeks to sell his stock to an outsider?
- If the Company becomes very successful soon after a founder has left the Company, should that founder become entitled to share in the bonanza?
- Should the founders agree upon a right of co-purchase giving remaining founders a right to purchase a prorata amount of the departing founder's shares at fair market value?
All of these issues, and more, are best dealt with in a written agreement executed by the Company and all of its founders, thus anticipating any potentially divisive problems before they arise.
Comment: Corporate buy-sell planning involves many considerations, including accounting, tax, insurance and estate issues, as well as legal ones. All of these are often best reviewed and dealt with at the outset of the business rather than later on when serious problems may arise.
© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1994; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.