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Buy Sell Agreements Are Important for Closely-Held Businesses

03.11.15 written by

I work with a number of business owners on various matters pertaining to the operation of their business.  One area that we discuss is the use of a buy-sell agreement among the owners of the business.  A buy-sell agreement is a contractual agreement.  This agreement is used by business owners to delineate their rights and responsibilities as it relates to their stock ownership and the transfer of the stock in various circumstances.  These transfer circumstances include events during life and also at death.

The initial part of the buy-sell agreement usually details the specific number of shares that each of the owners owns.  The agreement then discusses various restrictions that are placed on these shares.  These restrictions deal with whether or not a shareholder can encumber their stock by pledging the stock to secure personal debt and also discusses the transferability of the shares of stock.  Normally in a closely-held business situation, shareholders do not want other shareholders to be able to freely transfer their shares to whoever they would like to be the owners.  Therefore, this buy-sell agreement is used as a way to restrict the transfers of these shares.  However, there may be permitted transfers that the agreement allows among the shareholders or to the shareholder’s revocable trusts as long as the shareholder is the trustee and beneficiary of that revocable trust.

The agreement then goes on to discuss what happens to a deceased shareholder’s shares.  This usually is a specific situation that depends on the wishes of the individual shareholders of the corporation.  However, in a number of situations when a deceased shareholder passes away, his or her executor shall offer to sell the deceased shareholder’s shares to the surviving shareholders.  The surviving shareholders will then have an opportunity to purchase the deceased shareholder’s shares for a certain time period, and if the surviving shareholders do not purchase the shares, then the corporation may purchase the deceased shareholder’s shares.  Sometimes the agreement will also provide that the corporation must purchase the deceased shareholder’s shares.  If the deceased shareholder’s shares are not purchased, then those shares are able to be transferred in accordance with the deceased shareholder’s estate planning documents, such as his or her will or trust.

This buy-sell agreement can also determine what happens when a shareholder attempts to transfer their shares of stock, terminates their employment with the corporation or is declared to be mentally disabled, as well as other circumstances.  Usually, in these types of situations, the withdrawing shareholder shall be deemed to have offered their shares of stock to the non-withdrawing shareholders and those shareholders will have a certain period of time in which to purchase the withdrawing shareholder’s stock.  Once again, if the non-withdrawing shareholders do not purchase the withdrawing shareholder’s stock, then the corporation may or shall purchase all of such stock.  If the withdrawing shareholder stock is not purchased, then those shares may be transferred to a third party or may be retained by the withdrawing shareholder.

The agreement then spells out specific terms of the purchase of the shares such as the purchase price, which can either be book value, fair market value, or a value stipulated by the shareholders.  The agreement may also discuss the use of life insurance to fund these types of purchases.  The agreement also details when the closing shall take place, the amount of cash down payment needed for the sale, as well as the details of any promissory note which may be required to purchase the shares.

If you are a shareholder in a corporation and you want to make sure various protections are put in place concerning the transferability of shares, then please contact your corporate and estate planning attorney to discuss and establish the parameters for a buy-sell agreement for your corporation.

NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.

James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663
Phone:  330-364-3472
Fax:  330-602-3187