editing disabled

A shareholders' agreement, also known as a buy-sell agreement, is a legal agreement among owners of the family business regarding the circumstances and terms under which owners have the opportunity or obligation to buy or sell shares in the business. Issues and circumstances often addressed in a shareholders' agreement include: death, divorce, and termination of employment.

One of the important benefits of a shareholders' agreement is that it sets forth the ground rules for the operation of a business in advance, so that everyone knows his or her rights and obligations. A shareholders' agreement will often recite the share ownership and include an agreement as to who will be the directors and officers of the corporation. An important aspect of a shareholders' agreement is to limit the ability of shareholders to sell their shares. Successful closely held businesses are generally those that don't permit strangers to come into the business by buying existing shares. A typical provision would require that anyone who receives an offer to buy shares of the business must relay the offer to the other shareholders, who will have the right to match the offer. If the offer is not matched, the shareholder is free to sell to the outside buyer. Stricter shareholders' agreements will prohibit any outside sales, requiring instead that any shareholder who wishes to sell must do so to the existing shareholders, at a price that is often set forth (explicitly or by formula) in the shareholders' agreement. But this could be considered as too oppressive a provision.

Other provisions of a shareholders' agreement might require the business to buy the shares of a deceased or disabled shareholder, and require a shareholder to sell if the shareholder's employment is terminated or the shareholder becomes involved in a divorce or bankruptcy case (to avoid shares passing to ex-spouses or creditors). The agreement might also provide for the purchase of life insurance to fund a buyout at death. If the amount of life insurance coverage isn't adequate to cover the buyout, the balance is often payable in installments, in order to avoid burdening the business. If the life insurance exceeds the buyout cost, the agreement might provide that the balance remains with the business, or it might be paid to the deceased shareholders family as an additional benefit. When there are only two or three shareholders, they might each purchase and own insurance on the other shareholders. When there are more than three, it's usually easier to have the corporation own the insurance.

It is important to review a shareholders' agreement every few years, to ensure that provisions still work as intended and that valuation amounts or formulae are still appropriate.

This article is a stub. You can help Family Business Wiki by expanding it.

Categories: Shareholders