Purchase, Sale & Redemption of Ownership Interests
When minority owners of a publicly traded company become dissatisfied, are unable to continue as owners, or simply desire to no longer be involved in the company, it is rather simple to sell their shares and terminate their relationship with the corporation. This is not the case, however, for a closely held company.
If majority or minority owners of a closely held business, for whatever reason, need to sever their relationship with the business, it is important that the procedures have been laid out thoroughly and clearly at the outset. At the company’s formation, the owners of a closely held business will benefit greatly by negotiating and signing a buy-sell agreement. This foundational document sets out precisely how the company will handle certain situations should they arise. While there are numerous forms that can be obtained on the internet or other sources, it is really critical that individuals consult with an experienced corporate attorney to guide them in preparing a buy-sell agreement. Paying careful consideration to the unique circumstances of the business and the owners, a skilled Virginia business and tax attorney can draft a buy-sell agreement that best meets your current and future needs. This meticulous attention to details at the outset will save both the owners and the company much time and money and aid in their future success.
A buy-sell agreement may also be referred to as a stock repurchase agreement, purchase and sale agreement, or a stock redemption agreement. This document will address how the shares are valued, the terms of the purchase, the terms of any promissory note that may be issued, and the security agreement. Often, a buy-sell agreement will contain rights of first refusal which give the corporation or other specific shareholders the right to match any third-party offers to purchase the shareholder’s shares.
An extremely important aspect of buy-sell agreements is the adoption of a method for valuation. Comprehensive buy-sell agreements will detail the procedure to be used for fixing the value and the standard for valuing the interest to be purchased.
A buy-sell agreement will discuss which events are “triggering” events that will trigger a buy-sell and include specific provisions on how to handle those occurrences.
SHAREHOLDER DEATH PROVISIONS
Generally, there are two basic types of buy-sell agreements that owners of a company may employ to address the possibility of a shareholder’s death. With a Cross-Purchase Agreement, each owner of the company purchases an insurance policy on the other shareholders. The purchaser becomes both the owner and the beneficiary of the policy. If a shareholder dies, the remaining shareholders are able to use the proceeds of the life insurance policy to purchase the deceased shareholder’s shares.
Another type of buy-sell agreement is a Stock Redemption Agreement. In that scenario, the corporation owns life insurance policies on each of the shareholders. If a shareholder dies, the corporation buys the deceased shareholder’s shares with the life insurance proceeds.
Before selecting one type of buy-sell agreement to execute, it is important to understand that both types of agreements have distinct advantages and disadvantages. There are specific tax implications for all parties involved under both agreements. Additionally, the age or health of the shareholders can lead to uninsurability or create a disparity in premiums among the shareholders. This will matter under a Cross-Purchase Agreement but not be too important under a Stock Redemption Agreement. Equally important is discerning the differing administration responsibilities that come under both agreements.
Disability or Withdrawal
Less often addressed is the situation where an owner becomes disabled due to an accident or illness. This would obviously not be covered by the death provisions as no life insurance proceeds would be distributed. But a disability can certainly affect an owner’s participation in the business. Essentially, disability is just a form of withdrawing from the business. Other similar situations include retirement, the decision to quit, inability to continue in this line of profession, or the unfortunate conflict between owners.
The corporate law attorneys at MartinWren, P.C. have significant experience in issues regarding valuation, buyout provisions, rights of first refusal, and other matters pertaining to corporate ownership. For efficient and effective guidance in all matters pertaining to business ownership, contact the Virginia corporate law attorneys at MartinWren, P.C. at (434)817-3100.