A buy-sell agreement is a business contract most commonly entered into by individuals shareholders and the corporation. In simple terms, a buy-sell agreement is primarily used to restrict the transferability of the shareholder’s shares of stock in the corporation by providing for the purchase of the stock by the other shareholders or the corporation upon certain predetermined events (e.g., death of a shareholder, insolvency of a shareholder, disability, retirement, attempt by shareholder to sell stock to a third party). By limiting the transferability of stock, the corporation’s existing shareholders ensure that they remain in control and restrict the ability of third parties to obtain stock without their approval.
Whether a buy-sell agreement is needed by a corporation is something that must be evaluated on a case-by-case basis; however, below I’ve outlined three of the most commons reasons that shareholders decide to execute a buy-sell agreement.
(1) Continued Control. A buy-sell agreement can ensure that the existing shareholders of the corporation will be able to retain control and mangagement of the business despite various occurrences (death of a shareholder, insolvency of a shareholder, disability, retirement, attempt by shareholder to sell stock to a third party), which may otherwise affect the ownership and control of the corporation.
(2) Prevention of Conflicts by Beneficiaries. In the case of a death of a shareholder, a buy-sell agreement can potentially eliminate disputes between the remaining shareholders and the deceased shareholder’s beneficiaries regarding business decisions such as the issuance of dividends and expansion of the business.
(3) Resolution of Shareholder Disputes. If a major dispute occurs among the shareholders, a buy-sell agreement can provide for a forced buy-out or other procedures which may help facilitate the exit of the disguntled shareholder.