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Why Corporations Should Create Shareholder Buyout Agreements

When businesses are still in their early growth stages and everyone thinks they’ll remain together for many years, it may seem unnecessary to create shareholder buyout agreements. However, life revolves around constant change and often, one or more shareholders will likely move on at some point. When such events occur, it’s far better to have fully approved buyout agreements available than to suddenly wonder who your next shareholders will be – especially if you’re running a smaller close corporation.                                                                                          

Here are some of the more common reasons why shareholders often need to relinquish their stock, followed by suggested topics to address in a buyout agreement.         

Events that Often Trigger the Need to Buyout a Shareholder’s Stock

  • The individual decides to leave and may even want to start a new company;

  • A shareholder simply decides to retire from active involvement in company affairs and doesn’t wish to appoint a proxy holder to handle his/her future voting;

  • After a person’s marriage ends, s/he is ordered by a divorce court to turn over the stock to the ex-spouse;

  • Someone has to file for bankruptcy;

  • The shareholder may become seriously disabled, legally incapacitated to handle his/her own business affairs – or simply die;

  • A person may receive a very generous offer from another shareholder (or someone outside the company) to purchase the individual’s shares for a very high price.

 

Common Topics You May Want to Address in Your Corporation’s Buyout Agreement

  • There should be a clear statement indicating when a shareholder must sell his/her shares;

  • The agreement should indicate who has the first right to purchase the shareholder’s stock and what formula should be used to create a fair offer;

  • Under what circumstances, if any, an outside party should be given an opportunity to buyout the shares;

  • Although state laws can vary, many will allow you to include a “covenant not to compete” with the current corporation upon leaving. This is usually legal when the stockholder’s entire interest is being bought out;

  • When two parties each own 50% of the stock in a company, it’s very wise for each person to agree, in advance, to a “forced buy/sell” plan regarding stock upon leaving;

  • There should be a statement in the agreement that the party selling his/her shares must never disclose any proprietary information to other parties after selling the stock.

Possible Consequences of Not Creating Prepared Buyout Agreements in Advance

In general, it’s always best to do what’s necessary to discourage future lawsuits. If you’re tempted to avoid creating a standard corporate buyout agreement – mainly because you’re uncertain how to draft one in keeping with Georgia law, be sure to meet with your Peachtree City business attorney at your earliest convenience.

To obtain help with handling all of your Georgia business planning needs, please contact the Law Offices of Shane Smith today.  You can schedule your free initial consultation with a knowledgeable Peachtree City estate planning attorney by calling: (770) 487-8999.


Shane Smith
Advocate for the Seriously Injured in Georgia