Shareholder agreements should be executed whenever two or more people form a small corporation or a limited partnership. This agreement is also known as a shareholder buyout agreement or a buy/sell agreement.
It is imperative to have such an agreement as the terms laid out in the buy out agreement can help the owners of the corporation be prepared in case a shareholder wants out, dies, goes bankrupt or gets divorced. Buyout agreements can restrict a shareholder from selling or transferring shares when leaving the company.
Contents of a Buyout Agreement
Buyout agreements normally contain details about how and when shares can be bought or sold in a corporation. The main elements of the agreement are the price, funding of the buyout and the process for each possible scenario of the partnership. It could also include details of whether the shareholder leaving the corporation needs to be bought out; who can buy the stock of a departing shareholder – whether it should only be other shareholders, or anybody else; the price to be paid for the shareholder’s interest in partnering ownership in the corporation; and the events that may cause such a buyout.
Events to be Listed in the Shareholder Agreement
Listing out the events in stockholder buyout agreements can save a great deal of hassle when the event actually takes place. This is done not with fore-knowledge, but as a precautionary measure. Typically, a shareholder’s interest is bought out due to one of the many causes that could include retirement of a shareholder, an outside offer for the purchase a shareholder’s interest in the company that is too attractive to resist, foreclosure of a debt due to a shareholder’s stock, a divorce settlement entitling the spouse to all the shareholder’s stocks in the corporation, death of the shareholder, or personal bankruptcy.
Some agreements require the terminated employee to sell their interest back to the corporation. This is done to restrict access to private and confidential information of the company, which, otherwise, he would have access to even though not a part of the company.
The terms laid out in this agreement should clearly spell out what needs be done in case of each event, if it takes place.
Why Do Companies Issue Stock?
So why do companies issue stock? The primary reason for a company issuing stocks is to raise funds to expand business operations. These stocks can be bought by investors in the stock exchange market. How does a company go public? This is exactly how – by issuing stock. While information about when, why, how and who can issue stock may not necessarily be a part of the buyout agreement, events pertaining to shareholders’ interests could be triggered as a result of a stock issue.
Why You Need a Shareholder Agreement
A key investing advice that a person can receive is never to sign a deal in a corporation without having read the buy/sell agreement. If you are one of the co-founding owners of the company, you need to have it in writing as to what happens if one of the owners decides to call it quits. These things happen without warning; but, the corporation can always be prepared. Planning ahead is the most important aspect in forming a corporation.
Why cry over spilt milk when you can prevent the milk from spilling in the first place? If you’re looking for sound advice on the topic it’s just this: Never underestimate the value of buyout agreements.