Important company documents often overlooked are Buy-Sell and Shareholder Agreements (referenced as the “Agreements”). These are legally binding documents that provide for the orderly transition of a company or company interest(s). Often these Agreements are used interchangeably; however, a Shareholder Agreement[1] explicitly defines the roles of each shareholder and their responsibilities to each other and the company. It protects the rights of existing shareholders/owners and outlines their decisions on what outside parties may become future shareholders/owners. By having such an Agreement in place, shareholders/owners will be able to ensure that they are all aware of the direction of the company. With everyone in agreement, the company is more likely to maintain a stable ownership interest and operate effectively. When a company lacks a plan for succession, significant expense, delay, and a disruption of company operations and profits may result.

[1] A Shareholder Agreement may contain provisions of a buy-sell agreement.

Shareholder vs. Buy-Sell Agreement

Unlike the Shareholder Agreement, a Buy-Sell Agreement strictly deals with the transfer of ownership interests of the company; it includes provisions relative to the agreed upon handling of the transfer of ownership upon the occurrence of certain “triggering events” such as death, divorce, disability, or departure. This document allows shareholders/owners to plan for one of these triggering events before it inevitably occurs. Not only is it essential to have such a document in place, but it is of equal importance to review this document every few years to adjust for changes in the practice such as growth, changes in value, etc. If an Agreement is in place, the terms of said agreement will be executed even if it is old and outdated. If no Agreement is in place, then there is no plan to preserve the rights of the surviving owners or the continuation of the company. Although it is best to have these agreements formed at the inception of the company, a Buy-Sell or Shareholder Agreement may be put into effect at any time to protect the interests of those that have dedicated themselves to the success of the company.

What Goes Into an Effective Agreement?

An effective Buy-Sell Agreement should include provisions addressing the valuation of the ownership interests or the circumstances in which a company may dispose of an ownership interest(s), though it is ultimately at the owners’/shareholders’ discretion to tailor the agreement to their expectations. Another consideration is whether owners/shareholders will have the option to buy an exiting owners’/shareholders’ interest prior to it being sold to an outside party. With this provision, ownership interests in the company can be better managed by existing owners/shareholders. This protects the company from a break in management or voting control, which can potentially lead to needless expenses or even the collapse of the company.

Shareholders of a company founded on years of hard work, dedicated time, and invested capital will greatly benefit from implementing or reviewing either of these agreements. The expense of planning ahead and establishing these documents are minimal compared to the potential costs – both monetarily and structurally – associated with litigation resulting from ownership disputes. A well thought out Buy-Sell or a Shareholder Agreement will help mitigate problems before they occur and save countless hours of time and capital.

In Summary

If you would like a review of your current Buy-Sell Agreement and/or Shareholder Agreement or would like to discuss putting one in place, please contact us at 401-921-2000 or complete our online contact form.