As a shareholder in a closely held company, you have every reason to want to protect your interests. Since the shares in a closely held company are privately owned, your financial welfare may depend on your agreement with other investors about the fate of those shares if certain contingencies should arise.
It is not logical to believe the company or its shareholders will go on forever, and having a plan in place that covers many plausible possibilities is a wise move. A buyout agreement is one critical plan you and your fellow shareholders can consider.
Why do I need a shareholder buyout agreement?
A buyout agreement outlines the company's rights and obligations if the shares of an individual are at risk. Since a closely held corporation wants to keep its shares privately owned, it makes sense to limit those who would have access to them. There are numerous reasons why shareholders in a closely held company may face the need to consider a buyout of another shareholder's interests, for example:
- To obligate the ex-spouse of a shareholder to sell to the company any shares acquired during a divorce settlement
- To protect the shares from distribution to heirs if the shareholder should pass away
- To protect the shares from creditors if a shareholder should file for bankruptcy
- To reacquire the shares if the shareholder decides to retire from the company
- To compel the estate of a shareholder to sell the shares back to the company if doctors determine the shareholder is permanently incapacitated
Shareholders of your company are privy to private information about the business and its profits. Your company may include in its buyback agreement the requirement that any employees who are shareholders of the company must sell their shares back to the business if they are terminated from employment. In this way, you will also prevent that employee from retaining access to that privileged information.
Ironing out the details
A shareholder buyout agreement must answer any critical questions about situations that may place shares at risk of falling into the wrong hands, for example:
- Limiting who can purchase or own shares
- Deciding if the company will be obligated to buyout a shareholder under any of the above circumstances
- Agreeing on the value of the shares
- Determining how to pay for the buyout
Some options for funding the buyout include paying on installments from the company's profits or purchasing insurance policies to cover the cost of a buyout for each shareholder. To ensure your buyout agreement or any other contracts comply with federal and Ohio laws, you would do well to enlist the assistance of an experienced business attorney.