A lot of confusion exists regarding what exactly a shareholder buyout is. Many believe it involves the sale of stock or ownership interest. In reality, nothing could be further from the truth. In fact, a shareholder buyout agreement itself is a tool used to prevent the unauthorized or unfavorable sale of your company’s stock. If you work with others in either a general or corporate partnership, you may want to seriously consider putting such an agreement in place before it is too late.
What is It?
Rather than being an agreement available to outside parties to buy into the ownership of your company, a shareholder buyout agreement is an accord strictly between your ownership to help you retain your controlling interest. If one of your partners or investors chooses to or is forced to leave his or her role, such an agreement prevents him or her selling it to anyone else or simply having it up for grabs. Instead, you and the remaining shareholders get to determine whether you will use it to issue another round of stock sales, or simply buy the shares outright and strengthen each of your own individual ownership stakes. A number of different voluntary and involuntary events can trigger the need for a shareholder buyout. In many instances, your partner may simply decide to liquidate his or her business assets and retire. He or she may also be facing bankruptcy, for which capital may be needed to pay off debts. A violation of company policies or corporate bylaws that results in a partner’s termination would also likely warrant a buyout. However, other unforeseeable events may also serve to force your partner into selling his or her shares. These may include:
So why would you need a buyout clause in place? After all, the sale of a departing partner’s ownership shares will still result in money coming back to your company, right? In this case, this is truly a situation where it’s about more than just the money.
When You May Need It
Imagine if a partner has professional contact outside of you and your other shareholder’s sphere of influence. If he or she hold a majority stake in your company and chooses to sell to this party, you’re suddenly left answering to an outsider with whom you have no familiarity, and who holds no particular loyalty to you. What if your partner dies and his or her ownership is transferred to a beneficiary who has little experience in your industry? Each of these potential scenarios highlights the need to be proactive in protecting your company’s ownership.
When to Create it
Just how proactive do you need to be? The best time to set the terms for a shareholder buyout is before ever formally forming a business partnership. This allows you complete and total freedom to create your own standards for such an agreement, such as what events can trigger a buyout clause, how one’s individual ownership stake will be valued, and what the rate per share may be. You may also choose to avoid the need for a buyout altogether through stating that ownership will automatically be retained by shareholders if a departing partner is fired. In some cases, you may choose to allow your partner some flexibility in selling his or her shares, but only to parties you approve of. Including a shareholder buyout agreement in your initial business formation also allows you to simply extend the same terms to any future partners you bring in. Yet if you failed to create one at the time, that doesn’t mean you can’t still choose to implement one now. You will have to have current shareholder approval to do so, however. You and/or your partners have worked very hard to get your company where it currently is; why risk losing controlling interest to another? By placing a shareholder buyout agreement in place, you retain the right to determine the future of your company by ensuring that an ownership stake does not fall into the wrong hands.
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