What are Buy-Sell Agreements?
A Buy-sell agreements is an agreement between owners of a business that limits their ability to buy or sell an interest in the subject business. Generally, the document limits the ability of a shareholder to sell her interest in the business without meeting certain conditions. For example, the agreement may require the shareholder to offer her shares for sell to the business before offering it to other shareholders or third parties. It may also restrict the sale to either the corporation or existing shareholders. The Buy-Sell agreement also establishes a method for valuing the shares to be purchased from the exiting shareholder. Generally, it will provide some formula for valuation or prescribe a procedure for obtaining a binding valuation. It may also determine the method or terms for paying for the purchased shares.
The purpose of the buy-sell agreement is to maintain control over the outstanding shares. It generally makes certain that the corporation remains closely held by a limited number of potential shareholders. The agreement generally applies to any situation in which a shareholder leaves the corporation, dies, files for bankruptcy, gets a divorce, becomes mentally incapacitated, is discharged from the corporation’s employment, etc.