Shareholder Agreements: Buy-Sell Provisions
Just as Operating Agreements govern the relationship among members of limited liability companies, Shareholder Agreements govern the relationship among shareholders of corporations. Among the more important matters a Shareholder Agreement can and should address is how decisions are made and how to address deadlocks, particularly when the shares are held evenly between two parties. Typically directors of a corporation make the decisions for the corporation (such as whom to hire, whether to borrow money, and whether to sell stock of the company), however shareholders can be given approval rights over such matters. Further, when shares are owned equally (50/50) between shareholders typically each shareholder has the right to name one board director, and thus deadlocks can and likely will occur on the board level. While there is usually no perfect way to address deadlocks, various approaches are:
1) Agreeing that some trusted third party will break the deadlock; or
2) Providing for a right of buy-out, whereby one shareholder can force a buy-out of his or her shares. For instance, either shareholder can be granted the right to demand his or her stock be purchased by the other shareholder at whatever price the demanding shareholder selects. The other shareholder would then have to either (i) buy the shares at that price, or (ii) sell his or her shares to the demanding shareholder at that price.
Other options might also be available for a corporation, depending on the circumstances particular to the corporation.
If you would like to know more about Shareholder Agreements or buy-sell provisions, please contact Stephen Goldstein at email@example.com, or at (212) 586-5555.