Choosing The Right Type Of Buy-Sell Agreement For Your Business
By : John L . Egloff - RBE Partner
Consider the following scenarios –
Scenario 1 : Mary , Mark , and Melinda are the sole owners of Acme Widget Company , Inc ., an S-Corporation , with each of them owning 1,000 shares of stock . Unfortunately , Mark decides to file for divorce from his wife , Marjorie , with whom he ’ s always had a very difficult relationship . At the conclusion of their bitterly contested divorce proceedings , the court awards Marjorie onehalf of Mark ’ s shares in Acme .
Scenario 2 : Once again , Mary , Mark , and Melinda are the sole owners of Acme Widget Company , Inc ., with each of them owning 1,000 shares of stock . One morning , Mary and Melinda are saddened to learn that Mark had died of a heart attack during the night . A few weeks later , Mary and Melinda are even more distressed to learn that , in his will , Mark had left his shares of stock in Acme to scores of family members , friends , and charities .
In Scenario 1 , the original owners have suddenly found themselves saddled with a new and potentially very hostile “ partner .” In Scenario 2 , the multitude of new Acme shareholders will not only create a management nightmare , but may also result in the loss of Acme ’ s S-Corporation status and trigger certain securities law obligations .
Of course , many other such scenarios are also possible . For example , an owner ’ s shares could be seized by the IRS or some other creditor in a judicial proceeding , or an owner could simply decide to sell or give away some or all of his shares during his lifetime .
The examples above illustrate the reasons why closely-held businesses should take steps to restrict the ability of their owners to transfer their shares to persons outside of the existing ownership group , whether voluntarily or involuntarily . Our December 2020 article [“ Does My Business Need ( Or Need to Update ) A Buy-Sell Agreement ?”] provided an overview of the basic elements of buy-sell agreements . Now let ’ s take a closer look at the three most common varieties of these agreements and their respective advantages and disadvantages .
4
Riley Bennett Egloff LLP - July 2021