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Business Law Basics: Buy-Sell Agreements

by Joseph R. Harvath, Associate

A buy-sell agreement is an agreement that governs the sale of stock in a corporation.  The agreement can come in many different forms, and it may be limited or fairly general in scope. Examples of the different types of buy-sell agreements include the following: agreements that merely limit the power of a shareholder to sell stock with consent of the board of directors or other shareholders; agreements that allow other shareholders to purchase stock or provide a right of first refusal; and agreements that impose a duty on shareholders to buy the stock of any shareholder who dies, is adjudicated incompetent, or retires or otherwise withdraws from the business.

Buy-sell agreements are useful for many different situations and can provide value for different types of business organizations.  For a professional or S corporation, the buy-sell agreement ensures that the stock of the departing shareholder does not transfer to a party or individual that, by law, cannot own the shares. The buy-sell agreement also provides continuity when facing the departure of a shareholder, especially in the context of businesses with a small number of investors or officers, where the departure of one shareholder can affect a significant part of the overall management and ownership of the business.  Continuity also allows for businesses and shareholders to structure transfers with tax consequences in mind. Additionally, buy-sell agreements can provide liquidity for a shareholder of a closely held corporation, protect the “S” election of a corporation, and establish the value of the shares for estate tax purposes. 

Any business large enough to have employees needs to have a well drafted buy-sell agreement. Creation of a buy-sell agreement forces the business’ ownership to assess the current state of the business, as well as consider what can happen to the business in the near and long-term future.  Without a buy-sell agreement, transfer of business interests can become contentious, resulting in expensive and lengthy litigation.  Should a disagreement result in litigation, evidentiary hurdles, such as the Statute of Frauds and Dead Man’s Act, may prevent shareholders from introducing evidence supporting informally agreed upon transfers.  A carefully drafted and well written buy-sell agreement will ensure that ownership interests transfer in the intended manner, providing continuity and predictability.

Joseph Harvath is an associate in the Belleville and Edwardsville office.  He specializes his practice in estate planning, taxation and business law.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.

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