There is no more important document to business owners than a buy-sell agreement, which provides for the purchase of shares by the corporation – a redemption agreement – or by the other shareholder or shareholders. The buy-sell agreement can provide for the purchase and sale of the shares owned by one shareholder in the event of the termination of employment, retirement, disability, death, or involuntary transfers such as divorce, bankruptcy, insolvency, or legal disability. With a buy-sell agreement in place, shareholders can be certain their value in the corporation will be realized in the event a shareholder leaves the business and the remaining shareholders will continue to operate the business without interference from shareholders who are not involved in the business.
In addition to describing the circumstances under which the shares of one owner will be purchased by the corporation or the other shareholders, a comprehensive buy-sell agreement must state the value to be paid for the shares, or prescribe a formula for the determination of the value of the shares in the event the parties fail to update either the value or the formula.
It is important that the share value in the buy-sell agreement be updated regularly by the corporation and the shareholder. If the shareholders and the corporation regularly determine and memorialize the value, the parties can rest easy knowing that the amount they will pay or receive upon a triggering event will be the agreed-upon value, no more and no less. Moreover, if litigation results, shareholders can be confident the value as they determined it will be enforced, and that courts will not substitute their judgment for that of the shareholders. Conversely, if shareholders do not memorialize oral agreements to change values, courts may be unwilling to acknowledge that a modification of the agreed value was in fact made by the parties.
There are numerous court cases that have considered disputes between shareholders who had entered into buy-sell agreements but failed to update the value. Most of these courts are extremely reluctant to interfere with the value of shares agreed between shareholders. As one court put it: “. . . when an agreement for the redemption of the stock has been entered into without fraud, misleading, or overreaching, that agreement will prevail and there is no duty on the part of the other shareholders to revise, update, or change the redemption price in the absence of an agreement to do so.”
Thinadequacy of the consideration they have named in an unequivocal or unambiguous stock-redemption agreement. . . It is not the function of the court to rewrite a contract according to its [the court’s] notions of fairness.”
A substantial part of our practice is devoted to the representation of corporations and their shareholders, including the drafting of buy-sell agreements. If you have any questions regarding your buy-sell agreement or the regular update by the shareholders of the amount referenced in the agreement, we encourage you to telephone the attorney with whom you regularly work.