| p>Buy-sell agreements are designed to accomplish | | | | the valuation in cases of termination, particularly for |
| one or more of the following objectives from one or | | | | cause. |
| more of several viewpoints: the corporation, the | | | | R - Retires. The retirement of an |
| employee-shareholder, the non-employee shareholder, | | | | employee-shareholder creates a potential divergence |
| and any remaining shareholders. The buy-sell | | | | of interests between the shareholder and the |
| agreement provides for what happens to the shares | | | | corporation. |
| of owners who leave, for whatever reason, whether | | | | - The shareholder may desire current liquidity over the |
| favorable or unfavorable. | | | | uncertain future performance of the corporation. |
| From the corporation's viewpoint, the agreement may | | | | - The corporation may desire not to have potential |
| prevent the departing shareholder from retaining his | | | | interference or disagreement with corporate policy, or |
| shares. By requiring a departing shareholder to sell his | | | | to have the retired shareholder benefit from future |
| or her shares to the corporation, the corporation and | | | | appreciation in value. |
| remaining shareholders eliminate any potential for | | | | - Further, the corporation and the remaining |
| conflict over future corporate policies with the | | | | shareholders likely do not want a retired employee to |
| departed shareholder. They also eliminate the potential | | | | continue to benefit from their ongoing efforts. |
| for the departed shareholder to benefit from future | | | | D - Disabled. After a defined period of time, the |
| success of the business created by the remaining | | | | corporation may have the right (from its viewpoint) or |
| shareholders. Finally, the agreements prevent a | | | | the obligation (perhaps, from the employee's viewpoint) |
| shareholder (or his or her estate) from selling shares to | | | | to purchase the disabled employee's shares. If disability |
| "undesirable" parties, enabling the remaining | | | | is a trigger event, it is essential to have a clear |
| shareholders to decide who the next shareholder will | | | | definition of what "disability" means. |
| be, if any. These reasons for buy-sell provisions apply | | | | D - Dies. The death of a shareholder creates issues |
| to virtually all trigger events. | | | | that are often resolved by buy-sell agreements. |
| We use "QFRDD" to denote common trigger events | | | | If a shareholder dies owning a minority interest in a |
| for buy-sell agreements. | | | | corporation for which there is no market for its shares, |
| If you think about the events suggested by QFRDD, | | | | the illiquidity of the stock can create estate tax issues. |
| none of them are very pleasant to talk about, | | | | - The shares must be valued for estate tax purposes, |
| particularly to a group of shareholders who may have | | | | and the appraisal amount will add to the estate's value. |
| just come together for a common business purpose. In | | | | - To the extent that the estate is taxable, there may |
| fact, circumstances could be such that the shareholder | | | | be no liquidity to pay the estate taxes. |
| most affected by a trigger event has a proverbial gun | | | | - Buy-sell agreements provide a mechanism for |
| to his or her head. In the alternative, the company may | | | | determining the value of shares for estate tax |
| perceive that it has a gun to its head in order to fulfill | | | | purposes and for monetizing that value for the estate, |
| the repurchase requirements of an agreement. | | | | generally in cash or in a term note. |
| Think of QFRDD to remember. | | | | - Therefore, the shareholder's estate realizes liquidity |
| Q - Quits. A buy-sell agreement may provide a | | | | and can pay taxes due and does not face the |
| mechanism for shareholders who leave a business to | | | | combination of uncertainty of independent valuation |
| sell their shares to the corporation or other | | | | and the certainty of payment of taxes in the absence |
| shareholders. Shareholders may quit under a variety of | | | | of liquidity. |
| scenarios, some of which are more favorable to the | | | | - From the corporation's viewpoint, the agreement |
| corporation and other shareholders than others. The | | | | eliminates the need to address uncertain ownership |
| circumstances of quitting may determine how the | | | | dictated by the deceased shareholder's will and can |
| departing shareholder is treated under the terms of the | | | | create the requirement for funding. |
| agreement. | | | | If the parties agree, buy-sell agreements also operate |
| - Favorable circumstances. A shareholder may decide | | | | in the event of the divorce, declaration of insolvency, or |
| to leave a company to pursue other interests that are | | | | bankruptcy of one or more shareholders (or even the |
| not competitive with the activities of the company. | | | | corporation). In the event of the divorce of an |
| Assuming the ability to fund the purchase, the | | | | employee-shareholder, the buy-sell agreement will |
| company and remaining shareholders are likely to view | | | | most likely be designed to prevent the non-employee |
| such a departure on favorable terms. | | | | spouse from realizing any ownership in the stock of |
| - Unfavorable circumstances. Alternatively, a | | | | the corporation. If an employee declares bankruptcy or |
| shareholder may decide to leave a company and to | | | | becomes insolvent, the corporation may exercise its |
| pursue competitive activities. Under such | | | | right to purchase the shares to prevent their dispersion |
| circumstances, the company and remaining | | | | to creditors. |
| shareholders may be reluctant to pay full price | | | | It should be clear from the above that buy-sell |
| (whatever that means - to be determined as we | | | | agreements can be favorable from the viewpoints of |
| proceed) and desire to stretch out payment as long as | | | | employee-shareholders, non-employee shareholders, |
| possible. After all, no one wants to finance a | | | | the corporation, and any remaining shareholders in |
| competitor! | | | | many diverse situations. The emphasis is on "can be" |
| F - Is Fired. When an employee-shareholder is | | | | because the operation of an agreement can go awry |
| terminated, most corporations desire to retain control | | | | despite the best intentions of its creators. |
| over the shares. | | | | In conclusion, buy-sell agreements are designed to |
| - Terminations generally result in diverse, or more likely, | | | | provide objective means of transferring ownership in |
| adverse interests between the fired shareholder, the | | | | controlled and pre-determined ways under specified |
| corporation, and remaining shareholders. | | | | circumstances that may be difficult. |
| - From the employee's viewpoint, the agreement | | | | - In the absence of a workable agreement, the |
| assures that his or her shares can be sold at the | | | | remaining shareholders and the corporation may be |
| buy-sell price and creates a market for the shares. | | | | placed in the unenviable position of negotiating under |
| - From the corporation's viewpoint, buy-sell | | | | adverse circumstances with former friends, their |
| agreements create the right, or the obligation, to | | | | families, or their estates. |
| purchase the departing employee-shareholder's shares. | | | | - Such negotiations, which would occur after the |
| - They also eliminate the potential for the terminated | | | | interests of the parties have diverged, are difficult, |
| shareholder to benefit from any future success of the | | | | fraught with uncertainty, and often lead to litigation. |
| business created by the remaining employees and | | | | Workable buy-sell agreements are the cure for the |
| shareholders. Some agreements call for a penalty to | | | | potential problems enumerated above. |