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12 Things That Should Be in a Shareholders Agreement (But Often Aren't) [Part 2 Of 2]
In addition to the management provisions outlined in last week's column, you will also need provisions in your Shareholders' Agreement for an "exit strategy," allowing you to buy your partner out (or the other way around) in case things don't work out between you.
Here's a checklist of the most common buyout clauses, and some things to think about when discussing them with your business partner.
(7) A "Golden Rule" Buyout Clause. If the two of you are locking horns more than occasionally, it's probably a sign that the two of you were never meant to work together in the first place. A "golden rule" buyout clause allows you (assuming you're the one who wants to continue in the business) to make an offer to purchase the other's shares in the corporation for a price you consider fair. Your partner would then have a period of time (usually 30 days) to either accept your offer and agree to be bought out for the price you offered, or turn around and buy out your 50 percent stake in the corporation for the same price you offered him. Hence the name "golden rule" — your offer would be for a price you yourself would be willing to accept.
(8) A Buyout Provision In Case One of You Dies. When a shareholder dies, his shares in the corporation don't just disappear. They are an asset of his estate, and will pass to his heirs by will. If he dies intestate, then the intestate laws of your state will determine who gets his shares. Either way, you end up with the deceased's relatives as your business partners, and you don't want that. Make sure your shareholder's agreement includes a clause allowing you to buy out your partner's estate when he dies (and vice versa).
A common mistake: requiring the estate to sell ALL of your deceased partner's shares to you. Your partner will be upset that his estate won't be able to participate in the growth of the business after he dies, so consider a provision that would allow you to buy most, but not all, of his shares upon death (75 percent is customary), and convert the remaining shares into "nonvoting" shares so his heirs won't have the right to tell you how to manage the business.
(9) A Buyout Provision In Case One of You Becomes Disabled. Most people know they need a buyout provision in case a partner dies. It is much more likely, though, that a partner will become disabled at some point. Your shareholder's agreement should allow you to buy out your disabled partner if that happens.
(10) A Buyout Provision for "Involuntary Transfers." There are circumstances in which a partner's shares may be taken away from him without his consent — for example, if he files for bankruptcy. Make sure your shareholder's agreement allows you to repurchase any shares that were involuntarily transferred from your partner (not ALL of your partner's shares — that's a common drafting mistake).
(11) A Buyout Provision in Case One of You is Divorced. Once upon a time, if a partner divorced his spouse, his shares were not considered part of the marital estate because they were titled in his name. No longer. These days, judges have broad latitude to divide assets acquired during the marriage by either spouse pretty much any way they like to achieve a "fair and equitable" division of assets between the spouses. There's a good chance your partner's "ex" may end up owning a considerable number of shares.
Most people include "dissolution of a marriage" as part of the "involuntary transfer" buyout clause of the shareholder's agreement, but I think this deserves a special provision all its own. Make sure your partner's spouse (and your spouse) signs a "Spousal Consent" form agreeing that any shares he or she may receive in a divorce proceeding will be sold under the buyout clause.
(12) A "Withdrawing Partner" Buyout Clause. Lastly, don't forget to include a clause allowing you to buy your partner's shares in the corporation if he or she no longer wants to work in the business or is otherwise "not pulling his weight." The language here gets a bit tricky, but at the very least you should cover the following scenarios:
a) a partner announces his intent to retire or withdraw from the business to pursue another job opportunity;
b) a partner has an employment agreement with the corporation and the agreement terminates "with or without cause"; and
c) a partner fails to report to work for a period of X consecutive days.
And what should the purchase price be for all these different scenarios? See next week's column for the answer(s) . . .
Cliff Ennico (firstname.lastname@example.org) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.
COPYRIGHT 2008 CLIFFORD R. ENNICO.
DISTRIBUTED BY CREATORS SYNDICATE, INC.