27 Feb Shareholder Agreement Triggers
When you craft your buy-sell agreement, there are basic boiler-plate inclusions which should not be ignored which will trigger one party’s right or obligation to buyout another party under the agreement. Some of the worst litigation occurs when buy-sell agreements were not crafted or crafted poorly when businesses first started. The following are some of the standard triggers which will result in a buyout of one or more of the company founders.
- Disability or death of the owner. If the owner becomes incapacitated and cannot fulfill the duties of his/her job, then usually the best option is a buyout of stock. This option helps to mitigate risk and pass on stock value to the estate in the event of untimely death. There are numerous ways to structure death and disability trigger options in buy-sell agreements all of which can be fulfilled or supplemented using some form of life insurance.
- Divorce of the owner. Without a buyout trigger, the divorce of an owner can put the company’s longevity at risk, especially if a vindictive spouse feels the need to relinquish rights in the company. It’s best to avoid drama and require a buyout trigger in the event of spousal divorce.
- Personal bankruptcy of the owner entrepreneur. Similar to divorce, getting the company–which is generally a separate entity–tied up in complex divorce procedings can not only mean a waste of time for company management, but also can creat uncertainty for company management over particular voting rights of company stock. Buyout rights effectively neutralize any potential actions against on the part of other third parties in the case of divorce and bankruptcy.
- Owner expulsion. Kicking out an owner is almost always difficult to discuss and resolve, but like a tree, it often requires removing one of the branches so the tree might survive. There is no limit to the opportunity given to a great owner-employee, but one bad apple can spoil the entire business and its profitable cash flow. Triggers like this are generally structured to include super-high majority from all voting blocks of stock. This usually means north of 75% must agree someone needs voted off the island.
- Cash out and/or retirement of an owner. Owner retirement at the time of business sale represents a huge part of what we do and perhaps the most common reason for exit from profitable business deals.
Performing owner buyouts will remain a significant aspect for business owners in various fields over the coming decade as millions of baby boomers look to sell companies. Buyouts can be as complex as you would like to make them based on the individual needs of the respective corporations. Funding owner buyouts in your organization can also prove difficult.