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Corporate Buy-Sell Agreements

Michigan law requires corporations to have certain basic governance documents. Documents such as Articles of Incorporation and Bylaws dictate the relationships, rights, duties and responsibilities of the shareholders, officers and directors of the corporation. But these standard corporate documents do not typically contain terms for the liquidation of one or more owner’s interest when circumstances call for such a liquidation.

In the context of most publicly traded companies, shareholders have a fairly simple way to divorce themselves from the corporation when they are dissatisfied with the management of the business or other corporate matters; they merely sell their stock on the open market and get on with their lives. Things are not so easy for disgruntled shareholders of a privately held corporation. Without a readily ascertainable fair market value for their shares, or an easily identifiable market on which to sell them, shareholders of private corporations have limited options for getting out. This is why it may be advisable for the owners of privately held corporations to execute a Shareholder Agreement, commonly known as a Buy-Sell Agreement.

A well thought out and properly drafted Buy-Sell Agreement can address potential conflicts before they arise, and can cut off disputes that often come up during the course of a business’ life-cycle before such disputes occur.

With many privately held corporations, the primary means by which an owner realizes a return on investment is via wages as an employee of the business. If an owner’s employment is terminated by the corporation (by virtue of the other shareholder(s)), the terminated owner is left in a bad situation; there is a limited market, if any, to sell the stock of the private corporation. And without a salary from the business, the terminated owner has no way to access the value of his/her investment in the corporation. Depending on the circumstances, and the applicable local laws, the terminated owner may be successful in a lawsuit for minority shareholder oppression, but a more peaceful, non-litigious resolution is probably much more likely if there is a Buy-Sell Agreement in place. The Agreement could mandate that the corporation, or the other shareholders, purchase the stock of an owner whose employment is terminated involuntarily. The method for determining the purchase price and other terms of such a sale should be clearly articulated in the Agreement to avoid any disputes about who has what rights in this situation.

An involuntary termination of employment is only one of many “triggering events” to consider when contemplating a Buy-Sell Agreement. Other possible triggering events include voluntary terminations, the death of a shareholder, or any other events over which the owners have concerns. Do the shareholders want to allow one owner to quit employment but still enjoy the growth and investment in the business? Do the owners want to be business partners with the spouse of a deceased shareholder? Does the spouse of a deceased shareholder want to be the owner of a business he or she knows nothing about, or would they rather cash out and take the money?

Penzien & McBride can create a customized Buy-Sell Agreement to address the specific needs of your Michigan corporation. These agreements can also be created for Michigan business entities other than corporations, such as limited liability companies (LLC’s) and partnerships. If you would like to talk to a Penzien & McBride attorney about a Buy-Sell Agreement, or other corporate matters, please contact us at (586) 690-4400 or visit our contact page.