Buy-Out Provisions

Corporate Law Attorneys Serving the New York Area and Beyond

When an officer of a business leaves a company, the business may be thrown into turmoil. In some cases, the officer may sell his or her shares to someone with whom the other officers do not want to work. This departure and the addition of new and potentially unwelcome people into the business operations can significantly and adversely affect the business' objectives. A buy-out provision or agreement (also known as a buy-sell agreement) can be used in corporations, limited liability companies, and partnerships to limit some of the chaos that results when an officer leaves. These provisions or agreements can limit a shareholder's ability to sell or transfer shares upon leaving the company. Unfortunately, buy-out provisions are not always well written, and the failure to have a sound buy-out provision can lead to trouble, including the possibility of expensive litigation. Consult the New York corporate law lawyers at Klapper & Fass to help you draft a strong agreement.

Drafting a Buy-Out Provision

Buy-out provisions or agreements do not define the terms of a company's sale or purchase, but instead they constitute contracts between a company's shareholders. A buy-out provision can specify whether the company has an obligation to buy out a shareholder who has decided to leave. It can also provide for shareholder actions when a shareholder dies, such as whether and how the other shareholders can buy out the decedent. These provisions may be a separate buy-out agreement, but they also can be included in bylaws or articles of incorporation.

The provisions or agreements will protect the remaining shareholders from possible complications associated with the departing shareholder's will or trust, or his or her decision to sell shares. For example, they can stop an unwanted buyer from gaining an interest in or control of the company, and they can determine how a shareholder can release his or her ownership interest. Buy-out provisions or agreements should also specify which events trigger them, such as death, decision to leave, personal bankruptcy, retirement, divorce, or disability. In some cases, when an officer with a share is terminated, the buy-out provision specifies that the terminated employee's shares must be sold back to the company.

A company that wants to buy out a shareholder must be able to pay for that shareholder's ownership interest. In some cases, the buy-out provision can provide that business income or assets can be used to pay for this buy-out over time, while in other cases, insurance policies for the shareholder can be used to buy out an interest.

A failure to put buy-out provisions into corporate agreements can result in strife. If a shareholder dies, his or her relatives may be stuck with participating in the business, or co-owners may be stuck working with someone with whom they would never have chosen to go into business. If the shareholder suffers personal bankruptcy, the remaining shareholders may need to work with a bankruptcy trustee or creditor.

Explore Your Options with a Corporate Law Lawyer in New York

When you start a business, you may not be overly concerned with what will happen to your and your partners' ownership interests in case of significant adverse events like bankruptcy, death, or disability. However, failing to address the possibility of these events can result in disruption to your business down the line. Our New York corporate law attorneys can draft strong buy-out provisions as appropriate. We practice from offices in White Plains and Manhattan, and we serve the five boroughs of New York City, as well as Nassau, Rockland, Suffolk, and Westchester Counties. Our offices also provide legal representation in Illinois, Texas, California, Pennsylvania, and other states nationwide. Contact us through our online form or call us at 914.287.6466 for a free consultation with a corporate law or business litigation attorney.