Corporate Buy-Sell Agreement

Corporate Buy-Sell Agreement

Agreement Date: [__/__/____]
Company: [________________________________], a [________________________________] corporation (the "Corporation")
Shareholders: The individuals and entities identified on Schedule A hereto (each, a "Shareholder")

Recitals

WHEREAS, the Shareholders collectively own all [or a majority] of the issued and outstanding shares of capital stock of the Corporation, and desire to establish an orderly mechanism for the transfer of shares in the event of death, disability, divorce, bankruptcy, termination, or other triggering events;

WHEREAS, the parties desire to prevent shares of the Corporation from passing to persons who are not parties to this Agreement or who are unacceptable as co-shareholders, and to ensure business continuity;

WHEREAS, the parties intend to structure this Agreement as a [☐ Cross-Purchase Agreement / ☐ Entity Redemption Agreement / ☐ Hybrid (Wait-and-See) Agreement] as described in Article 2;

WHEREAS, the parties intend to fund certain obligations under this Agreement with life insurance and/or disability buyout insurance as described in Article 7;

NOW, THEREFORE, in consideration of the mutual covenants herein and other good and valuable consideration, the parties agree as follows:

Article 1 – Definitions

"Agreed Value" means the value of shares as agreed upon by all Shareholders and the Corporation, as set forth in Schedule B (updated annually).

"Appraised Value" means the value determined pursuant to the appraisal process in Article 5.

"Buyout Price" means the price per share determined pursuant to Article 5.

"Cause" means (a) conviction of a felony; (b) willful misconduct materially harmful to the Corporation; (c) material breach of this Agreement or the Shareholder's employment or service agreement not cured within 30 days; or (d) breach of fiduciary duty.

"Disability" means a physical or mental condition that renders a Shareholder unable to perform the material duties of their position for a period of [90] consecutive days or [180] days in any 12-month period, as certified by a licensed physician agreed upon by the parties (or, if they cannot agree, appointed by the American Arbitration Association).

"Fair Market Value" means the price at which shares would change hands between a willing buyer and a willing seller, neither being under compulsion to buy or sell and both having reasonable knowledge of relevant facts, determined without minority discount or lack-of-marketability discount (unless otherwise agreed).

"Involuntary Transfer" means any transfer by operation of law, including upon bankruptcy, insolvency, divorce, attachment, or execution by creditors.

"Permitted Transfer" means a transfer to a trust or entity for estate planning purposes, as described in Section 3.5.

"Transfer" means any direct or indirect sale, assignment, gift, pledge, hypothecation, or other disposition of shares, whether voluntary or involuntary.

"Triggering Event" means any of the events described in Article 3.

Article 2 – Agreement Structure

The parties hereby elect the following structure for this Buy-Sell Agreement:

☐ Cross-Purchase Agreement: Upon a Triggering Event, the remaining Shareholders shall purchase the Departing Shareholder's shares. Each Shareholder shall own life insurance policies on the lives of the other Shareholders.

Advantages: Surviving shareholders receive a step-up in tax basis; avoids corporate-level AMT issues; straightforward for two-shareholder companies.

☐ Entity Redemption Agreement: Upon a Triggering Event, the Corporation shall purchase (redeem) the Departing Shareholder's shares. The Corporation shall own life insurance policies on each Shareholder.

Advantages: Simpler for multiple-shareholder companies; corporation bears the financial burden; insurance proceeds go directly to fund the redemption.

☐ Hybrid / Wait-and-See Agreement: The Corporation has the first option to purchase the Departing Shareholder's shares; if the Corporation declines or is restricted by DGCL § 160, the remaining Shareholders shall purchase. The parties may elect cross-purchase or entity redemption at the time of the Triggering Event.

Article 3 – Triggering Events

3.1 Triggering Events Table

3.2 Death

Upon the death of a Shareholder, the Corporation (and/or the remaining Shareholders, as applicable) shall purchase all shares owned by the deceased Shareholder at the Buyout Price within [90] days after (a) the date of death, (b) the appointment of the executor or administrator of the estate, or (c) the probate of the will, whichever occurs later.

3.3 Disability

Upon the permanent Disability of a Shareholder (as certified pursuant to the definition above), the Corporation (and/or remaining Shareholders) shall have the [option / obligation] to purchase all shares held by the Disabled Shareholder within [90] days after such determination of Disability becomes final and uncontested.

3.4 Voluntary Transfer

Before any Shareholder may transfer any shares to a third party, such Shareholder must first offer the Corporation and the remaining Shareholders a right of first refusal in accordance with Article 4.

3.5 Permitted Transfers

The following transfers shall not constitute Triggering Events, provided the transferee executes a written counterpart to this Agreement agreeing to be bound by its terms:
(a) Transfer to a revocable trust of which the Shareholder is the primary beneficiary and trustee;
(b) Transfer to a wholly-owned family limited partnership or LLC for estate planning;
(c) Transfer by will or intestacy upon the Shareholder's death (subject to the provisions of Section 3.2).

Article 4 – Right of First Refusal

4.1 Transfer Notice

Before any voluntary transfer to a third party, the Selling Shareholder must deliver a written Transfer Notice to the Corporation and all other Shareholders, specifying the identity of the proposed transferee, the number of shares, the price per share, and all other material terms.

4.2 Corporation Option (First Priority)

The Corporation shall have [30] days after receipt of the Transfer Notice to elect to purchase all (or, with Selling Shareholder consent, less than all) of the offered shares at the Buyout Price.

4.3 Shareholder Option (Second Priority)

If the Corporation declines or is unable to purchase (due to DGCL § 160 restrictions), the remaining Shareholders shall have an additional [20] days to elect to purchase the offered shares pro rata (based on their relative ownership percentages).

4.4 Third-Party Sale

If neither the Corporation nor the remaining Shareholders exercise their ROFR, the Selling Shareholder may sell the offered shares to the identified third party on the same terms within [90] days, provided such third party executes a counterpart to this Agreement.

Article 5 – Valuation and Buyout Price

5.1 Valuation Methodology

The parties shall use the following method to determine the Buyout Price (select one; or see Section 5.4 for sequential approach):

☐ Method 1 – Agreed Value (Fixed Price)
The Buyout Price shall be the per-share Agreed Value as set forth in Schedule B, which the parties agree to update on or before [January 1] of each year by mutual written agreement. If the parties fail to update Schedule B within any 12-month period, the most recent Agreed Value shall be adjusted by the percentage change in the [Consumer Price Index / prior year EBITDA multiple / other: ____].

☐ Method 2 – Formula Value
The Buyout Price shall be determined by the following formula:

Buyout Price = [____] × [EBITDA / Annual Revenue / Book Value / Other: ____] as of [the most recent fiscal year end / trailing twelve months]

Multiply: [EBITDA/Revenue/Book Value] as of [the last completed fiscal year]: $[________________________________]
Multiplied by: [____] × (industry multiple)
Divided by: Total outstanding shares: [________________________________]
Equals: Per-share Buyout Price: $[________________________________]

☐ Method 3 – Independent Appraisal
The Buyout Price shall be the Fair Market Value per share as determined by an independent, qualified business appraiser selected as follows:
(a) The parties shall attempt to agree on a single appraiser within [15] days after the Triggering Event;
(b) If they cannot agree, each party shall appoint one appraiser within [30] days, and those two appraisers shall select a third appraiser within [15] days;
(c) The Buyout Price shall be the average of the two closest appraisals (if three are obtained) or the single appraisal (if agreed upon);
(d) Appraisal costs shall be borne [equally / by the selling party / by the purchasing party].

☐ Method 4 – Sequential / Hybrid Approach
(a) If Schedule B Agreed Value was updated within the past [12] months: use Agreed Value.
(b) If Schedule B Agreed Value is stale (not updated within [12] months): use Formula Value as an interim price.
(c) Either party may require an independent appraisal within [30] days of the triggering event, at shared cost; the appraisal result supersedes the formula/agreed value.

5.2 Valuation Adjustments

The Buyout Price may be adjusted as follows:

5.3 No Minority or Marketability Discount

Unless otherwise agreed in writing, the Buyout Price shall be determined without applying a minority discount or lack-of-marketability discount, regardless of the number of shares being purchased.

5.4 Dispute Resolution for Valuation

If the parties cannot agree on the Buyout Price or appraiser selection, the dispute shall be submitted to binding arbitration before the American Arbitration Association under its Commercial Arbitration Rules. The arbitrator shall be a certified business valuator (CBV) or accredited senior appraiser (ASA) with at least 10 years of experience in business valuations.

Article 6 – Payment Terms

6.1 Payment Structure

The Buyout Price shall be paid as follows (select applicable):

☐ Lump Sum: The full Buyout Price shall be paid in cash at closing.

☐ Installment Payments:

• Down payment: [____]% of the Buyout Price at closing ($[________________________________])
• Balance: Paid in equal [monthly / quarterly / annual] installments over [____] years
• Interest rate: [____]% per annum on the unpaid balance
• Acceleration: Remaining balance due immediately upon default or sale of the Corporation

☐ Life Insurance Proceeds: To the extent life insurance proceeds are available and payable to the purchaser(s), such proceeds shall be applied to the Buyout Price, with any excess paid as installments as provided above.

6.2 Closing

The closing of the purchase and sale shall occur at the principal offices of the Corporation within [____] days after the final determination of the Buyout Price, unless extended by mutual written agreement.

6.3 Promissory Note

If payment is to be made in installments, the purchasing party shall deliver a full-recourse promissory note (the "Buyout Note") to the Departing Shareholder at closing, bearing interest at [____]% per annum, with payments as specified in Section 6.1. The Buyout Note shall be secured by a pledge of the purchased shares until paid in full.

6.4 DGCL § 160 Restriction

If the Corporation's purchase of shares would violate DGCL § 160 (which prohibits repurchases that would impair capital), the Corporation's obligation shall be suspended until the restriction is removed, and the Shareholders shall have the option to purchase the affected shares during such period.

Article 7 – Life Insurance and Disability Insurance Funding

7.1 Life Insurance – Entity Redemption

The Corporation shall obtain and maintain life insurance policies on the life of each Shareholder in amounts at least equal to each Shareholder's proportional interest in the Corporation's current Agreed Value:

7.2 Life Insurance – Cross-Purchase

If this is a Cross-Purchase Agreement, each Shareholder shall obtain and maintain life insurance policies on the lives of the other Shareholders in amounts reflecting their respective buyout obligations. Each Shareholder shall be the owner and beneficiary of the policy(ies) on the other Shareholders' lives.

7.3 Disability Buyout Insurance

The parties [shall / may] obtain disability buyout insurance policies covering each Shareholder in amounts sufficient to fund the Buyout Price upon a disability triggering event. Policies shall be owned by the Corporation (entity redemption) or the other Shareholders (cross-purchase).

7.4 Insurance Policy Obligations

Each insured Shareholder shall:
(a) Cooperate in the underwriting process;
(b) Maintain insurability to the extent within the Shareholder's control; and
(c) Not take any action to impair the policies.

7.5 IRC § 303 Redemption

In the case of a deceased Shareholder whose estate includes Corporation shares, if the value of the shares is includable in the deceased Shareholder's gross estate and the Corporation qualifies under IRC § 303, the parties acknowledge that the Corporation may redeem stock from the estate in amounts up to the sum of the death taxes and funeral and administration expenses, with such redemption potentially qualifying for favorable exchange treatment under IRC § 302 / § 303.

7.6 Policy Premium Responsibility

The party owning the policy (Corporation or individual Shareholder, as applicable) shall be responsible for timely payment of all premiums. Failure to pay premiums within [30] days of the due date shall be an event of default, and the other parties may cure such default and seek reimbursement.

Article 8 – Restrictions on Transfer; Legend

8.1 Prohibition on Transfer

No Shareholder shall transfer, assign, pledge, hypothecate, or otherwise dispose of any shares of the Corporation, or any interest therein, except in accordance with this Agreement. Any purported transfer in violation of this Agreement shall be null and void and of no force or effect.

8.2 Legend

All share certificates (or book-entry records) for shares subject to this Agreement shall bear a legend substantially as follows:

"THE SHARES REPRESENTED HEREBY ARE SUBJECT TO A BUY-SELL AGREEMENT AMONG THE CORPORATION AND THE SHAREHOLDERS NAMED THEREIN, DATED [__/__/____], WHICH RESTRICTS THE TRANSFER OF THESE SHARES AND PROVIDES FOR THEIR PURCHASE UPON CERTAIN TRIGGERING EVENTS. A COPY OF SUCH AGREEMENT IS ON FILE AT THE CORPORATION'S PRINCIPAL OFFICE."

8.3 Stop-Transfer Instructions

The Corporation shall notify its transfer agent (if any) of the restrictions and may decline to register any transfer made in violation of this Agreement.

Article 9 – Shareholder Covenants

9.1 Non-Competition (Optional)

☐ In connection with any purchase of shares pursuant to this Agreement, the Departing Shareholder shall execute a non-competition and non-solicitation agreement restricting the Departing Shareholder from competing with the Corporation for a period of [____] years within [________________________________] (geographic area), in exchange for additional consideration of $[________________________________].

☐ No non-competition covenant is required.

9.2 Confidentiality

Upon a Triggering Event, the Departing Shareholder shall maintain in confidence all proprietary and confidential information of the Corporation and shall not use or disclose such information for the benefit of any competing business.

9.3 Cooperation

Upon a Triggering Event, the Departing Shareholder shall cooperate with the Corporation and remaining Shareholders in effecting an orderly transition, including executing all required transfer documents and providing reasonable assistance for a transition period of up to [90] days.

Article 10 – Deadlock Provisions (if applicable)

If the Shareholders are deadlocked (unable to reach a decision on a fundamental corporate action for a period of [90] days), the following procedure shall apply:

☐ Not applicable (this is not a two-shareholder equal-ownership company)

☐ Texas Shoot-Out / Buy-Sell: Any Shareholder may trigger the deadlock buy-sell by offering in writing to buy all other Shareholders' shares at a specified price per share. Each other Shareholder shall then elect, within [30] days, to either (a) sell their shares at the offered price, or (b) buy the offering Shareholder's shares at the same price per share.

Article 11 – Tax Matters

11.1 Tax Allocation

In the case of an asset sale or purchase, the parties shall negotiate in good faith an allocation of the Buyout Price among the assets of the Corporation in accordance with IRC § 1060 and the applicable Treasury Regulations.

11.2 Section 338(h)(10) Election (S-Corporation)

If the Corporation is an S-Corporation, the parties shall cooperate to determine whether a joint Section 338(h)(10) election would be mutually beneficial.

11.3 IRC § 264 Limitation

The parties acknowledge that the Corporation generally cannot deduct premiums paid on life insurance policies where the Corporation is the owner and beneficiary (IRC § 264), and life insurance proceeds are generally excludable from gross income under IRC § 101.

Article 12 – Miscellaneous

12.1 Governing Law. This Agreement is governed by the laws of the State of [________________________________].

12.2 Dispute Resolution. Any dispute arising under this Agreement (other than valuation disputes addressed in Article 5) shall be resolved by binding arbitration in [City, State] under the AAA Commercial Arbitration Rules.

12.3 Amendments. This Agreement may be amended only by a written instrument signed by the Corporation and all Shareholders.

12.4 Entire Agreement. This Agreement constitutes the entire agreement of the parties regarding the subject matter hereof.

12.5 Counterparts; Electronic Signatures. May be executed in counterparts; electronic signatures valid.

12.6 Binding Effect. This Agreement binds and inures to the benefit of the parties and their respective heirs, executors, administrators, legal representatives, successors, and permitted assigns.

12.7 No Waiver. Failure to enforce any provision shall not be deemed a waiver thereof.

12.8 Notices. All notices shall be in writing and delivered by certified mail, overnight courier, or email with confirmation to the addresses on Schedule A.

Signatures

CORPORATION:

[________________________________]

By: __________________________________
Name: [________________________________]
Title: [________________________________]
Date: [__/__/____]

SHAREHOLDERS:

__________________________________
[________________________________] (Print Name)
Shares Owned: [________________________________]
Date: [__/__/____]

__________________________________
[________________________________] (Print Name)
Shares Owned: [________________________________]
Date: [__/__/____]

__________________________________
[________________________________] (Print Name)
Shares Owned: [________________________________]
Date: [__/__/____]

Schedule A – Shareholders

Schedule B – Agreed Value

(Update annually by mutual written agreement of all parties. If not updated within 12 months, adjust per Section 5.1.)

Practitioner Notes:
- Cross-purchase vs. entity redemption: For a two-shareholder company, a cross-purchase agreement is often preferred because the surviving shareholder receives a full step-up in basis in the purchased shares (to their Fair Market Value at date of purchase), whereas entity redemption does not affect the surviving shareholder's basis in their existing shares.
- Life insurance: For entity redemption, the corporation pays premiums with after-tax dollars (premiums are not deductible under IRC § 264) but receives the proceeds income-tax-free under IRC § 101. For C-corporations, consider the alternative minimum tax (AMT) implications of large life insurance proceeds.
- IRC § 303: Allows a corporation to redeem stock from a decedent's estate in a tax-favorable manner (treated as a sale, not a dividend) to provide liquidity for estate taxes and expenses, provided the stock value exceeds 35% of the adjusted gross estate.
- DGCL § 160: The Corporation cannot repurchase shares if doing so would cause its capital to become impaired. Include language allowing the Corporation to defer the repurchase until legally permissible, with the surviving Shareholders having a backup purchase right.
- Community property states (CA, TX, WA, AZ, NV, ID, LA, NM, WI): Spousal consent is advisable and may be legally required for transfers of community property interests in shares. Include a spousal consent exhibit.