Shareholder Buyout Agreement

Shareholder Buyout Agreement

Purpose of This Template

A Shareholder Buyout Agreement (also called a Buy-Sell Agreement) establishes the terms under which shareholders can or must sell their ownership interests. This document:

• Provides Exit Mechanisms - Creates orderly process for ownership changes
• Establishes Valuation - Defines how shares will be valued
• Prevents Disputes - Reduces conflicts by pre-agreeing on terms
• Protects Remaining Shareholders - Controls who can become a shareholder
• Ensures Business Continuity - Keeps business operating during transitions

Types of Buyout Structures

Cross-Purchase Agreement

• Shareholders buy from departing shareholder
• Other shareholders purchase the departing shareholder's interest
• Typically used with fewer shareholders
• Requires multiple life insurance policies if used for death triggers

Redemption (Entity Purchase) Agreement

• Company buys from departing shareholder
• Corporation redeems the departing shareholder's stock
• Simpler with multiple shareholders
• Company owns life insurance policies

Hybrid Agreement

• Combination of both approaches
• Company has first option; shareholders have second option
• Provides flexibility

Pre-Agreement Checklist

Company Information Gathered

☐ Current shareholder list and ownership percentages
☐ Stock certificate records
☐ Articles of Incorporation
☐ Bylaws
☐ Existing shareholder agreements
☐ Current company valuation
☐ Recent financial statements
☐ Life insurance policies on shareholders
☐ Disability insurance information

Professional Team Engaged

☐ Corporate attorney
☐ Accountant/CPA
☐ Business valuation expert
☐ Insurance advisor
☐ Estate planning attorney (for each shareholder)

Shareholder Buyout Agreement

Parties

COMPANY:
| Field | Information |
|-------|-------------|
| Company Name | |
| State of Incorporation | |
| Date of Incorporation | |
| Principal Address | |
| Type of Corporation | ☐ C-Corp ☐ S-Corp ☐ Close Corporation |

SHAREHOLDERS:

Article I: Definitions

Section 1.1 - Key Definitions

"Agreed Value" means:
☐ The value determined under Section 3 (Valuation)
☐ The value established in the most recent Certificate of Agreed Value

"Book Value" means the net worth of the Company per its financial statements, calculated in accordance with GAAP.

"Buyout Price" means the price per share to be paid to a Selling Shareholder, calculated as the Agreed Value multiplied by the percentage of outstanding shares being purchased.

"Fair Market Value" means the price a willing buyer would pay a willing seller, neither being under compulsion, with both having reasonable knowledge of relevant facts.

"Majority Shareholders" means shareholders holding more than 50% of outstanding shares.

"Permitted Transferee" means:
☐ A Shareholder's spouse
☐ A Shareholder's lineal descendants
☐ A trust for benefit of Shareholder or family
☐ Another current Shareholder
☐ Other: _________________________________

"Pro Rata Share" means the percentage that a Shareholder's shares bear to all outstanding shares (excluding shares being purchased).

"Selling Shareholder" means any Shareholder who is selling or required to sell their shares under this Agreement.

"Trigger Event" means any event described in Article II.

Article II: Triggering Events

Section 2.1 - Mandatory Buyout Events

The following events REQUIRE a buyout:

Death of Shareholder:
☐ Mandatory buyout within _____ days of death
☐ Purchased by: ☐ Company ☐ Other Shareholders ☐ Either (Company first option)
☐ Life insurance proceeds to fund purchase

Permanent Disability:
☐ Mandatory buyout after disability continues for _____ months
☐ "Disability" defined as: ☐ Per disability insurance policy ☐ Unable to perform duties
☐ Medical certification required from: _________________________________

Termination of Employment (Shareholder-Employee):
☐ Mandatory buyout required: ☐ Yes ☐ No
☐ Applies to: ☐ Voluntary termination ☐ Termination for cause ☐ Termination without cause
☐ Different pricing for cause vs. without cause: ☐ Yes ☐ No

• For cause price: _____% of Agreed Value
• Without cause price: _____% of Agreed Value

Bankruptcy of Shareholder:
☐ Mandatory buyout required: ☐ Yes ☐ No
☐ Trigger: Filing of bankruptcy petition
☐ Company option to purchase before creditors

Divorce:
☐ Mandatory buyout if shares awarded to non-shareholder spouse: ☐ Yes ☐ No
☐ Right of first refusal on spousal transfer: ☐ Yes ☐ No

Section 2.2 - Voluntary Triggering Events

The following events trigger buyout OPTIONS (not mandatory):

Voluntary Withdrawal/Retirement:
☐ Shareholder may request buyout
☐ Notice required: _____ days/months
☐ Company/Shareholders option to purchase: ☐ Yes ☐ No
☐ Company obligation to purchase: ☐ Yes ☐ No

Proposed Sale to Third Party:
☐ Right of first refusal: ☐ Yes ☐ No
☐ Notice required: _____ days before proposed sale
☐ Matching period: _____ days to match third-party offer

Deadlock/Irreconcilable Differences:
☐ Deadlock buyout provision: ☐ Yes ☐ No
☐ Mechanism: ☐ Shotgun/Russian Roulette ☐ Mediation first ☐ Other

Article III: Valuation

Section 3.1 - Valuation Method

☐ Option A: Fixed Price (Certificate of Agreed Value)

• Value updated annually by unanimous shareholder agreement
• If not updated within _____ months, alternative method applies
• Current Agreed Value: $_____________ per share
• Date of last valuation: _____________

☐ Option B: Formula-Based Valuation

• Formula: _________________________________
• Example: Book Value x _____ + Goodwill Factor
• Adjustments: _________________________________

☐ Option C: Independent Appraisal

• Appraiser selected by: _________________________________
• Appraisal standards: ☐ ASA ☐ AICPA ☐ NACVA ☐ IRS guidelines
• Appraisal cost paid by: ☐ Company ☐ Selling Shareholder ☐ Split
• Appraisal completed within: _____ days of Trigger Event

☐ Option D: Multiple Appraiser Process

• Seller selects one appraiser
• Buyer/Company selects one appraiser
• If valuations differ by more than _____%, third appraiser selected
• Final value: ☐ Average ☐ Middle value ☐ Third appraiser binding

Section 3.2 - Valuation Adjustments

☐ Minority Discount:

• Applied: ☐ Yes ☐ No
• Percentage: _____%

☐ Lack of Marketability Discount:

• Applied: ☐ Yes ☐ No
• Percentage: _____%

☐ Control Premium:

• Applied for majority sales: ☐ Yes ☐ No
• Percentage: _____%

☐ Special Adjustments:

• For cause termination: Discount of _____%
• For breach of agreement: Discount of _____%
• Other: _________________________________

Section 3.3 - Certificate of Agreed Value (if using Option A)

CERTIFICATE OF AGREED VALUE

The undersigned Shareholders hereby agree that the Fair Market Value of each share of [COMPANY NAME] stock is: $_____________ per share.

This Agreed Value is effective as of: _____________

Article IV: Purchase Procedures

Section 4.1 - Notice of Triggering Event

☐ Written notice required within _____ days of Trigger Event
☐ Notice must include:

• Description of Trigger Event
• Number of shares involved
• Proposed closing date
• Any required documentation (death certificate, medical certification, etc.)

Section 4.2 - Company's Option (If Redemption or Hybrid)

☐ Company has first option to purchase all offered shares
☐ Option period: _____ days from notice
☐ Company must exercise by written notice
☐ If Company declines or cannot purchase, Other Shareholders may purchase

Section 4.3 - Shareholder's Option (If Cross-Purchase or Hybrid)

☐ Each Shareholder may purchase their Pro Rata Share
☐ Exercise period: _____ days from Company declination or original notice
☐ If any Shareholder declines, others may purchase declining Shareholder's portion
☐ Second round exercise period: _____ days

Section 4.4 - Forced Sale (Drag-Along)

☐ Drag-along rights included: ☐ Yes ☐ No
☐ Majority Shareholders may force minority to sell upon:

• Third-party acquisition offer
• Shareholder approval: ____%
• Terms: Same terms as majority
• Conditions: _________________________________

Section 4.5 - Tag-Along Rights

☐ Tag-along rights included: ☐ Yes ☐ No
☐ If majority sells, minority may participate on same terms
☐ Notice required: _____ days before closing

Article V: Payment Terms

Section 5.1 - Payment Options

Death Buyout:
☐ Full payment at closing from life insurance proceeds
☐ Balance (if any) paid over: _____ months/years

Disability Buyout:
☐ Full payment at closing
☐ Installment payments over: _____ months/years
☐ Down payment: ____% at closing
☐ Interest rate on balance: ____% per annum

Voluntary Retirement/Withdrawal:
☐ Full payment at closing
☐ Installment payments over: _____ months/years
☐ Down payment: ____% at closing
☐ Interest rate on balance: ____% per annum

Termination of Employment:
☐ Full payment at closing
☐ Installment payments over: _____ months/years
☐ Different terms for cause vs. without cause:

• For cause: _________________________________
• Without cause: _________________________________

Third-Party Sale (ROFR):
☐ Match third-party payment terms
☐ Company/Shareholders may substitute their own terms: _________________________________

Section 5.2 - Default Payment Terms

Unless otherwise specified:
| Element | Terms |
|---------|-------|
| Down Payment | % of Buyout Price at closing |
| Balance | Payable in equal installments |
| Payment Frequency | Monthly / Quarterly / Annual |
| Term | months/years |
| Interest Rate | % per annum |
| Security | ☐ Pledged shares ☐ Personal guarantee ☐ Other |
| Prepayment | ☐ Allowed without penalty ☐ Penalty: ____% |

Section 5.3 - Security for Deferred Payments

☐ Purchased shares pledged until paid in full
☐ Security agreement required
☐ UCC financing statement filed
☐ Personal guarantee of purchasing Shareholders
☐ Other security: _________________________________

Section 5.4 - Default on Payments

If Buyer defaults:
☐ Selling Shareholder may recover shares
☐ Selling Shareholder may retain payments as liquidated damages
☐ Selling Shareholder may pursue full payment
☐ Interest rate increases to: ____% per annum

Article VI: Insurance Funding

Section 6.1 - Life Insurance

☐ Life insurance required: ☐ Yes ☐ No

Policies:
| Insured Shareholder | Policy Owner | Beneficiary | Face Amount |
|---------------------|--------------|-------------|-------------|
| | ☐ Company ☐ Shareholders | ☐ Company ☐ Shareholders | $ |
| | ☐ Company ☐ Shareholders | ☐ Company ☐ Shareholders | $ |
| | ☐ Company ☐ Shareholders | ☐ Company ☐ Shareholders | $ |

☐ Policies reviewed annually
☐ Coverage adjusted for changes in Agreed Value
☐ Premium payments: ☐ Company pays ☐ Insured pays ☐ Split

Section 6.2 - Disability Insurance

☐ Disability buyout insurance required: ☐ Yes ☐ No
☐ Policies: _________________________________
☐ Premium payments: ☐ Company pays ☐ Insured pays ☐ Split

Section 6.3 - Insurance Shortfall

If insurance proceeds are less than Buyout Price:
☐ Balance paid in cash at closing
☐ Balance paid in installments per Section 5.2
☐ Purchase price reduced to insurance amount (for specific triggers)

Article VII: Restrictions on Transfer

Section 7.1 - General Restriction

☐ Shareholders may not transfer shares except as permitted by this Agreement
☐ Transfers in violation are void
☐ Company shall not register unauthorized transfers

Section 7.2 - Permitted Transfers

Transfers allowed without triggering buyout:
☐ To Permitted Transferees (as defined)
☐ Condition: Transferee must sign this Agreement
☐ Condition: Transferee must meet qualifications: _________________________________

Section 7.3 - Right of First Refusal

Before any transfer to third party:
☐ Selling Shareholder must offer shares to Company/Other Shareholders first
☐ Offer must include all material terms of proposed sale
☐ Company has _____ days to accept
☐ If Company declines, Other Shareholders have _____ days to accept
☐ If not accepted, Selling Shareholder may sell to third party on same terms
☐ Sale must close within _____ days or ROFR restarts

Section 7.4 - Shotgun/Russian Roulette Clause (if applicable)

☐ Not included
☐ Included:

• Either Shareholder may initiate by offering to buy other's shares at stated price
• Recipient must either sell at that price OR buy initiator's shares at same price
• Response deadline: _____ days
• Closing: _____ days after response

Article VIII: Closing Procedures

Section 8.1 - Closing Date

☐ Closing within _____ days of Trigger Event
☐ Closing within _____ days of exercise of option
☐ Location: _________________________________

Section 8.2 - Seller's Deliveries

☐ Stock certificates endorsed for transfer
☐ Stock powers
☐ Spousal consent (if required)
☐ Resignation letters (if director/officer)
☐ Release of claims
☐ Non-compete agreement (if required)
☐ Other: _________________________________

Section 8.3 - Buyer's Deliveries

☐ Cash payment or certified funds
☐ Promissory note (if installments)
☐ Security agreement (if applicable)
☐ Evidence of insurance assignment (if applicable)

Article IX: Non-Competition and Confidentiality

Section 9.1 - Non-Competition by Selling Shareholder

☐ Not required
☐ Required:

• Duration: _____ years from closing
• Geographic area: _________________________________
• Restricted activities: _________________________________
• Exception for termination without cause: ☐ Yes ☐ No

Section 9.2 - Non-Solicitation

☐ Duration: _____ years from closing
☐ Applies to customers: ☐ Yes ☐ No
☐ Applies to employees: ☐ Yes ☐ No

Section 9.3 - Confidentiality

☐ Selling Shareholder shall maintain confidentiality of Company information
☐ Duration: ☐ Indefinite ☐ _____ years

Article X: Release of Claims

Section 10.1 - Mutual Releases

At closing:
☐ Selling Shareholder releases Company and Other Shareholders from claims
☐ Company and Other Shareholders release Selling Shareholder from claims
☐ Exceptions: _________________________________

Section 10.2 - Release of Personal Guarantees

☐ Company shall use best efforts to release Selling Shareholder from personal guarantees
☐ If unable to release, Company shall indemnify Selling Shareholder
☐ Specific guarantees: _________________________________

Article XI: Tax Considerations

Section 11.1 - Tax Treatment

☐ Parties acknowledge different tax consequences for redemption vs. cross-purchase
☐ Each party responsible for own tax advice
☐ Parties agree to cooperate on tax reporting

Section 11.2 - Reasonable Compensation (S-Corp)

☐ For S-Corps, parties acknowledge Shareholder-employee compensation issues
☐ Buyout payments structured as: ☐ Stock redemption ☐ Compensation ☐ Combination

Section 11.3 - Section 303 Redemption (Estate Planning)

☐ Parties intend to structure death buyouts to qualify for IRC Section 303 treatment where applicable

Article XII: Miscellaneous Provisions

Section 12.1 - Legend on Stock Certificates

All stock certificates shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A SHAREHOLDER BUYOUT AGREEMENT DATED [DATE]. COPIES AVAILABLE FROM THE COMPANY SECRETARY."

Section 12.2 - Binding on Heirs and Assigns

This Agreement binds Shareholders and their heirs, personal representatives, successors, and assigns.

Section 12.3 - Spousal Consent

☐ Spousal consent required: ☐ Yes ☐ No
☐ Consent form attached as Exhibit A

Section 12.4 - Amendment

This Agreement may only be amended by written agreement of:
☐ All Shareholders
☐ Majority of Shareholders
☐ Company Board of Directors and majority Shareholders

Section 12.5 - Termination

This Agreement terminates upon:
☐ Written agreement of all parties
☐ Company dissolution
☐ Only one Shareholder remaining
☐ IPO or public offering

Section 12.6 - Governing Law

This Agreement governed by laws of: State of _________________________________

Section 12.7 - Dispute Resolution

☐ Mediation first - Required before litigation/arbitration
☐ Binding Arbitration - Rules: _________________________________
☐ Litigation - Venue: _____________ County, _____________

Section 12.8 - Attorneys' Fees

☐ Prevailing party entitled to reasonable attorneys' fees

Section 12.9 - Severability

Invalid provisions do not affect remaining provisions.

Section 12.10 - Entire Agreement

This Agreement supersedes all prior agreements regarding stock transfers and buyouts.

Signature Page

COMPANY:
| | |
|---|---|
| Company Name | _________________________________ |
| By (Signature) | _________________________________ |
| Printed Name | _________________________________ |
| Title | _________________________________ |
| Date | _________________________________ |

SHAREHOLDERS:

Shareholder 1:
| | |
|---|---|
| Signature | _________________________________ |
| Printed Name | _________________________________ |
| Date | _________________________________ |

Shareholder 2:
| | |
|---|---|
| Signature | _________________________________ |
| Printed Name | _________________________________ |
| Date | _________________________________ |

Shareholder 3:
| | |
|---|---|
| Signature | _________________________________ |
| Printed Name | _________________________________ |
| Date | _________________________________ |

Exhibit A: Spousal Consent

CONSENT OF SPOUSE

I, _________________________, am the spouse of _________________________, a Shareholder of [COMPANY NAME].

I have read the Shareholder Buyout Agreement dated _____________ and understand its terms.

I consent to the terms of this Agreement and agree that any interest I may have in the shares (including any community property interest) is subject to this Agreement.

I agree not to transfer any interest in the shares except in accordance with this Agreement.

(Repeat for each Shareholder's spouse)

Important Warnings

Annual Review Required

Buyout agreements become outdated quickly. Review annually to:

• Update valuations
• Verify insurance coverage
• Account for new shareholders
• Address changed circumstances

Tax Implications Vary

Redemptions and cross-purchases have different tax consequences. Consult tax advisors before structuring.

Life Insurance Ownership Matters

Who owns and is beneficiary of life insurance has significant tax implications. Structure carefully.

Minority Shareholder Protection

Minority shareholders should negotiate fair terms. Without protection, majority shareholders may exploit buyout provisions.

Estate Planning Coordination

Buyout agreements must coordinate with Shareholders' estate plans. Conflicts can create problems for heirs.

This template is provided for informational purposes only and does not constitute legal advice. Shareholder agreements are complex and require professional guidance. Consult with a qualified corporate attorney, tax advisor, and insurance professional before executing any shareholder buyout agreement.