Shareholders’ Agreement – Mandatory Sale of Shares
We have previously blogged on shareholders’ agreements and common provisions included in shareholders’ agreements. For small companies with a limited number of shareholders, consideration should be given to whether certain circumstances would force a shareholder to sell their shares back to the company, or to other shareholders, and including this in the shareholders’ agreement.
It is common, for instance, for closely-held companies to include a clause in their shareholders’ agreement to provide that on the death of a shareholder, the company or the surviving shareholders have a right to buy the shares from the estate of the deceased shareholder for their fair market value at the time of death. The reasoning behind including a clause of this nature is that the parties may have agreed to enter into business with the deceased shareholder, but don’t necessarily want to be in business with their family. It also provides the estate with some liquidity for an asset that might represent a significant part of the estate.
A mandatory sale could also be triggered on the disability of a shareholder that prevents the shareholder from working in the business, bankruptcy of the shareholder, termination of the shareholder as an employee, or breaching the terms of the shareholders’ agreement.
The circumstances on which a mandatory sale is triggered, and the price paid for the shares for each triggering event can all be outlined in the terms of a shareholders’ agreement. Putting these types of provisions in a shareholders’ agreement now, when the parties are getting along, may help to reduce disputes later.
Thinking of putting a shareholders’ agreement in place for your company? Contact us.