Delaware Buy-Sell Agreement between Two Shareholders of Closely Held Corporation

• Category: Corporations - Contracts
• State: Multi-State
• Control #: US-02553BG
• Format: Word; Rich Text

Description

A corporation whose shares are held by a single shareholder or a closely-knit group of shareholders (such as a family) is known as a close corporation. The shares of stock are not traded publicly. Many of these types of corporations are small firms that in the past would have been operated as a sole proprietorship or partnership, but have been incorporated in order to obtain the advantages of limited liability or a tax benefit or both. A buy-sell agreement is an agreement between the owners (shareholders) of a firm, defining their mutual obligations, privileges, protections, and rights. Delaware Buy-Sell Agreement between Two Shareholders of Closely Held Corporation: A Comprehensive Overview Introduction: A Delaware Buy-Sell Agreement is a legally binding contract that outlines the terms and conditions governing the transfer of shares between two shareholders of a closely held corporation based in Delaware. This agreement helps mitigate potential disputes and ensures a smooth transition of ownership interests. Different types of Buy-Sell Agreements exist, each catering to varied shareholder needs and circumstances. This article provides a detailed description of a typical Delaware Buy-Sell Agreement and explores some common variations. Key Terms: 1. Delaware Corporation: A business entity incorporated in the state of Delaware, providing various benefits such as strong legal precedent, favorable tax laws, and flexible corporate governance structure. 2. Closely Held Corporation: A corporation where a few shareholders, often family members, own a majority of the shares, and these shares are not publicly traded. 3. Shareholders: The individuals or entities who own shares in the closely held corporation and are parties to the Buy-Sell Agreement. 4. Buy-Sell Agreement: A legally binding contract that outlines the terms and conditions for the sale and purchase of shares in a closely held corporation. Components of a Delaware Buy-Sell Agreement: 1. Triggering Events: This section identifies specific events that can trigger a buy-sell transaction, such as the death, disability, retirement, or voluntary/involuntary resignation of a shareholder. It also includes provisions for divorce or bankruptcy of a shareholder. 2. Valuation Methodology: Describes the method to determine the fair value of shares upon triggering events. Common methods include appraisal by a neutral third-party, agreement by both parties, or utilizing a predetermined formula. 3. Funding Mechanisms: Outlines how the purchasing shareholder will fund the buyout, using options like cash payments, promissory notes, installment payments, or insurance policies. 4. Right of First Refusal: Specifies whether shareholders have the right to purchase the shares before they are sold to third parties. If exercised, this allows existing shareholders to maintain control and prevent dilution of ownership. 5. Non-Compete and Non-Disclosure Agreements: Addresses restrictions on shareholders from engaging in competitive activities or disclosing proprietary information after the buyout. 6. Dispute Resolution: Outlines the process for resolving conflicts, such as arbitration or mediation, to avoid expensive litigation. Types of Delaware Buy-Sell Agreements: 1. Cross-Purchase Agreement: In this agreement, individual shareholders have the right and obligation to purchase the shares of the other shareholder. 2. Stock Redemption Agreement: The corporation itself has the obligation to purchase and retire the shares of the departing shareholder. 3. Hybrid Agreement: Combines elements of both cross-purchase and stock redemption agreements, providing flexibility for shareholders to choose the most suitable option. Conclusion: A Delaware Buy-Sell Agreement is a crucial document for closely held corporations, ensuring a smooth transition of ownership and providing a structured approach to resolve potential disputes. By delineating trigger events, valuation methods, funding mechanisms, and other relevant provisions, this agreement protects the interests of both shareholders and the corporation. Understanding the various types of Delaware Buy-Sell Agreements allows shareholders to tailor the agreement to their specific needs and circumstances. Seek legal counsel to draft and review a comprehensive Delaware Buy-Sell Agreement that best suits your corporation's requirements.

Delaware Buy-Sell Agreement between Two Shareholders of Closely Held Corporation: A Comprehensive Overview Introduction: A Delaware Buy-Sell Agreement is a legally binding contract that outlines the terms and conditions governing the transfer of shares between two shareholders of a closely held corporation based in Delaware. This agreement helps mitigate potential disputes and ensures a smooth transition of ownership interests. Different types of Buy-Sell Agreements exist, each catering to varied shareholder needs and circumstances. This article provides a detailed description of a typical Delaware Buy-Sell Agreement and explores some common variations. Key Terms: 1. Delaware Corporation: A business entity incorporated in the state of Delaware, providing various benefits such as strong legal precedent, favorable tax laws, and flexible corporate governance structure. 2. Closely Held Corporation: A corporation where a few shareholders, often family members, own a majority of the shares, and these shares are not publicly traded. 3. Shareholders: The individuals or entities who own shares in the closely held corporation and are parties to the Buy-Sell Agreement. 4. Buy-Sell Agreement: A legally binding contract that outlines the terms and conditions for the sale and purchase of shares in a closely held corporation. Components of a Delaware Buy-Sell Agreement: 1. Triggering Events: This section identifies specific events that can trigger a buy-sell transaction, such as the death, disability, retirement, or voluntary/involuntary resignation of a shareholder. It also includes provisions for divorce or bankruptcy of a shareholder. 2. Valuation Methodology: Describes the method to determine the fair value of shares upon triggering events. Common methods include appraisal by a neutral third-party, agreement by both parties, or utilizing a predetermined formula. 3. Funding Mechanisms: Outlines how the purchasing shareholder will fund the buyout, using options like cash payments, promissory notes, installment payments, or insurance policies. 4. Right of First Refusal: Specifies whether shareholders have the right to purchase the shares before they are sold to third parties. If exercised, this allows existing shareholders to maintain control and prevent dilution of ownership. 5. Non-Compete and Non-Disclosure Agreements: Addresses restrictions on shareholders from engaging in competitive activities or disclosing proprietary information after the buyout. 6. Dispute Resolution: Outlines the process for resolving conflicts, such as arbitration or mediation, to avoid expensive litigation. Types of Delaware Buy-Sell Agreements: 1. Cross-Purchase Agreement: In this agreement, individual shareholders have the right and obligation to purchase the shares of the other shareholder. 2. Stock Redemption Agreement: The corporation itself has the obligation to purchase and retire the shares of the departing shareholder. 3. Hybrid Agreement: Combines elements of both cross-purchase and stock redemption agreements, providing flexibility for shareholders to choose the most suitable option. Conclusion: A Delaware Buy-Sell Agreement is a crucial document for closely held corporations, ensuring a smooth transition of ownership and providing a structured approach to resolve potential disputes. By delineating trigger events, valuation methods, funding mechanisms, and other relevant provisions, this agreement protects the interests of both shareholders and the corporation. Understanding the various types of Delaware Buy-Sell Agreements allows shareholders to tailor the agreement to their specific needs and circumstances. Seek legal counsel to draft and review a comprehensive Delaware Buy-Sell Agreement that best suits your corporation's requirements.