What Every Company Needs To Know About Stock Buyout Agreements

Apr 7 09:07 2012 Gen Wright Print This Article

A buyout is a transaction whereby the majority stock or ownership equity of a company is acquired.

stock buyout agreements are used to set the terms of the transaction. Also called buy-sell agreements,Guest Posting they are used in many businesses, including limited liability companies, corporations, and limited and general partnerships. Buyout agreements often restrict or limit a shareholder's ability to sell shares or transfer them to someone else when they leave the company. They are designed to give the company right of first refusal.

Reasons for having stock buyout agreements

The stock buyouts agreements do not define terms of purchase or sale of a company. They are contracts between shareholders of a company. They determine how the company deals with the stock owned by a shareholder who is leaving, and whether the company must buyout the shareholder. The agreement also indicates the right to buy out a shareholder in case of death or any other event. A buyout agreement is used to protect shareholders, from financial implications or complications that may arise when a shareholder leaves a company.

Buyout agreements indicate who is allowed to buy a shareholder's stock, how the stock should be valued, whether the company is obliged to buy, and the terms of payment for the buyout. The agreements protect the company by ensuring that the company can keep away an unwanted buyer. This is important to keep certain buyers from acquiring an interest in the company. It also helps to guide the shareholder, who has information on how to dispose of ownership interest in the company.

When stock buyouts are carried out

Stock buyout agreements help to determine the events that can initiate a buyout. Most of the events identified in the agreements include death, personal bankruptcy, retirement, disability or incapacitation, and divorce. Most buyout agreements allow the company to acquire the stock of a shareholder who files for bankruptcy. In the case of death, the family may be required to sell back the stock to the company. This also happens in divorce, where the ex-spouse is required to sell the interest back to the company. When a shareholder retires or is disabled or incapacitated, he may be required to sell the interest to the company.

Some buyout agreements compel or force an employee who has been terminated, or has resigned, to sell their stock back to the company. This is usually done to protect the company by barring the terminated employee from accessing private company information.

Funding the buyout

When a company needs to buy out a shareholder, it must be able to come up with payment for the full value of the stock. Companies have to look for ways to get the funds and in many cases; they turn to various sources, including selling the assets of the business. In many cases, the agreements stipulate that a company can pay over a certain period of time. In this case, the company uses the income earned to make the payments. A payment plan may be set up, which allows the company to pay 20 % up front, and the balance in fixed installments over a number of years.

In some cases, companies use the proceeds earned from an insurance policy to buyout the shareholder. Most companies purchase life insurance policies for their shareholders. Some even purchase disability insurance policies. The proceeds of the policies are used to buy the shares, if the shareholder dies or becomes disabled.

The importance of having a written agreement covering to buyout conditions cannot be overstated. Taking stock away from a shareholder who is violating the company rules or regulations can help to save the company.

Source: Free Guest Posting Articles from ArticlesFactory.com

About Article Author

Gen Wright
Gen Wright

Go visit to http://www.legalforms.name for more details on the buyout agreements and other corporate related legal forms. There are many free legal resources including legal forms free downloads, business forms and corporation/LLC forms available for your immediate download.

View More Articles