Buy-sell agreements protect each owner from being forced to accept a new co-owner who acquires a share of the business from an original owner, e.g. by purchase, inheritance, divorce, bankruptcy, etc. These buy-sell agreements usually give the original owners the right to buy another owner’s share upon specific triggers, e.g. sale, death, divorce, bankruptcy, etc. When evaluating whether a buyout has been triggered under such an agreement, the precise identity of each owner of the business can be extremely important.
In Han v. Hallberg, the Court of Appeal considered whether the death of one dentist in a four-way partnership triggered a buyout when the deceased dentist’s partnership interest was owned by his trust. Refusing to follow an earlier case which found an original owner continued to be a partner after transferring ownership to his trust, the Hallberg court held the dentist’s death did not trigger the buyout “upon the death of a partner” because the trust, not the deceased dentist, was the partner.
This ruling is particularly important for buy-sell agreements with triggering events unrelated to a proposed transfer of ownership, e.g. termination of a shareholder’s employment or upon the filing of a lawsuit by the shareholder against the company. If an original owner transfers his share of the company to a trust, Hallberg suggests a mandatory buyout would not be triggered if the now-former shareholder (rather than his trust) experienced a triggering event, e.g. sued the company or was terminated from his employment.
