Whether you own part of a corporation, LLC, or partnership, you should have a shareholder agreement (or operating agreement, partnership agreement, etc.) that sets forth the rights and responsibilities each of the owners has with respect to the company. One of the most important parts of a shareholder agreement is a buy-sell provision.
Buy-Sell agreements typically prohibit an owner from selling or transferring his stake in the company without first offering the other owners the option to purchase their shares on the same terms. This prevents the non-transferring owners from having to accept a new person as a co-owner or partner in the business, by giving them the option to purchase the shares first.
The importance of having these provisions was recently illustrated in Luxury Asset Lending, Inc., v. Philadelphia Television Network, Inc., where one shareholder of a television network attempted to pledge shares of corporate stock as collateral for a personal loan that had nothing to do with the business. This could have seriously jeopardized the corporation were it not for a shareholder agreement that “explicitly restricted the sale, transfer, or pledging of shares without allowing other shareholders a right of first refusal and made any transfer effected in violation of the restriction void.”
If you do not have a shareholder agreement with the owners of your business, contact experienced corporate counsel to prepare an agreement that will protect your investment.
