Illinois Shareholder Agreements
Buy Sell Agreements
If a shareholder of a closely held corporation decides to sell their shares, it may prove difficult to find a buyer. There’s often not a market for shares of such companies. A related problem, from the perspective of the other shareholders, is that if a buyer is found, then the remaining shareholders might find themselves partnered with a third party they have no interest in working with.
A means of tackling both problems is a shareholder buy/sell agreement. Such an agreement typically provides two things. First, that if a shareholder wants to sell his or her shares, the other shareholders have the right of first refusal, allowing them to block a sale. Second, that those other shareholders must purchase the shares of another shareholder under certain circumstances. These frequently include the death of that shareholder or his/her termination whether voluntary or involuntary.
Shareholder agreements provide protection for both departing and remaining shareholders. Departing shareholders are able to sell their shares, something they might struggle to do without an agreement, and remaining shareholders gain control over who can become a shareholder of the company, again something they would not necessarily have without the agreement.
For their various advantages, shareholder agreements are not without pitfalls. Shareholder agreements that provide for the purchasing of shares from a departing shareholder often also specify how those shares are to be valued. Depending on the method, that valuation might be lower than what a shareholder might otherwise get. If the value is based on book value of the company, for example, that excludes goodwill which might be a substantial part of the shares’ real world value.
Shareholder agreements often provide that shares will be purchased from a departing shareholder whether or not their termination is voluntary. Depending on the circumstances, the termination of a shareholder might constitute minority oppression, something for which shareholders can seek relief in court. Because of the agreement, however, a court may rule that the shareholder has waived their right to contest the termination.
Thus, while shareholder agreements provide many benefits, the specifics of any such agreement should be carefully reviewed in collaboration with counsel, to ensure that the protections offered are maximized and the potential pitfalls are warded against.
Horowitz Law Office represents shareholders to review and draft shareholder agreements and to litigate and resolve their complex disputes. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org