June 4, 2014
When a shareholder in a multiple-owner company decides to withdraw from a corporation, her shares need to be transferred. But to whom? And how? It depends on how the shareholder’s agreement is worded. Two scenarios are: A shareholder retires and sells the shares to the remaining shareholder(s) A shareholder resigns and sells the shares back to the corporation The first method is sometimes referred to as a “cross-purchase agreement.” Under a cross-purchase agreement, the shareholders agree to buy each other out when one withdraws. The corporation is not part of the purchase/sale. The second scenario, sometimes referred to as a “stock redemption,” is where the corporation — not the individual shareholders — buy back the stock. The downside to #1: the individual shareholders need to come up with the funds for the buyout. Under #2, the corporation comes up with the funds. In both situations, life insurance proceeds can be used . . . but that doesn’t help when an owner, say, resigns, and remains very much alive. That’s why your shareholder agreement needs to have a…
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