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Buy-Sell Agreement
Board of Directors’ Resolution Authorizing Execution of Buy-Sell Agreement
There has been presented to this board of directors and reviewed by it a form of Buy-Sell Agreement (“Agreement”), which is deemed to be in the best interests of this Corporation and its Shareholders.
RESOLVED, that the Agreement that has been reviewed at this meeting is approved. The president or any vice president of this Corporation together with the secretary or assistant secretary of this Corporation are authorized and instructed, for and in the name of this Corporation, to execute and deliver the Agreement in substantially the form that was presented to this meeting, with such changes in it as they may approve. The execution and delivery of this Agreement is conclusive evidence of this approval.
RESOLVED FURTHER, that the officers of this Corporation are authorized and instructed to execute all additional documents and take any additional action necessary to cause this Corporation to enter into and perform its obligations under this Agreement.
BUY-SELL AGREEMENT AMONG THE SHAREHOLDERS OF _ _[name of corporation]_ _ AND _ _[name of corporation]_ _
Preamble
This Buy-Sell Agreement (Agreement) is made on _ _[date]_ _, at _ _[city]_ _, California, among _ _[names of shareholders]_ _ (Shareholders), and _ _[name of corporation]_ _, a California corporation (Corporation) with its principal office at _ _[city]_ _, California, with respect to all shares of the Corporation’s capital stock now or hereafter outstanding, for the purpose of protecting the Corporation and the Shareholders, as well as providing continuity for the Corporation’s business in the event of the occurrence of certain events discussed in this Agreement. The Shareholders together own all outstanding shares of the Corporation’s stock as _ _[follows/shown in Exhibit A]_ _.
Names of Shareholders Number of Shares Owned
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
THE CORPORATION AND THE SHAREHOLDERS AGREE AS FOLLOWS:
- Add one of the following alternatives
- Alternative 1: Share certificate legend requirement
On execution of this Agreement, each Shareholder shall have placed on the certificates representing his or her shares the legend set forth in paragraph _ _[see form 3.51-1]_ _ of this Agreement. None of the shares presently owned or subsequently acquired by the Shareholders shall be sold, _ _[pledged]_ _, _ _[encumbered]_ _, transferred, or disposed of in any way, whether voluntarily, involuntarily, or by operation of law, except under the terms of this Agreement. Each Shareholder shall have the right to vote his or her shares and receive the dividends paid on them until the shares are sold or transferred as provided in this Agreement _ _[or until Shareholder’s employment by the Corporation is terminated, whichever occurs first]_ _.
- Alternative 2: Deposit share certificates with corporation
Concurrently with the execution of this Agreement, each Shareholder has endorsed stock assignment forms separate from the certificates representing his or her shares and has deposited the assignment forms and certificates with the secretary of the Corporation. Despite this endorsement and deposit, each Shareholder shall have the right to vote his or her shares and receive the dividends paid on them until the shares are sold or transferred as provided in this Agreement _ _[or until Shareholder’s employment by the Corporation is terminated, whichever occurs first]_ _. None of the shares shall be sold, _ _[pledged]_ _, _ _[encumbered]_ _, transferred, or disposed of in any way, whether voluntarily, involuntarily, or by operation of law, except under the terms of this Agreement.
Each share certificate, whether presently owned or subsequently issued, shall have conspicuously endorsed on its face the following words: “Sale, transfer, hypothecation, encumbrance, or disposition of the shares represented by this certificate is restricted by the provisions of a Buy-Sell Agreement among the Shareholders _ _[and the Corporation]_ _ of _ _[date]_ _. All provisions of the Buy-Sell Agreement are incorporated by reference in this certificate. A copy of the Agreement may be inspected at the principal office of the Corporation.” A copy of this Agreement shall be delivered to the secretary of the Corporation and shall be shown to anyone inquiring about it.
Right of First Refusal
Except as provided in paragraph _ __ _, no Shareholder shall sell, transfer, _ _[pledge]_ _, _ _[encumber]_ _, _ _[hypothecate]_ _, or in any way dispose of any of his or her shares or any right or interest in them without obtaining prior written consent of the Corporation and of all other Shareholders, unless the Shareholder shall first have given written notice (“Offer Notice”) to the Corporation, in accordance with paragraph _ __ _ of this Agreement, of his or her intention to do so.
The Offer Notice _ _[shall be accompanied by an executed counterpart of any document of transfer, which]_ _ must include the name and address of the proposed transferee and specify the number of shares to be transferred, the price per share, and the terms of payment. Promptly on receipt of the notice, _ _[e.g., the secretary of the Corporation]_ _ shall forward a copy of the notice _ _[and the executed counterpart]_ _ to each member of the Corporation’s board of directors, and within _ _[e.g., 20]_ _ days thereafter a meeting of the board of directors shall be duly called, noticed, and held to consider the proposed transfer. For _ _[e.g., 45]_ _ days following notice to the Corporation, it shall have the option, but not the obligation, to purchase all or any part of the shares at the price and on the terms stated in the notice _ _[and any accompanying transfer document(s)]_ _ _ _[or at a price determined in the same manner as is provided in paragraph _ _ _ __ _ of this Agreement, whichever price is lower]_ _. The Corporation’s right to exercise the option and to purchase the stock is subject to the restrictions governing a corporation’s right to purchase its own stock in California Corporations Code sections 500-501 and to any other pertinent governmental restrictions that are now, or may become, effective.
If the Corporation exercises the option within the _ _[e.g., 45]_ _-day period, the _ _[secretary of the]_ _ Corporation shall give written notice of that fact to the offering Shareholder. The Corporation shall pay the purchase price in the manner _ _[provided in the _ _[Agreement/terms of sale to the proposed transferee]_ _/set forth in the transfer document(s) accompanying the notice]_ _.
If the option is not exercised by the Corporation on all shares set forth in the notice of intention to transfer within the _ _[e.g., 45]_ _-day period, notice of the proposed transfer in the same form as the Offer Notice given to the Corporation shall be given immediately in accordance with paragraph _ __ _ to the remaining Shareholders, who shall have the option, but not the obligation, to purchase any shares not purchased by the Corporation at the price and on the same terms and conditions specified in the notice _ _[and any accompanying transfer document(s)]_ _. Within _ _[e.g., 20]_ _ days after giving the notice, any Shareholder desiring to acquire any part or all of the shares offered shall deliver to the _ _[secretary of the]_ _ Corporation a written election to purchase the shares or a specified number of them. If the total number of shares specified in the elections exceeds the number of available shares, each Shareholder shall have priority, up to the number of shares specified in his or her notice of election to purchase, to purchase the available shares, in the same proportion that the number of the Corporation’s shares, that he or she holds, bears to the total number of the Corporation’s shares held by all Shareholders electing to purchase. The shares not purchased on such a priority basis shall be allocated in one or more successive allocations to those Shareholders electing to purchase more than the number of shares to which they have a priority right, up to the number of shares specified in their respective notices, in the proportion that the number of shares held by each of them bears to the number of shares held by all of them.
Within _ _[e.g., 10]_ _ days after the mailing of the notice to the Shareholders, the _ _[secretary of the]_ _ Corporation shall notify each Shareholder of the number of shares as to which his or her election was effective, and the Shareholder shall meet the terms and conditions of the purchase within _ _[e.g., 10]_ _ days thereafter.
If the Corporation and the remaining Shareholders do not purchase all the shares set forth in the notice of intention to transfer, all the shares may be transferred to the proposed transferee on the terms specified in the notice, at any time within _ _ days after expiration of the Shareholders’ option. The transferee will hold the shares _ _[subject to/free and clear of]_ _ the provisions of this Agreement. No transfer of the shares shall be made after the end of the _ _-day period, nor shall any change in the terms of transfer be permitted without a new notice of intention to transfer and compliance with the requirements of this paragraph.
Any transfer by any shareholder in violation of this paragraph shall be null and void and of no effect.
Pledge, Hypothecation, or Other Encumbrance
Despite any provision in this Agreement to the contrary, any Shareholder may pledge, hypothecate, or otherwise encumber (“encumber”) his or her shares, as security for any debt, on condition that the secured creditor agrees that:
If the shareholder defaults on the secured debt, the secured creditor shall give the Corporation written notice of the default. The notice shall include the name and address of the creditor, the amount of the default, the amount of the debt, the date it was incurred, and a copy of the note and any documents that establish the security interest.
For _ _[e.g., 30]_ _ days after receipt of the written notice of default, the Corporation shall have the right to cure the default and take possession of the encumbered shares. Any Shareholder who is in default agrees to vote in favor of any action required to allow the Corporation to cure the default, if requested by _ _[a majority of]_ _ the other Shareholders.
To the extent the default is not cured by the Corporation within the _ _-day period, the other Shareholders shall have the right to cure the default and take possession of the encumbered shares for _ _[e.g., 30]_ _ days after expiration of the Corporation’s time to cure the default. The other Shareholders shall have the right to cure the default and to acquire the encumbered shares in the same proportion that the shares they hold bear to the total number of the Corporation’s shares or in any other proportion on which they agree.
If the Corporation and the other Shareholders do not cure the default within the time permitted, the secured creditor may pursue any and all legal and equitable remedies.
Permitted Transfers; Prior Rights of Original Transferor
- Permitted transfers
Despite any provision in this Agreement to the contrary, any Shareholder may transfer shares subject to this Agreement to _ _[state permitted transfers, e.g., other shareholders, any immediate family member (normally of lineal descent), a revocable trust established for the primary benefit of the shareholder and his or her spouse or registered domestic partner and issue, provided that the shareholder is the settlor and a trustee of the trust, or any general or limited partnership, corporation, co-tenancy, joint tenancy, or other entity of which the shareholder or an immediate family member is in control]_ _. Any permitted transferee(s) shall hold the shares subject to all provisions of this Agreement, as provided in paragraph _ __ _.
- Prior rights of orginial transferor
Despite any provision of this Agreement to the contrary, if any permitted transferee of any donor Shareholder desires to transfer any or all of his or her shares received from that donor Shareholder to anyone other than that donor Shareholder and/or the permitted transferee’s permitted transferees, or if any such shares would be transferred, awarded, or confirmed to any such person (whether voluntarily, involuntarily, or by operation of law) were it not for the provisions of this paragraph, then that donor Shareholder shall have the exclusive right to purchase any or all of the shares that would be transferred but for this paragraph, during a period of _ _[e.g., 15]_ _ days after the Corporation receives notice specifying the name and address of the proposed transferee, the shares proposed to be transferred, awarded, or confirmed, and any price for which the shares are to be transferred, awarded, or confirmed or the permitted transferee’s desire to transfer the shares or of any event or occurrence that would cause the shares to be transferred, awarded, or confirmed. If the donor Shareholder does not timely exercise this right, then the notice shall be considered to be the Offer Notice, and the Corporation and the Shareholders (including the donor Shareholder) shall have the right to purchase the shares that would be transferred but for this paragraph as otherwise provided in paragraph _ _ _ __ _ of this Agreement.
Obligations of Transferees
Unless this Agreement expressly provides otherwise, each transferee or any subsequent transferee of shares in the Corporation, or any interest in such shares, shall hold the shares or interest in the shares subject to all provisions of this Agreement and shall make no further transfers except as provided in this Agreement. Transfer of the shares shall not be entered on the books of the Corporation until an amended copy of this Agreement has been executed by the prospective transferee. Failure or refusal to sign such an amended copy of this Agreement shall not relieve any transferee from any obligations under this Agreement.
Optional Purchase on Bankruptcy
In the event any Shareholder is adjudicated a bankrupt (voluntarily or involuntarily), or makes an assignment for the benefit of creditors _ _[or files a petition seeking to force the involuntary winding up and dissolution of the Corporation under Corporations Code section 1800]_ _, _ _[or if substantially all property of the Shareholder is levied on and sold in a judicial proceeding]_ _, the Corporation and the other Shareholders shall have the option for _ _[e.g., 90]_ _ days following notice of any such event(s) to purchase all _ _[or any part]_ _, of the shares owned by the Shareholder. Any Shareholder who has information that would reasonably cause the Shareholder to believe that his or her shares would be transferred involuntarily or by operation of law shall give written notice to the Corporation and the other Shareholders in accordance with paragraph _ __ _, and shall offer or shall be deemed to have offered to sell his or her shares at the price and on the terms provided in this Agreement. The option shall be exercisable first by the Corporation and thereafter by the remaining Shareholders in the manner provided by paragraph _ __ _. In the event this option is not exercised for all the shares owned by the Shareholder, the Shareholder or the Shareholder’s successor in interest will hold the shares _ _[subject to/free and clear of]_ _ this Agreement.
Optional Purchase on Breach of Agreement
A Shareholder’s violation of any material provision contained in this Agreement that remains uncured for a period of at least thirty (30) days from the date a Shareholder or the Corporation gives written notice of such breach to the Shareholder in accordance with paragraph _ __ _ (unless the nature of the breach is such that it cannot be cured within said 30-day period, then the Shareholder shall have such additional time as may be reasonably necessary to cure the breach, provided that the curing of such breach is begun promptly and is pursued with diligence) shall trigger an optional buy-back of such Shareholder’s stock. The Corporation shall give written notice of such breach to the Shareholders in accordance with paragraph _ __ _. By such notice, the breaching Shareholder shall be deemed to offer to sell his or her shares at the price and on the terms provided in this Agreement. The Corporation and the other Shareholders shall have the option for _ _[e.g., 90]_ _ days following notice of any such event(s) to purchase all _ _[or any part]_ _ of the shares owned by the Shareholder. The option shall be exercisable first by the Corporation and thereafter by the remaining Shareholders in the manner provided by paragraph _ __ _. In the event this option is not exercised for all the shares owned by the Shareholder, the Shareholder or the Shareholder’s successor in interest will hold the shares _ _[subject to/free and clear of]_ _ this Agreement.
Optional Purchase on Criminal Conviction or Willful Misconduct
A Shareholder who is convicted of a felony or engages in willful misconduct (which shall mean the knowing and intentional failure to exercise ordinary care to prevent material injury to the Corporation or an intentional act with knowledge that it is likely to result in material injury to the Corporation), fraudulent activities, _ _[a franchise violation]_ _, conflicts of interest, personal dishonesty, breach of fiduciary duty, sexual harassment, or willful violation of the law (other than a violation of a traffic law or similar minor offense) that in any manner adversely affects the Corporation’s business or reputation shall trigger an optional buy-back of such Shareholder’s stock. In the event any Shareholder has been convicted of a felony or has engaged in willful misconduct as set forth in this paragraph, such Shareholder, his personal representative, or any Shareholder shall give written notice to the Corporation and the other Shareholders in accordance with paragraph _ __ _. By such notice, the offending Shareholder shall be deemed to have offered to sell his or her shares at the price and on the terms provided in this Agreement. The Corporation and the other Shareholders shall have the option for _ _[e.g., 90]_ _ days following notice of any such event(s) to purchase all _ _[or any part]_ _ of the shares owned by the Shareholder. The option shall be exercisable first by the Corporation and thereafter by the remaining Shareholders in the manner provided by paragraph _ __ _. In the event this option is not exercised for all the shares owned by the Shareholder, the Shareholder or the Shareholder’s successor in interest will hold the shares _ _[subject to/free and clear of]_ _ this Agreement.
Purchase on Death
- Add one of the following alternatives
- Alternative 1: Mandatory purchase on death by corporation or shareholders
Within a period beginning with the death of any Shareholder and ending _ _[e.g., 60]_ _ days after the _ _[death/qualification of his or her executor or administrator]_ _, his or her estate shall sell and the Corporation shall purchase and redeem all the decedent’s shares of the Corporation’s stock, at the price and on the terms provided in this Agreement.
If it is not legally possible for the Corporation to purchase the shares because it cannot meet the requirements of California Corporations Code sections 500-501, the Corporation shall purchase as many shares as it is permitted to purchase under those sections, and the surviving Shareholders shall purchase all the decedent’s shares not purchased by the Corporation at the price and on the terms provided in this Agreement. The surviving Shareholders’ obligation to purchase shall be several, not joint, and shall be proportionate to their respective shareholdings in the Corporation.
- Alternative 2: Mandatory purchase on death by shareholders
Within a period commencing with the death of any Shareholder and ending _ _[e.g., 60]_ _ days after the _ _[death/qualification of his or her executor or administrator]_ _, the deceased Shareholder’s estate shall sell and the remaining Shareholders shall purchase all the decedent’s shares of the Corporation’s stock at the price and on the terms provided in this Agreement. The obligation of the surviving Shareholders to purchase shall be several and not joint and shall be in proportion to their respective shareholdings in the Corporation.
- Alternative 3: Optional purchase on death by corporation or shareholders
The Corporation shall have the option, for a period commencing with the death of any Shareholder and ending _ _[e.g., 60]_ _ days after the _ _[death/qualification of his or her executor or administrator]_ _, to purchase all _ _[or any part]_ _ of the shares owned by the decedent, at the price and on the terms provided in this Agreement. The option shall be exercised by giving notice to the decedent’s estate or other successor in interest in accordance with paragraph _ __ _. If the option is not exercised within that _ _[e.g., 60]_ _-day period for all shares owned by the decedent, the surviving Shareholders shall have the option, for _ _[e.g., 30]_ _ days commencing with the end of that _ _[e.g., 60]_ _-day period to purchase all _ _[or any part]_ _ of the shares owned by the decedent, at the price and on the terms provided in this Agreement. The option shall be exercised by giving notice, in accordance with paragraph _ __ _, to the executor or administrator, stating the number of shares to which it is exercised. If notices of exercise from the surviving Shareholders specify in the aggregate more shares than are available for purchase by the Shareholders, each Shareholder shall have priority, up to the number of shares specified in his or her notice, to purchase the available shares in the same proportion that the number of the Corporation’s shares he or she holds bears to the number of the Corporation’s shares held by all Shareholders electing to purchase. The shares not purchased on such a priority basis shall be allocated in one or more successive allocations to those Shareholders electing to purchase more than the number of shares to which they have a priority right, up to the number of shares specified in their respective notices, in the proportion that the number of shares held by each of them bears to the number of shares held by all of them. In the event this option is not exercised as to all the shares owned by the decedent, the decedent’s estate will hold those shares _ _[subject to/free and clear of]_ _ the provisions of this Agreement.
Optional Purchase on Termination of Employment
In the event any employee Shareholder is no longer employed by the Corporation because of _ _[retirement]_ _, _ _[voluntary termination]_ _, or _ _[termination by the Corporation for cause]_ _, the Corporation and the remaining Shareholders shall have the option for _ _[e.g., 90]_ _ days following notice of any such event(s) to purchase all _ _[or any part]_ _ of the shares owned by the Shareholder. Notice shall be given to the Corporation and the other Shareholders in accordance with paragraph _ __ _. The option shall be exercisable first by the Corporation and thereafter by the remaining Shareholders, at the price and on the terms provided in this Agreement, and in the manner provided by paragraph _ __ _. In the event this option is not exercised as to all the shares owned by the Shareholder, the Shareholder or his or her successor in interest will hold the shares _ _[subject to/free and clear of]_ _ the provisions of this Agreement.
Notwithstanding any other provision of this Agreement or California Corporations Code section 185, an employee Shareholder whose employment terminates because of _ _[retirement/voluntary termination/termination by the Corporation for cause]_ _ shall forfeit all shareholder rights immediately on termination of employment.
Purchase on Disability
If any Shareholder becomes disabled for more than _ _[e.g., three]_ _ months, and that disability is likely to persist for _ _[e.g., one year]_ _, the Corporation and the remaining Shareholders shall have the option for _ _[e.g., 90]_ _ days following notice of any such event(s) to purchase all _ _[or any part]_ _, of the shares owned by the Shareholder. Notice shall be given to the Corporation and the other Shareholders in accordance with paragraph _ _[see form 3.71-5]_ _. The option shall be exercisable first by the Corporation and thereafter by the remaining Shareholders, at the price and on the terms provided in this Agreement, and in the manner provided by paragraph _ _[see forms 3.52-1, 3.57-1]_ _. In the event this option is not exercised for all the shares owned by the Shareholder, the Shareholder or his or her successor in interest will hold the shares _ _[subject to/free and clear of]_ _ the provisions of this Agreement.
- If applicable, add the following option
- Option: Mandatory purchase for disabled employee/shareholder
If a Shareholder who is also an employee (Employee Shareholder) becomes disabled, the Corporation shall continue to pay the salary of the Employee Shareholder for a period not to exceed _ _[e.g., 12]_ _ months at _ _[e.g., full]_ _ monthly salary adjusted for any federal or state disability compensation received, beginning with the date of the onset of disability.
On the disability of the Employee Shareholder for a period of _ _[e.g., 12]_ _ consecutive months, the Corporation shall, within a _ _[e.g., 90]_ _-day period after the disability period, purchase all shares owned by the Disabled Shareholder at the price and on the terms provided in this Agreement.
If the Employee Shareholder should die after becoming disabled, but before the actual sale of his or her shares, then the purchase and sale of his or her shares will be treated as the purchase and sale of a deceased Shareholder’s shares under paragraph _ __ _ of this Agreement.
For purposes of this paragraph, “disability” shall be defined in accordance with the terms of any disability insurance policy on the Shareholder that is owned by the Corporation at the time of the onset of the disability. In the absence of such a disability insurance policy, “disability” shall mean _ _[state evidence of disability, e.g., inability to perform all or substantially all of his or her regular duties in the business]_ _.
In the event the Corporation and the Shareholder or his or her personal representative fail to agree on whether the Shareholder is or is likely to remain disabled for purposes of this paragraph, the Shareholder or his or her personal representative and the Corporation shall each designate an arbitrator, and the two arbitrators so selected shall decide the issue. If the arbitrators cannot agree, they shall designate a third arbitrator to reach a decision. The arbitrators shall be entitled to receive and rely on any advice that they shall deem required to enable them to make a decision under this paragraph, and their decision shall be final and binding on the Corporation and the Shareholders.
Book Value
The purchase price to be paid for the shares subject to this Agreement shall be _ _[number, e.g., 115]_ _ percent of their book value determined as of the end of the fiscal quarter _ _[preceding the month]_ _ in which the event requiring determination of the purchase price occurs. The Corporation’s book value shall be equal to the excess of the book value of the total assets of the Corporation, _ _[including any proceeds of insurance policies/excluding the proceeds of any insurance policies owned by the Corporation on the lives of its shareholders]_ _, over the book value of the Corporation’s total liabilities, excluding the Corporation’s liability under this Agreement to purchase the shares for which the purchase price is being measured, based on the Corporation’s books and records.
The Corporation’s book value shall be determined in accordance with the accrual method of accounting and in accordance with generally accepted accounting principles applied on a basis consistent with those previously applied by the Corporation but observing the following principles:
- a. All accrued and properly accruable taxes and assessments shall be deducted as liabilities.
- b. All normal fiscal year-end accruals and deferrals (including depreciation and income taxes) shall be prorated over the fiscal year.
- c. All inventory shall be valued at cost or market value, whichever is lower.
- d. All real property, leasehold improvements, machinery, furniture, fixtures, and equipment shall be valued at the valuation appearing on the Corporation’s books and records as adjusted for depreciation.
- e. The Corporation’s book value shall include the amount of any cash surrender value of any insurance policies owned by the Corporation insuring the life of any person.
- f. Each account payable shall be valued at its face amount.
- g. Each account receivable shall be valued at its face amount less a reasonable reserve for bad debts.
The book value shall be fixed under this paragraph by the accountants of the Corporation who regularly prepare the Corporation’s financial statements and shall be communicated in writing to each person who is a party to the sale of shares. The book value shall be computed as of the last day of the Corporation’s fiscal quarter most recently preceding the event triggering the purchase right or obligation. The book value so computed shall be conclusive and binding on all parties for all purposes. This amount shall be divided by the number of shares of the Corporation’s capital stock then outstanding.
Capitalized Earnings Formula
The purchase price to be paid for each share subject to this Agreement shall be computed as follows: The net profits of the Corporation for each of the _ _[number, e.g., five]_ _ complete fiscal years preceding the date of determination of price for purposes of this Agreement shall be adjusted by deducting from the Corporation’s profits _ _[state adjustment factors, e.g., state and federal income taxes]_ _. The net profit figures for the _ _[number, e.g., five]_ _ years, thus adjusted, shall be added together and the total shall be divided by _ _[number of years, e.g., five]_ _. This average adjusted net profit figure shall be multiplied by _ _[number, e.g., four]_ _, and the result shall be divided by the number of shares of the Corporation’s capital stock then outstanding.
Appraisal Using “Baseball Arbitration”
If the selling Shareholder and the purchaser of the shares of the selling Shareholder under this Agreement cannot agree on a fair market value of the selling Shareholder’s shares (Offered Shares) within _ _[number, e.g., 15]_ _ days after the purchaser gives written notice to the selling Shareholder of its election, independent appraisers shall determine such fair market value in the following manner:
- (a) The purchaser shall select one appraiser and send written notice thereof to the selling Shareholder within _ _[number, e.g., 30]_ _ days after the end of the _ _[number, e.g., 15]_ _-day period described above. The selling Shareholder shall either (i) agree to the appraiser which the purchaser has selected or (ii) select a second appraiser by giving written notice thereof to the purchaser within _ _[number, e.g., 30]_ _ days after the end of said _ _[number, e.g., 30]_ _-day period. The selling Shareholder’s failure to give such notice within said _ _[number, e.g., 30]_ _-day period shall constitute its agreement to the appraiser that the purchaser has selected. Each appraiser selected in accordance with this subsection (a) shall (i) be a member of a recognized professional organization for appraisers and (ii) have at least _ _[number, e.g., three]_ _ years’ experience in appraising assets similar to the Corporation’s assets.
- (b) The appraiser(s) selected in accordance with subsection (a) above shall determine the fair market value of the Offered Shares, within _ _[number, e.g., 60]_ _ days after the last appraiser is selected.
- (c) If the purchaser’s appraiser is the only appraiser selected in accord with subparagraph (a) above, then the fair market value set forth in such appraiser’s appraisal shall constitute the fair market value of the Offered Shares.
- (d) If two appraisers are selected in accord with subparagraph (a) above and the fair market values set forth in their respective appraisals are within _ _[number, e.g., 10]_ _ percent of one another, then the fair market value of the Offered Shares shall equal the average of the two appraisals.
- (e) If two appraisers are selected in accord with subparagraph (a) above and the fair market values set forth in their respective appraisals are not within _ _[number, e.g., 10]_ _ percent of one another, then such two appraisers shall appoint a third appraiser. Any such third appraiser shall (i) be a member of a recognized professional organization for appraisers and (ii) have at least _ _[number, e.g., three]_ _ years’ experience in appraising assets similar to the Corporation’s assets. Such third appraiser shall determine the fair market value of the Offered Shares within _ _[number, e.g., 30]_ _ days after its appointment. The two appraisals that are nearest in amount shall be retained and the third appraisal shall be discarded. The fair market value of the Offered Shares shall equal the average of the two retained appraisals; provided, however, that if one appraisal is the average of the other two appraisals, such appraisal shall constitute the fair market value of the Offered Shares.
- (f) The purchaser and the selling Shareholder shall bear the cost of their respective appraisers. The purchaser and the selling Shareholder shall each bear one-half of the cost of any third appraiser.
- (g) At any time during the appraisal process, and before final determination, (i) a party may accept the other party’s value or (ii) the parties may negotiate a mutually agreeable value, whereupon the appraisal process shall terminate.
- If applicable, add the following option
- Option: Specified methods of appraisal
In making the appraisal, the appraiser(s) shall value real estate and improvements at fair market value; machinery and equipment shall be valued at replacement cost or fair market value, whichever is lower; finished inventory shall be valued at cost or market, whichever is lower; goods in process shall be valued at cost, using the cost accounting procedures customarily used by the Corporation in preparing its financial statements; receivables shall be valued at their face amount, less an allowance for uncollectible items that is reasonable in view of the past experience of the Corporation and a recent review of their collectibility; and all liabilities shall be deducted at their face value, and a reserve for contingent liabilities shall be established, if appropriate. The value of other comparable companies, if known, shall also be considered.
Agreed Price With Arbitration
The purchase price to be paid for each share subject to this Agreement shall be equal to the agreed value of the Corporation divided by the number of shares outstanding as of the date the price is to be determined. The initial agreed value of the Corporation is _ _[dollar amount]_ _. On _ _[date, e.g., March 15]_ _ of each year hereafter, the parties to this Agreement shall review the Corporation’s financial condition as of the end of the preceding fiscal year and shall decide by mutual agreement the Corporation’s fair market value, which, if agreed on, shall be the Corporation’s value until a different value is agreed on or otherwise established under this Agreement. If the parties agree, they shall provide evidence of it by placing their written and executed agreement in the Corporation’s minute book.
If no valuation has been agreed on within two years before the date of the event requiring an agreement on value, the value of a selling Shareholder’s interest shall be agreed on by the selling Shareholder or his or her successor in interest and the remaining Shareholders. If they do not agree on a value within _ _[number, e.g., 30]_ _ days after the date of the event requiring the determination, the value of the selling Shareholder’s interest shall be determined by arbitration as follows: The remaining Shareholders and the selling Shareholder or his or her successor in interest shall each name an arbitrator. If the two arbitrators cannot agree on a value, they shall appoint a third, and the decision of a majority of the three arbitrators shall be binding on all parties. Arbitration shall be in accordance with the rules of the American Arbitration Association that are in effect at the time of arbitration.
Insurance Policies
To fund the payment of the purchase price for the shares to be purchased under this Agreement on the death of any Shareholder, each Shareholder shall maintain in full force and effect a life insurance policy on the life of each other Shareholder in the face amounts shown in Exhibit _ _to this Agreement. Each Shareholder executing this Agreement specifically consents to the maintenance of such a policy and, if the Shareholder is an employee, consents to the fact that coverage may continue even after the Shareholder terminates employment. Each such policy is listed and described in the exhibit, and any additional policies acquired later for the same purpose shall also be listed in the exhibit. Each policy belongs solely to the Shareholder who applied for it and, subject to this Agreement, the owner of each policy reserves all the powers and rights of ownership of that policy. Each such owner shall be named as the primary beneficiary of his or her respective policies and shall pay all premiums on them as they become due. No Shareholder shall exercise any of the powers of ownership of any of the policies by changing the named beneficiary, electing optional methods of payment, canceling the policy, converting it, borrowing against it, or in any other way changing its nature, value, or the rights under the policy. Any dividends paid on any of the policies before maturity or the insured’s death shall be paid to the policy owner and shall not be subject to this Agreement. Receipts showing payment of premiums shall be delivered to the secretary of the Corporation at least _ _[number, e.g., 10]_ _ days before each date on which the respective premiums are due, and the receipts shall be held by the secretary for inspection by all Shareholders.
On the occurrence of any event that leads to the purchase of shares under this Agreement, the consideration to be paid for the shares shall be paid to the transferring Shareholder or to his or her estate, as the case may be. If the event that leads to the purchase is the death of a Shareholder, the Corporation or the surviving Shareholders shall file the necessary proofs of death and collect the proceeds of any outstanding insurance policies on the life of the deceased Shareholder as covered by this Agreement. The decedent’s personal representative shall apply for and obtain any necessary court approval or confirmation of the sale of the decedent’s shares under this Agreement. In all events, consideration for the shares shall be delivered as soon as practicable to the person entitled to it, and the _ _[secretary/(other holder of certificates)]_ _ shall cause the certificates representing the purchased shares to be properly endorsed and, on compliance with paragraph _ __ _, shall issue new certificate(s) in the name of the purchaser or purchasers. If the purchase follows the death of any Shareholder, the price to be paid for the shares of the deceased Shareholder shall not be less than the amount of life insurance in force on his or her life under the terms of this Agreement. If the purchase price exceeds the amount of insurance proceeds, the purchaser or purchasers shall pay the purchase price in cash up to the full amount of the insurance proceeds and shall pay the balance of the purchase price in cash _ _[or under a promissory note]_ _. If the insurance proceeds exceed the purchase price, the excess shall be paid to the _ _[insured/beneficiary of the policy]_ _.
In the event that a selling Shareholder shall fail to produce or deliver the stock certificate or certificates representing the shares of stock involved, duly endorsed for transfer, then the purchase price (consisting of cash and/or a promissory note) for the shares of stock may be tendered and delivered by the purchaser to the Secretary of the Corporation for the account and benefit of the selling Shareholder, and the selling Shareholder shall be notified in writing of that action by the purchaser. Such tender and delivery shall constitute valid payment for the shares of stock, and the purchase of the shares shall be deemed thereby to have been fully effected, so that all right, title, and interest in and to the shares of stock so purchased shall be considered vested in the purchaser, and all rights of the selling Shareholder, or any transferee, assignee, or any other person having any interest in those shares of stock, shall cease and terminate except only for the right, if any, to receive the purchase price for the stock and the right to have the stock deposited to secure the payment of the purchase price. The Secretary or Assistant Secretary of the Corporation, as attorney-in-fact for and in the name of the selling Shareholder, shall cause the shares of stock so purchased to be transferred on the books of the Corporation to the purchaser. The purchase price, as determined and paid in accordance with these terms, shall be payable to the selling Shareholder only on delivery of a stock certificate or certificates for the shares of stock to be purchased, duly endorsed for transfer, together with the payment of all costs and expenses of the Corporation incurred in connection with the transaction.
Each Shareholder does hereby irrevocably appoint and designate the Secretary or Assistant Secretary of the Corporation, and their respective successors in office, as the Shareholder’s attorney-in-fact on the Shareholder’s behalf, and on behalf of the Shareholder’s estate and personal representative, to effect the transfer of the shares of stock on the books of the Corporation in the manner provided above.
Notes and Security
The deferred portion of the purchase price for any shares purchased under this Agreement shall be represented by a promissory note executed by all the purchasing Shareholders, providing for joint and several liability. Each maker agrees to pay his or her prorata portion of each installment of principal and interest as it falls due. The note shall provide for payment of principal in _ _[number]_ _ equal quarterly installments with interest on the unpaid balance at the rate of _ _[number]_ _ percent per year, with full privilege of prepayment of all or any part of the principal at any time without penalty or bonus. Any prepaid sums shall be applied against the installments thereafter falling due in inverse order of their maturity, or against all the remaining installments equally, at the option of the payers. The note shall provide that, if a default occurs, at the election of the holder the entire sum of principal and interest will immediately be due and payable and that the makers shall pay reasonable attorney fees to the holder if suit is commenced because of default. The note shall be secured by a pledge of all the shares being purchased in the transaction to which the note relates _ _[and of all other shares owned by the purchasing Shareholders]_ _. The pledgeholder shall be _ _[name of pledgeholder]_ _, and the pledge agreement shall contain such other terms and provisions as may be customary and reasonable. As long as no default occurs in payments on the note, the purchasers shall be entitled to vote the shares; however, dividends shall be paid to the holder of the note as a prepayment of principal. The purchasers shall expressly waive demand, notice of default, and notice of sale, and they shall consent to public or private sale of the shares in a default, in mass or in lots at the option of the pledgeholder, and the seller shall have the right to purchase at the sale.
Administrative Approvals
The Corporation agrees to apply for, and use its best efforts to obtain, all governmental and administrative approvals required in connection with the purchase and sale of shares under this Agreement. The Shareholders agree to cooperate in obtaining the approvals and to execute any and all documents that they may be required to execute in connection with the approvals. The Corporation shall pay all costs and filing fees in connection with obtaining the approvals.
Unneeded Insurance Policies
On the death of any Shareholder, each surviving Shareholder shall have the option for _ _[number, e.g., 60]_ _ days to purchase the life insurance policy on the Shareholder’s life owned by the decedent. Each Shareholder shall also have the right to purchase the policies on his or her life within _ _[number, e.g., 60]_ _ days after the sale or transfer of all of his or her shares or after termination of this Agreement. This option shall be exercised by delivering written notice of exercise to the decedent’s personal representative or to the owner of the policy and paying the purchase price in cash. The purchase price shall be equal to the cash surrender value of the policy, reduced by any unpaid loans made against the policy. If the option is not exercised within that period, the policy owner may surrender the policy for its cash value or dispose of it in any other way he or she sees fit. The parties agree to execute such releases and assignments as may be necessary to effectuate the provisions of this paragraph.
Mandatory Dissolution of Corporation
Paragraph _ _. If the option provided in this Agreement to purchase shares on the death of any Shareholder is not exercised, the parties agree that, within _ _[number, e.g., 10]_ _ days after expiration of the option, a Shareholders’ meeting will be duly called, noticed, and held. At that meeting, all Shareholders shall vote their shares to dissolve the Corporation, and they shall execute and file, or cause to be executed and filed, all documents necessary to accomplish the dissolution of the Corporation.
Termination of Agreement
This Agreement shall terminate on:
- 1. The written agreement of all parties;
- 2. The dissolution, bankruptcy, or insolvency of the Corporation; or
- 3. At such time as only one Shareholder remains.
Preserving S Corporation Election
The Corporation and each Shareholder agree to execute any documents and consents necessary, and to cause them to be delivered in a timely manner to the Internal Revenue Service in order to allow the Corporation to elect to be taxed as an S corporation under Internal Revenue Code sections 1361-1379. Despite any provision of this Agreement to the contrary, no transfer of the Corporation’s shares shall be made by any Shareholder to any corporation, partnership, or trust, or to any other transferee, whether voluntarily, involuntarily, or by operation of law, if the effect of the transfer would be to cause the election to be terminated.
Each Shareholder agrees to include in his or her will or revocable trust a direction and authorization to his or her executor or trustee to comply with the provisions of this Agreement and to sell his or her shares in accordance with this Agreement. However, the failure of any Shareholder to do so shall not affect the validity or enforceability of this Agreement.
Insurance Company or Trustee Provisions
To fund in whole or in part the payment of the purchase price of the shares to be bought by the other Shareholders on the death of any Shareholder, the Shareholders have procured and made subject to this Agreement the life insurance policies on each Shareholder in the face amount shown in Exhibit _ _ to this Agreement. Any policies later required for this purpose shall also be listed in the exhibit. Each of those policies is deemed to be owned by the Shareholders other than the Shareholder whose life is insured by the policy, in proportion to the number of shares owned by each other Shareholder. Except as otherwise specifically provided with respect to any policy, all life insurance policies on any Shareholder acquired by the other Shareholders to fund the buy-out shall be subject to this paragraph even though the policies might not be included on Exhibit _ _.
The Trustee named in this Agreement shall be the named beneficiary of all policies issued subject to this Agreement and shall retain possession of the policies.
The Shareholders, other than the Shareholder whose life is insured by the policy, shall be the beneficial owners of each policy issued subject to this Agreement. As long as this Agreement is in effect, the Shareholders agree that they will maintain such insurance and that they will not exercise any of the rights, privileges, and benefits accruing under any policy they own subject to this Agreement, nor will they assign, encumber, borrow against, or otherwise dispose of any such policy, without first obtaining the written consent of the insured Shareholder and giving the Trustee _ _[number, e.g., 15]_ _ days’ written notice of the contemplated exercise. The insurance company insuring the life of a Shareholder shall give the insured, on the insured’s written request, any information about the status of the policy or policies on such Shareholder’s life.
The Shareholder beneficial policyholders shall pay all premiums on the policies issued subject to this Agreement, in proportion to their respective ownership interests. The Trustee shall file with each insurance company insuring the life of a Shareholder under this Agreement a request that copies of all delinquent payment notices be sent to the insured Shareholder. If any premium is not paid in full on or before _ _[number, e.g., 20]_ _ days before it is due, the insured may pay the premium on behalf of the other Shareholders. Payment by the insured shall be considered a loan to the other Shareholders to be repaid on demand of the insured, with interest from the date of payment at an annual rate equal to the maximum rate established by applicable law as of such date.
On the death of a Shareholder, the Trustee shall immediately proceed to collect the proceeds of the policy or policies payable to him, her, or it by reason of the Shareholder’s death. All such proceeds will be paid by the Trustee to the legal representative of the deceased Shareholder for the purchase of the deceased Shareholder’s shares under this Agreement, and any proceeds in excess of the purchase price provided in Exhibit _ _ shall be paid to the estate of the deceased Shareholder, upon receipt of a writing delivered to the Trustee. However, the Trustee shall be entitled first to deduct from the proceeds compensation and reimbursable expenses. Proceeds paid to the legal representative of the deceased Shareholder to purchase the shares shall be deemed to have been paid by each purchasing Shareholder pro rata.
_ _[Name of trustee]_ _ is hereby appointed to act as Trustee under this Agreement. _ _[Name of successor trustee]_ _ is appointed to act as Trustee under this Agreement if _ _[name of trustee]_ _ is unable or unwilling to serve in that office.
The Trustee agrees to hold safely the insurance policies deposited with him, her, or it under and subject to this Agreement, but shall be under no duty or obligation as to any insurance policy payable to him, her, or it as Trustee, except as expressly provided by this Agreement. The Trustee shall receive any sums that may be paid to him, her, or it as Trustee and beneficiary of the life insurance policies made subject to this Agreement and shall hold and dispose of those sums under the terms of this Agreement. The Trustee shall make all reasonable efforts to obtain the insurance proceeds payable by reason of an insured Shareholder’s death, but shall be under no obligation to institute an action to recover any such proceeds, unless indemnified (in a reasonably satisfactory manner) for all expenses and attorney fees connected with the action.
The Trustee shall be paid reasonable compensation for his, her, or its services and shall be reimbursed for all reasonable expenses and attorney fees. The Trustee shall be entitled to deduct such compensation and expenses before paying the remaining proceeds to the legal representative of the deceased Shareholder, or to any other person, under this paragraph.
By vote of the Shareholders holding a majority of the shares held by the Shareholders, the Trustee may be removed and a new Trustee appointed. The Trustee shall have the right to resign at any time on _ _[number, e.g., 30]_ _ days’ written notice to the Shareholders, such resignation to take effect at the end of the _ _[number, e.g., 30]_ _-day period. On the resignation or removal of the Trustee, the Shareholders owning a majority of the shares held by the Shareholders shall appoint as soon as possible a new Trustee to have all the rights, powers, and duties specified in this Agreement. The resigning or removed Trustee shall deliver to the new Trustee all policies held under this Agreement.
Miscellaneous Matters
Agreement to perform necessary acts
Each party to this Agreement agrees to perform any further acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement.
Amendments
The provisions of this Agreement may be waived, altered, amended, modified, or repealed, in whole or in part, only on the written consent of all parties to this Agreement.
Successors and assigns
This Agreement shall be binding on and enforceable by and against the parties to it and their respective heirs, legal representatives, successors, and assigns.
Validity of agreement
All provisions of this Agreement are separate and divisible, and if any part is held invalid, the remaining provisions shall continue in full force and effect.
Notices
All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or within _ _[e.g., 72]_ _ hours after mailing, if mailed to the party to whom notice is to be given, by first-class mail, registered or certified, postage prepaid, and properly addressed to the party at the address set forth on the signature page of this Agreement, or any other address that a party may designate by written notice to the others.
Governing law
This Agreement shall be governed by, and construed in accordance with, the laws of the State of California.
Counterparts
This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Entire agreement
This Agreement contains the entire agreement among the parties hereto and supersedes any prior oral or written agreements among them with respect to the subject matter contained herein. There are no representations, agreements, arrangements, or understandings (oral or written) among the parties hereto relating to the subject matter of this Agreement that are not fully expressed herein.
General interpretation
The terms of this Agreement have been negotiated by the parties hereto and the language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent. This Agreement shall be construed without regard to any presumption or rule requiring construction (i) against the party causing all or any part of such instrument to be drafted or (ii) in favor of the party receiving a particular benefit under the Agreement. No rule of strict construction will be applied against any party hereto.
Third parties: no interest
Nothing in this Agreement (whether express or implied) is intended to or shall (i) confer any rights or remedies under or by reason of this Agreement on any persons other than the parties hereto and their respective successors and assigns, (ii) relieve or discharge the obligation or liability of any third person to any party hereto, or (iii) give any third person any right of subrogation or action against any party to this Agreement.
Acknowledgement of legal representation
_ _[Law Firm]_ _, legal counsel for _ _[Client Name]_ _, has prepared this Agreement solely on behalf of _ _[Client Name]_ _. The other parties to this Agreement have retained, or have had the opportunity to retain, separate counsel to (i) help them in evaluating this Agreement and (ii) assist them in determining whether the provisions contained in this Agreement are in their best interests and consistent with their respective economic objectives.
Signatures
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first shown above.
Company
By __[Signature of president]__ _ _[Name of corporation]_ _ _ _[Typed name]_ _ _ _[Address of principal office of corporation]_ _ President
By __[Signature of secretary]__ _ _[Typed name]_ _ Secretary
Shareholders
__[Signatures of shareholders]__ _ _[Typed names below]_ _ _ _[Residence addresses of shareholders]_ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Consent of Spouse or Registered Domestic Partner
CONSENT TO STOCK BUY-SELL AGREEMENT OF _ _[NAME OF CORPORATION]_ _
The undersigned are the spouses _ _[or registered domestic partners]_ _ of _ _[names of shareholders]_ _, respectively. Each of us acknowledges that he or she has read the Stock Buy-Sell Agreement, of _ _[date]_ _, by and between _ _[names of shareholders]_ _, and _ _[name of corporation]_ _, a California corporation (Corporation), and clearly understands its provisions. Each of us is aware that, by the provisions of this Buy-Sell Agreement, _ _[he/she/he or she]_ _ and _ _[his/her/his or her]_ _ spouse _ _[or registered domestic partner]_ _ have agreed to sell or transfer all their interest in the Corporation, including any community property interest, in accordance with the terms and provisions of this Agreement. Each of us hereby expressly approves of and agrees to be bound by the provisions of this Agreement in its entirety, including, but not limited to, those provisions relating to the sales and transfers of the interest in the Corporation. If any of us predeceases _ _[his/her/his or her]_ _ spouse _ _[or domestic partner]_ _ when _ _[his/her/his or her]_ _ spouse _ _[or domestic partner]_ _ owns an interest in the Corporation, each of us hereby agrees not to devise or bequeath whatever community property interest we may have in the Corporation in contravention of this Agreement.
Date: _ _ _ _ _ _ __[Signature]__ _ _[Typed name of spouse or registered domestic partner]_ _
Date: _ _ _ _ _ _ __[Signature]__ _ _[Typed name of spouse or registered domestic partner]_ _
