Buy - Sell
by David
B. South
October 2, 2007
 David B. South, President of the Monolithic Dome Institute |
At times, we are asked to set up a business partnership or a corporation with friends, relatives or acquaintances. Over time, the players in such an arrangement often change. These changes can occur because of death, sickness, financial considerations, disagreement, etc. How do we handle such a change?
Often shareholders or partners will want to get out with their money. A shareholder may want the business to continue but, at the same time, want to transfer his/her interest to another family member or someone altogether new. Yet the original partners may only want the original investors involved.
In my opinion, the start of the new business (NEWCORP) is the best time for providing for changes.
NEWCORP, for example, was started by six unequal partners. One owns fifty-five percent, four own ten percent and one owns five percent. So we have a majority stockholder as well as five unequal minority stockholders. How do we establish procedures that will deal with future changes in a way that is fair to all?
A suggested framework follows. WARNING: This framework has not been sanitized by an attorney. It does not represent legal advice. It is merely a suggested framework, meant as an aid, not as a legal contract. Check with your attorney before entering into any contract.
Note the three paragraphs that follow: A, B and C. Paragraph A discusses establishing a value for the shares. Paragraph B presents information on selling shares. Paragraph C relates to minority shareholders retrieving their investment.
A) VALUES OF SHARES OUTSTANDING
At each annual shareholders' meeting or at a specially called shareholders' meeting, shareholders must adopt a value for the outstanding shares. This value should be the fair market value that takes into account: 1) book value, 2) market value by appraisals, 3) fair price to either buy or sell shares and outstanding obligations. If the value is contested, outside appraisals may be arranged. The company will choose an appraiser, the contestant will choose an appraiser, and the two appraisers will choose a third appraiser. The final value must be agreed upon by two of the three appraisers. The contesting party must pay for the appraisals.
B) SALE OF SHARES – FIRST RIGHT OF REFUSAL
If a shareholder has a bona fide offer to purchase her/his shares, NEWCORP must be offered first right to purchase at the agreed price and terms of the bona fide offer. NEWCORP must be given 30 days from date of written offer to answer. Next, the other shareholders must be offered a chance to buy. They also must respond within thirty days.
C) SHAREHOLDERS HAVE THE RIGHT TO SELL TO NEWCORP
Any shareholder may surrender all or part of his/her shares to NEWCORP at anytime. NEWCORP must purchase the shares at 90% of the value set in A above. The terms are to be equal quarterly payments, over 10 years, starting not less that 60 days after surrender of shares. The interest rate to the shareholder on the unpaid balance is to be at 6% interest.
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