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By: Patrick B. Mathis

Buy-Sell Agreements often have provisions that allow options for the shareholders who decide to withdraw their participation in the company. There can be many reasons for a shareholder to do so and often agreements will include a “put option” or “call option” to address these situations.

Put Option

Some buy-sell agreements will include a “put option” which serves to establish a market for shareholders by allowing a shareholder to tender his or her shares to the company at any time for redemption. This put option serves to create a market for shareholders and available liquidity which in many closely held corporations would be otherwise unavailable.

The price may be established by annual agreement, appraisal, formula or other valuation approach as discussed below and the terms for payment may be similarly established as either a lump sum at closing or payable over a period of years with a specified interest rate, collateral terms, personal guarantees, etc.

While some put options may be available to shareholders at any time, this right to tender may be limited to the period following a shareholder’s termination of employment by retirement, resignation or disability so that it only becomes available upon a shareholder’s disengagement from an active role in the business.

Call Option

Similar to a put option, the corporation may be given a “call option” which would allow the corporation to elect to redeem the shares of a shareholder who has terminated employment with company at any time following the date of such termination.

Again, the valuation of the shares, terms for payment, etc. would be set forth in the terms of the agreement.

This type of option may also be included to provide the company with a call option in the event of a shareholder’s bankruptcy or other court-ordered transfer of shares such as in the case of a divorce or a creditor claim, etc. so that the corporation would have the ability to avoid the scenario of having a shareholder who is not actively engaged in the business or perhaps hostile to the business through such an involuntary transfer.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.