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By: Patrick B. Mathis

Buy-Sell Agreements regarding corporate stock are generally structured as either stock redemption agreements in which the corporation and shareholders are parties to the agreement or cross-purchase agreements in which the shareholders enter into the agreement between each other.

For corporations, the buy-sell restrictions may also be incorporated into the corporation’s articles of incorporation or bylaws.

Similarly, for limited liability companies, or partnerships, the arrangements may be between the members of the LLC or partners, or incorporated into the LLC operating agreement or partnership agreement terms.

For purposes of these materials reference will be made to the term “buy-sell agreement” in the context of a stock redemption agreement and referencing stock in a corporation. However, with appropriate modifications these provisions may be applied to a shareholder cross-purchase agreement, corporate bylaws, a limited liability company operating agreement or partnership agreement.

Stock Redemption Agreements

In a stock redemption agreement the corporation is a party to the agreement along with corporate shareholders who enter into the agreement. The restrictions under the agreement will apply to all shareholders who entered into the agreement as well as their successors who receive shares subject to the terms and provisions of the stock redemption agreement. This application to stock transferees is generally included within the terms of the stock redemption agreement.

Shareholders who do not enter into the agreement will generally not be subject to the terms and conditions of the stock redemption agreement, though their successor owners may be subject to such restrictions. 805 ILCS 5/6.55.

Cross – Purchase Agreements

Under a cross-purchase agreement the shareholders enter into an agreement regarding restrictions on the transfer of shares, rights of first refusal, etc. which bind the shareholders. The corporation is typically not a party to this cross purchase agreement as it is a contract between individual shareholders.

Generally cross-purchase agreements are used in situations with a relatively limited number of shareholders because in many cases the purchase obligation/rights which arise at a shareholder’s death are funded through life insurance policies maintained by the shareholders on the other shareholders. While this arrangement may be relatively easy in a situation in which there are only two or three shareholders, with a larger number of shareholders the logistical complexity of maintaining multiple policies, or funding premiums, split between multiple shareholders make these unwieldy arrangements.

While previously cross-purchase agreements may have been preferable in some situations to avoid the tax preference treatment and corporate alternative minimum tax on life insurance proceeds, under the Tax Cuts and Jobs Act of 2017 this issue was eliminated with the repeal of the corporate alternative minimum tax.

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.