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Buy/Sell Agreements

Dear Dave
Our firm is set up as a corporation. My partner and I each own 50% of the stock. We are in the early planning stages of selling some of our stock to three senior engineers this fall as a first step of an ownership transition plan. Our attorney mentioned that we may want to change our current buy/sell agreement from a cross purchase agreement, to a corporate stock redemption. Why would he say this?

Dear WP
Buy/sell agreements spell out what happens when a triggering event occurs setting the buy/sell mechanism into motion. The five basic triggers are: a shareholder’s death, disability, voluntary or involuntary separation from service, or reaching a specified retirement age.

The cross purchase form of agreement involves each shareholder entering into separate agreement with each other shareholder to provide for an orderly disposition of stock if and when a trigger occurs. In your case, with ultimately five shareholders, you can see how this would become pretty complicated and cumbersome each time a transaction were to occur.

The disposition of stock under a corporate redemption agreement is a straightforward two-party transaction between each shareholder and the corporation independent of the other shareholders. Once you have more than two shareholders, corporate redemption agreements are generally easier to understand and simpler to administer.

There are numerous tax and legal issues associated with buy/sell agreements which also enter into the decision-making process as to which format to use. I urge all readers to seek the counsel of an experienced attorney and accountant to lead you to the proper choice for your situation.

Wahby and Associates