The following rules be followed when preparing a shareholders’ agreement containing stock transfer restrictions, buy-out provisions, and related matters:
(1) The parties to the agreement should be explicitly identified and should include the corporation. To render the agreement enforceable against the corporation, it is important to include it as a party, even if it has no options to exercise or explicit duties to perform. The successors in interest of the participants and the corporation should also be included as parties.
(2) The business purpose of the agreement should be explicitly set forth.
(3) The consideration for the agreement should be explicitly described. This rule should be followed even if, as is often the case, the consideration consists of the mutual obligations and promises of the parties.
(4) Both the restrictions imposed and the types of transfer of the stock to which the restrictions apply should be clearly and unambiguously described. In defining the types of transfers to which the restrictions apply, it is important to state whether the restrictions apply to pledges or other security-type transfers, transfers by operations of law, gifts, and transfers by reason of death or incompetency.
(5) The valuation figure or formula should be given or described in detail.
(6) Any buy-out or option provisions should be thoroughly described, and the duties of all parties with respect to such provisions should be clearly delineated.
(7) Any funding provisions included in the arrangement should be set forth, together with the duties and obligations of all parties with respect to these provisions. A list of all life insurance policies provided under the agreement should be included.
(8) Provisions should be made for the amendment and termination of the agreement.
(9) If the agreement is to provide disability buy-outs for disabled participants, a definition of disability and the amount and source of any disability insurance should be set forth.
(10) The state whose laws are to govern the agreement should be stated.
(11) Especially in community property states, the written consent of the participants’ spouses to the agreement should be obtained. This is particularly necessary in agreements containing buy-out provisions in the event of the death or disability of a participant.
(12) The stock certificates of all stock subject to the agreement should contain an appropriate notice of the transfer restrictions.
(13) The participants should be required to take the steps necessary to reconcile their personal estate documents (wills, trusts, etc.) with the provisions of the agreement.