When forming a company, consider how it will end

Ira Leibowitz, The Daily Record Newswire

There are many issues facing the owner of a company and those between owners can become contentious and create costly litigation.

Among the worst outcomes is the court appointing a receiver to operate your business followed by a legal dissolution of the firm. The best time to agree to the terms of a buyout is when owner relationships are agreeable.

The best time to write buyout provisions is when the business is being formed or as shortly thereafter as possible.

There is a likelihood that at some point an owner may withdraw or be asked to withdraw from the company. There are many scenarios that could lead to that outcome. Some of the more common ones are enlightening.

Death, disability or retirement are facts of life and reasons for an agreement with buyout provisions. When one of these events occur, do you want an owner’s wife or children as the replacement owner? Would your company be better off having the right to buy the owner’s interest and retain its options?

It’s best to consider the options well before hand. The other owners of the business, or the business itself, could be given the opportunity to purchase the interest for full value, if it be your desire, with a minority discount. Your agreement would set the parameters for valuing the shares to be purchased and the terms of payment. Upon a death, life insurance may be the best way to fund the buyout. Otherwise, a payout over time arrangement may be the answer.

If an owner is going into bankruptcy, forced into an involuntary transfer of its assets or voluntarily wishes to sell ownership shares to a third party, it would be beneficial to have an agreement for the purchase of that owner’s interest.

There are a number of “bad guy” situations where the owner should be required to sell his interest to the other owners of the business at a significant discount. Those would include instances of bad conduct delineated in the agreement, (i.e. conviction of a crime) or violation of a material provision in an agreement.

If the business is a professional one requiring licensed ownership, and an owner’s professional license is terminated, that constitutes bad conduct which may create an embarrassing legal battle over the owner’s interests, especially if it had not been spelled out in a prior written agreement.

What if a majority of the ownership decides to sell the company at a negotiated price but the minority owners refuse to agree to sell at that price? If the purchaser is interested in owning the entire company that could kill the deal. Language in your agreement requiring the majority shareholders to sell their stock at the desired price accepted by the majority would have made the deal viable. The agreement may provide the right to demand that minority owner shares be included in a sale by the majority.

And, what if one owner simply no longer wants to work with the other? Wouldn’t it be comforting to have an enforceable disposition resolving the disaffected owner’s interest?

What should owners be doing with this potential minefield? Work out an upfront agreement resolving the various scenarios. Without an agreement spelled out, it is likely the owners will fight over the value of their interest, creating a host of related issues. To gain the upper hand, the owner’s interest may even be sold without his permission to a third party. This could be disastrous to the business and your peace of mind.

Owners beware: You never know what the future holds.


Ira Leibowitz is an attorney with offices in Melville, New York; visit www.linkedin.com/ pub/dir/Ira/Leibowitz.