Buy-Sell Agreements

A well-drafted buy-sell agreement helps business owners prepare for future contingencies, reduce costs, and avoid disputes or litigation. These agreements often include specialized provisions designed to address ownership transitions and business deadlocks. Four common provisions are highlighted:

• Wait-and-See Provision: This clause commits owners to a future sale while allowing flexibility in deciding how the transaction will occur at the time of the triggering event, such as an owner’s death. It gives the company and surviving owners options regarding who purchases the departing owner’s shares, allowing tax and ownership decisions to be made when circumstances are clearer.
• Shotgun Clause: Used to resolve disputes or deadlocks between owners, this provision allows one owner to offer a price for the other owner’s shares. The receiving owner must either accept the offer or purchase the initiating owner’s shares at the same price. This structure encourages fair pricing and helps avoid lengthy legal battles. Similar provisions are sometimes called Russian roulette, Texas shoot-out, or Dutch auction clauses.
• Drag-Along Provision: This clause protects majority owners by requiring minority shareholders to participate in a sale if the majority owner sells their stake. Minority owners must sell their shares at the same terms and price, preventing them from blocking a transaction.
• Tag-Along Provision: Designed to protect minority shareholders, this provision allows them to participate in a sale initiated by the majority owner, ensuring they receive the same terms and price as the majority shareholder.

Overall, these provisions help business owners anticipate “what if” scenarios and ensure their buy-sell agreements remain aligned with the company’s evolving needs and exit planning goals.