of a major shareholder in a closely-held corporation can seriously
interrupt continuity and profitability of the business.
Surviving shareholders must struggle with how to continue the
company as a profitable business with the loss of a key
player. Heirs must concern themselves with how to replace
the income that the shareholder had earned and how to extract
their inherited portion of the company value.
To minimize the areas of conflict
and to realize a smooth transition, company owners should enter
into an agreement while the parties are still living. This
is called a buy-sell agreement. Stock purchase plans are
generally arrangements through which shareholders agree to sell
their stock interests in the event of specific triggering events
such as death, disability, or retirement.
Stock purchase plans are generally
classified into three categories: stock redemption plans, cross
purchase plans, and hybrid plans.
Under a stock redemption plan,
the corporation agrees to purchase all or part of the stock
interest of a shareholder. There are three approaches to
stock redemptions - full redemptions, partial redemptions and
Section 303 redemptions.
In a cross purchase agreement,
the remaining shareholders buy the stock interest of a single shareholder. They can either
distribute the shares proportionally to
what they had before the triggering event occurred or
non-proportionally according to what is outlined in the buy-sell
A hybrid plan, or wait-and-see
approach, gives the corporation the first chance to buy. If
the corporation does not buy in within a specified time frame (90
days say), the other stockholders will have the option to
buy. If that option is not exercised then the corporation
Factors to Consider
Many factors need to be considered when
determining the best type of stock purchase plan to implement, cost factors, psychological factors, ease of
administration, tax implications, and transfer for value rules to name
a few. You should seek the advice of financial and legal counsel
to help implement your plan.