Public and private businesses view their stocks in very different lights. While public firms might sell their company stock at the current market price at any time, private firms will keep stocks within their group of shareholders. With that said, if one of the shareholders leaves a private business, there must be processes to ensure that their shares are redistributed appropriately. Redemption agreements are there to ensure that stocks within private businesses are properly sold between shareholders in the case of someone leaving the company.
However, with such a significant purpose, redemption agreements must be thoroughly written and agreed upon. A business attorney can help.
What Is a Redemption Agreement?
A redemption agreement is a document formally written and agreed upon many years before any shareholders leave the company; essentially, it is a type of buy-sell agreement. It is a legally binding document to help avoid compensation-related issues when someone leaves a company and dictate what the rest of the shareholders earn from the departed individual’s stocks. Redemption agreements can be best utilized when shareholders have an equal amount of stock in the company. On the other hand, this agreement ensures that if there is a minority shareholder, they do not suddenly obtain enough stock to become a majority without the proper ruling. Redemption agreements keep the distribution of stocks fair and pre-planned for the rest of the shareholders.
What Could Happen to a Business Without a Redemption Agreement?
Without a redemption agreement in place or with a loose redemption agreement implemented, a business might find itself distributing stocks in an unfair or unregulated manner. For example, if a shareholder passes away without a proper agreement, their [majority] shares might end up with a family member with no business background. This could leave the rest of the shareholders in a difficult position.
It might also leave the business’s shares open to purchase by a third-party individual or company, and suddenly, the current shareholders have someone new alongside them. Without a redemption agreement, shares are not distributed to the right people in the right amounts, leading to mismatched leadership and an unknown future.
Everything That Should Be Included in a Redemption Agreement
While every redemption agreement is unique to each business, they will all require the same information to ensure the smoothest transition, both legally and within the company.
You Will Need Information Such As:
Payment — This will detail the amount of compensation required to give the leaving shareholder.
Expenses — If there are any expenses, this section will detail who must pay.
Shareholder Warranties — The shareholder will prove they are the sole owner of the stock with the proper documentation.
Corporation Warranties — The corporation will prove that the given redemption agreement does not violate any laws or contracts in place.
Voting Rights — This section will explain whether voting rights are given to the stock.
Binding Agreement — A redemption agreement must have a binding agreement to be legally intact.
When You Should Contact a Business Attorney
Given the intricacies behind a redemption agreement and its significance for a company’s future, a business attorney is essential for writing it and enacting it later. Many details and legalities go into drafting this agreement, and to ensure that you, as the stakeholder and your business are properly protected, partnering with a business attorney to help with its creation can ensure that nothing slips through the cracks. Additionally, when it comes time for any of your stakeholders to leave the business or if someone involuntarily leaves the business, a business attorney can ensure the wishes and legalities of the redemption agreement are upheld, and it gets done right. A business attorney can provide a smooth transition for all the shareholders involved and keep the business moving forward. When a contract of any kind needs to be written or enacted, a business attorney should be involved.
If you have further questions or are in a place where you need a redemption agreement drafted or enacted, contact the team at Hartmann Law.