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Using a buy-sell agreement to protect corporate stock in divorce

One of the most disruptive events in the life of a closely held corporation in California is the divorce of one of the owners. Without prior planning, a shareholder's divorce could insert the shareholder's former spouse into the management of the corporation if the stock is a community asset. Also, a shareholder may be forced to sell valuable stock at a loss in order to satisfy a property distribution order. A well-drafted stock transfer agreement or buy-sell agreement can eliminate these risks.

Stock transfer agreements have many uses, but their primary function is to ensure the continuity of management by the original group of shareholders in the event of retirement, death, disability or divorce of any shareholder. A buy-sell agreement is a contract to which the corporation and all shareholders are parties. If shareholders are added after the corporation is formed, such shareholders must agree to the terms of the buy-sell agreement. Most attorneys recommend that spouses sign consent forms waiving their community property interest in the spouse's shares.

These agreements operate in the same general manner: upon the happening of a specified event, such as a divorce, the shareholder and the shareholder's estate agrees to sell his or her stock to the corporation and the corporation agrees to buy the stock. The agreement must be in writing and signed by the corporate officers and all shareholders. The existence of the agreement must be endorsed on all stock certificates.

Many shareholders in close corporations desire to continue their involvement in the corporation after their divorce become final. The spousal waiver of community property rights is the easiest way to ensure such an outcome. The waiver can be a separate document or part of a prenuptial agreement. Anyone considering the use of a buy-sell agreement may wish to consult a lawyer who is knowledgeable about drafting and enforcing such agreements.

Source: California Lawyer, "Using a Restricted Stock Agreement," William L. Porter, Sept. 17, 2017

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