What To Do If An Owner of A Business wants to Transfer its Interests

New Yorker’s are a mobile bunch. Espe­cially New York busi­ness own­ers. Busi­ness open and close every day.  It is risky to believe that your co-owners will still be with you five years down the line. It is likely that there will come a time when of your co-owners will want to sell his shares or inter­ests in the com­pany to some­one else.  One of the most com­mon ways that a small busi­ness can get dis­rupted is when an owner desires to sell or trans­fer his inter­ests in a com­pany. So, what should you do?  You should cre­ate in advance a method for the own­ers to review and block any that is not in the best inter­ests of the com­pany.  Here are some things you should think about:

1. Right of First Refusal. This is the most com­mon pro­vi­sion in a buy-sell agree­ment. The owner who wishes to sell his inter­ests first offers it to his co-owners before any­one else.
2. Decide the Price of the Own­er­ship Inter­ests in Advance. Often the price will be set at the price a pro­posed out­side buyer has bid.  I do not rec­om­mend this option because a fraud­u­lent offer is pos­si­ble. Another method is to set a pre-determined price at the time a buy-sell agree­ment is drafted.  Another option is to set a high down pay­ment price which would show good faith.
3. Make clear the effect of any sale on Minor­ity Own­ers. Often a right of first refusal pro­vi­sion may freeze out a minor­ity owner from sell­ing his inter­ests.  As a result, it may be impor­tant to include a “Right to a Forced Sale” clause.
4. Decide who can buy the inter­est. Should the com­pany have the right to pur­chase shares or the indi­vid­ual owners?
5. Should an owner be able to give away his inter­est? Often own­ers wish to grant their inter­ests in a com­pany to a trust for estate plan­ning rea­sons. This could be prob­lem­atic because tech­ni­cally the trust would own the shares of the busi­ness. Often these issues are addressed when draft­ing a buy sell agreement.
6. No Trans­fer Restric­tions. Refus­ing to trans­fer any own­er­ship inter­est is another pos­si­bil­ity. This can lim­ited in a few dif­fer­ent ways, such a no trans­fers to cer­tain per­sons and no trans­fers with­out writ­ten con­sent of the other owners.

You should decide in advance what to do if an owner of a busi­ness wants to trans­fer its inter­ests through a buy sell agree­ment to avoid unnec­es­sary prob­lems and poten­tial litigation.

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