In an organization, what will the other members do if a shareholder leaves, dies, or gets disable? Well, a stock redemption agreement, prepared at the time of distribution of the shares, shall come to rescue.
This agreement has the complete details as to how the shares will be transferred or purchased in such circumstances. Moving forward, let’s understand the redemption agreement definition and how useful this agreement is .
What Is a Stock Redemption Agreement?
A legal document created between the corporation and the shareholders, where the stock owner sells or transfers its stocks back to the corporation is a stock redemption agreement. This agreement is mostly used in partnership, corporation, or limited liability companies.
Firstly, a buy and sell agreement is created to restrict the owners from transferring shares’ ownership in a closed business organization. It helps to create an orderly and planned transfer of a business interest.
What Are the Differences Between the Stock Redemption Agreement and Stock Transfer Agreement?
While crafting a shareholder agreement, one of the major decisions to make is whether the transaction should be redemption or transfer.
When there are multiple owners, the ownership percentage of the shareholders remains unchanged if one or more than one owner leaves. The selling shareholder sells their shares back to the organization in exchange for cash or property in the stock redemption agreement.
On the other hand, if the company wants to keep the number of shares intact, they create a stock transfer agreement. Here, in case of retirement or death of a shareholder, the other members will be given a chance to purchase the shares.
What Are Included in a Stock Redemption Agreement?
The company shall create their agreement as per its requirement. However, they can refer to stock redemption agreements to state their terms clearly and lawfully. Here are a few common terms to be included in the agreement:
- Payment: The corporation agrees to pay the stated amount to the leaving shareholder. The mode of payment and the last due date shall be mentioned here.
- Delivery: The corporation shall provide the successful payment via the above-mentioned mode and the shareholders agree to fully transfer the ownership and the rights over those listed shares.
- Voting Rights: If there is any voting rights or obligation on the owner of the above-listed stock, it shall get nullified or void upon transferring the shares to the company.
- Shareholder Warranties: The shareholder shall provide the warranty that he is the sole owner of the above-listed stock. There shall not be any third party involved for said stock ownership which could conflict with the agreement.
- Corporation Warranties: The corporation shall provide the warranty that there are no restrictions or agreements by the laws which could interfere with the redemption of the said shares. Furthermore, the redemption agreement shall not violate the state or federal laws and regulations.
- Expenses: Any kind of expenses incurred while preparing the redemption agreement shall be the individual responsibility of each party.
- Exhibits & Addendums: In case of any exhibits or addendums shall be considered valid only if given in written and signed by both the parties.
- Waiver: If the parties agree to provide a waiver of any single right or term of the redemption agreement, the party shall not constitute the whole agreement canceled.
- Severability: If the party finds any provision of the agreement invalid, all the other sections of the agreement shall continue to be upheld and enforced.
- Binding Agreement: Both the parties and their successors shall be considered legally bound with this agreement until its termination.
- Modification: If any party wishes to modify the stock redemption agreement, he/she needs to provide a written addendum signed by both parties.
- Acceptance: Both parties need to constitute their signature stating that they have read and understood the above terms and agree to follow the same.
Conclusion
Most of the time, the members don’t think through the real tragedies in the business. In such conditions, this agreement helps to make fair decisions that keep the business running smoothly.
With this, the partners can also agree on the price and conditions ahead of time without any need for hasty decisions. It will save a lot of chaos and mess in the business arrangement.
So, to be one step ahead, you could get a free sample of stock redemption agreement on CocoSign, a leading agreement templates provider, where there is a wide range of templates available created by legal professionals.