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Buyout provisions valuable to retain control of shares

A shareholders’ agreement should almost invariably deal with buyouts as a way to control who owns shares in the event of certain circumstances, Toronto business lawyer Anton Katz tells AdvocateDaily.com.

“Buyout provisions are valuable for all sorts of reasons,” says Katz, principal of Anton M. Katz Barrister & Solicitor. “A shareholders’ agreement can be utilized to effect a buyout of a person’s shares in certain defined circumstances. It can reserve to the corporation or the other shareholders either a right or an obligation to buy out shares.”

That right or obligation can exist in certain circumstances and can arise in situations that are either voluntary or involuntary, he says. Common involuntary events include death, disability, insolvency and marital breakdown.

As well, the buyout rights function as preemptive in some instances such as a shareholder’s death, insolvency or marital breakdown.

“In those circumstances, if there aren’t buyout rights then the shares would go to the person's estate when they die, their spouse upon marital breakdown or to a trustee in the event of insolvency,” Katz notes. “The buyout rights are preemptive because they prevent another party from receiving the shares.”

This can stop strangers or interlopers from interfering in the business of the corporation, he says. As well, other parties may not want the person's spouse or creditor to be a new shareholder in the corporation.

In the event of disability, if there were no buyout rights, then nothing would happen to the ownership of the shares. “While the shareholder may be unable to perform their duties to the corporation, their shares are not automatically going to another party,” he says.

When it comes to voluntary events, Katz says there can be call rights on the part of the other shareholders or the corporation whereby they’re entitled to compel someone to part with their shares.

“They have that right and are voluntarily exercising it without relying on unusual circumstances,” he says. “There could also be a buyout of shares in the context of a shotgun clause — a buy-sell provision that the other shareholders or the corporation can trigger which may result in a buyout.”

Call or shotgun rights are valuable because they can be triggered if a corporation no longer wishes to have someone as a shareholder.

“This type of buyout provision can help parties part ways by paying an amount of money,” he adds.

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