Tag: business law

Have You Looked At Your Buy-Sell Agreement Lately? Business Succession Planning

John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago.  They were equal partners and formed a corporation.  On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions.  This type of agreement is sometimes referred to as a “buy-sell agreement”.

Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment.  Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value.  There was no adjustment for good will or other intangible assets.  Also, the increase in value of any assets would not be taken into consideration.  The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments.  The business was required to purchase a departing shareholders shares.

Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC.  They did not think to have a buy-sell for the LLC.

John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low.  He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement.  Shortly thereafter, Mary announced her retirement.

The remaining owners are concerned that the business will not be able to support payments to John and to Mary.  Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.

Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement.  As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business.  If more than one owner were to retire, it would cause a bigger strain.  Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.

Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis.  For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits.  Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.

Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners.  Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty  years.

Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at msaunders@lgattorneys.com.

Important Notice to Privately Held Corporations: Compliance with Corporate Formalities Helps Stave Off Personal Liability

Many believe that by incorporating their business, they are shielding themselves from personal liability.

However, to avoid personal liability for the business’s actions, the business must have a separate identity apart from its shareholders, officers, directors, and employees. Strictly following corporate formalities, such as maintaining annual consents, maintaining corporate records, and meeting additional requirements can help maintain protection from liability.

The Illinois Appellate Court, in Buckley v. Abuzir, 2014 IL App (1st) 130469 (2014), recently held that while traditionally shareholders, officers, directors, employees, may be held liable if the business’s corporate formalities and additional procedures are not followed, now, even certain third parties, may face liability if such third parties exercise certain amounts of control over the business.

At a minimum, a corporation must have adequate capitalization, issue stock, observe corporate formalities, maintain corporate records, not commingle funds, not divert corporate funds from the business, and maintain arm’s-length relationships among related entities.

To protect shareholders, officers, directors, employees and now certain third parties from personal liability, business owners should review their books and records. If you have any questions regarding corporate law or business law matters, please contact:

Morris R. Saunders at:

(312) 368-0100 / msaunders@lgattorneys.com

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