Shareholder Oppression and Buy-Sell Agreements

The Key Elements of a Buy-Sell Agreement

Buy-sell agreements are – or at least should be – comprehensive contracts that anticipate future events and needs. Key features include:

• Parties - The shareholders and the company itself are parties to the agreement.
• Share transfer restrictions - The agreement places restrictions on the ability of shareholders to freely transfer their shares.
• Triggers - It sets forth trigger events requiring or allowing the purchase of shares, such as death, disability, retirement, divorce, or termination of employment.
• Valuation - A formula or process for establishing the fair value buyout price for shares is defined.
• Funding - Mechanisms to fund share purchases are specified, such as insurance policies or sinking funds.
• Purchase terms - The timing, payment schedule, closing requirements, and other terms for share purchases under the agreement are detailed.
• Purchase options - The agreement outlines if the buyout is mandatory or an option, and whether the company and/or shareholders have the option to purchase the shares.
• Right of first refusal - The agreement may provide a right of first refusal governing share transfers.
• Dispute resolution - A process is defined for resolving any disputes over valuation, terms, timing, or other issues.

Hopkins Centrich Law, Your Shareholder Oppression Law Firm

Hopkins Centrich Law provides cutting-edge, high-quality, creative legal solutions for minority shareholders in Texas Closely Held Corporations when their rights have been abused by the majority owners. Our attorneys and staff have decades of experience in virtually every aspect of business law in The Woodlands and Texas. We have designed and incorporated businesses, managed their every legal concern, engaged in litigation on their behalf, aided with mergers and acquisitions, managed mergers, acquisitions, and sales.

Hopkins Centrich Law knows Texas business law. We are uniquely positioned to help shareholders when they have ample cause to believe their rights are being violated. When we work with a client, our sole focus is on them. We take advantage of everything technology has to offer in order to optimize how we work. That gives us more time to spend with you, more time to understand the issues, and more time to negotiate and prepare for trial.

We get that no one wants to contact a law firm unless they feel they absolutely have to. When they do, it almost always means that ‘things have reached a head.’ The attorneys and staff of Hopkins Centrich Law understand what you are going through. We will make the process understandable; you will know what is happening with your case every step of the way, and you will never have to track us down for answers.

What To Look For

It’s an unfortunate fact of business life that sometimes a contract does not work as it was intended or the majority owners of a closely held company fail to act in the best interest of the company or shareholders. That can occur when a buy-sell agreement is ‘activated.’

Buy-sell agreements can potentially be used as a tool for shareholder oppression in a closely held company. Some of the issues that can arise include:

• Unfair valuation - The buyout price formula may undervalue the shares of the minority shareholder or overvalue the shares being bought back from the majority.
• Lack of marketability discounts - Minority shares may be subject to steep discounts for lack of marketability, reducing the minority's buyout price.
• Triggering events favor majority - The events triggering the buy-sell agreement may be under the control of the majority shareholders.
• Coercive use - The agreement could be used coercively to force minority shareholders out of the company against their wishes.
• Amendment without consent - The majority shareholders amend the agreement's terms without input from the minority.
• Funding obstacles - The company may claim lack of funds to buy out the minority as required by the agreement.
• Violation of terms - The majority shareholders violate the terms and conditions of the buy-sell agreement to the detriment of the minority.
• Right of first refusal - Refusal rights may give the majority the ability to block sales to third parties and set unfair purchase terms.
• Loss of employment - The minority shareholder may lose employment after being forced to sell their shares.
• Lack of transparency - The agreement may not provide sufficient access to company financials and other information to allow for fair valuation.
• Change of control provisions - These could allow the majority shareholders to gain further control through selective triggering.
• No independent appraisal process - Without an impartial appraiser, the majority can manipulate the valuation process.
• Restrictions on lifetime transfers - Provisions prohibiting lifetime gifts or asset transfers can lock in the minority shareholder.
• Failure to fund mandatory buybacks - The company may claim an inability to fund buybacks required under the agreement terms.
• Limitations on partial sales - Restricting the minority from selling part of their shares incrementally can exacerbate oppression.
• Poorly defined triggering events - Vague or ambiguous language leaves triggering up to the interpretation of the majority shareholders.
• Funding tied to discretionary compensation - Basing buyout funding on executive bonuses the majority controls can deprive minority shareholders.
• Lack of periodic review process - Without periodic reassessment, an outdated agreement can become highly oppressive.
• Unreasonable payment terms - Extended payout periods and below-market interest rates disadvantage minority shareholders.
• No exit or put option - The minority may have no way to exit the company if the agreement lacks a put option.

To help prevent oppression and conflict, buy-sell agreements should be entered into voluntarily by all parties, provide fair valuation methods, and allow for periodic reassessment of the terms. That, of course, does not always happen.

What to Do If You Think Your Minority Rights are Being Violated

First, do not believe anything you read online, or listen to someone who tells you that the Texas Supreme Court did away with Shareholder Oppression lawsuits. The Court merely limited some of the basis for bringing a Shareholder Oppression action. There are still many avenues to relief available, particularly where the majority shareholders have made decisions that are not In the best interests of the business.

Don’t wait. If you think your shareholder rights have been trampled on don’t hesitate to call. Don’t hope that things change, don’t let a matter fester, don’t try to solve the problem yourself through emails and letters and not-so-calm conversations. Contact us. The earlier you do, the better, there are deadlines for every legal action. The longer you wait, the fewer your legal options.