Agreement between shareholders and corporation to purchase stock (Section 303 redemption).
This is an agreement executed on _________[date], between _________, Inc., an _________ corporation, called “the Corporation,” and _________, _________ and _________, sometimes referred to collectively as “the shareholders,” and each singly as “a shareholder.”
The shareholders own the common stock (referred to as “shares”) of the Corporation as follows:
and they and the Corporation desire the stock to remain closely held in order to promote harmonious management of the Corporation’s affairs.
Therefore, the shareholders and the Corporation agree as follows:
1. Purchase obligations upon death.
1.1. Upon the death of a shareholder, his or her estate shall sell and the Corporation and the surviving shareholders shall purchase the shares which the deceased shareholder owned at death for the price and upon the other terms provided.
1.2. The number of the deceased shareholder’s shares which the Corporation shall purchase shall be the lesser of:
(i). the maximum number which it may purchase and the purchase qualify as a distribution in full payment in exchange for the estate’s stock under IRC §303, or under the equivalent section or sections of any successor code in force at the shareholder’s death. Provided that if: in the opinion of counsel for the Corporation, the maximum number of shares that may be purchased under this paragraph 1.2(i) is limited due to the operation of the attribution rules of IRC §318, the Corporation shall purchase the shares held by a deceased shareholder’s spouse and lineal descendants.
(ii). the maximum which it may purchase under the laws of the state or states having jurisdiction over the redemption of its stock; and the surviving shareholders shall purchase the balance of the shares which the deceased shareholder owned at his or her death.
1.3. Each surviving shareholder shall purchase and the deceased shareholder’s estate shall sell that portion of the balance of the shares which the deceased shareholder owned at his or her death which equals the proportion which the number of shares then owned by each such surviving shareholder is of the total number of the shares then owned by all surviving shareholders.
1.4. The parties recognize that the maximum number of shares which the Corporation may purchase from the estate of a deceased shareholder and the purchase qualify as a distribution in full payment and exchange for the estate’s stock under IRC §§ Section 303, is not exactly determinable until the final determination of the amount of federal estate tax and state death taxes of the deceased shareholder’s estate, and that the latter events which might not occur for a substantial time following the deceased shareholder’s death. Therefore, in order to provide for a timely redemption of shares, the parties agree that the “maximum number” of shares which the Corporation shall purchase for the purposes of paragraph 1.2(i), shall be an estimate of the maximum number.
1.5. Within 30 days of appointment, the personal representative of the deceased shareholder’s estate shall file with the Corporation this estimate in writing. There shall be set forth in the estimate all facts by which its accuracy may be verified including a detailed description of each asset includable in the gross estate of the deceased for federal estate and state death tax purposes, together with the personal representative’s opinion as to the estate and state death tax value as of date of death, an itemization of each deduction allowable in the personal representative’s opinion as a deduction from the gross estate in arriving at the net estate subject to tax, funeral expenses and expenses of estate administration and an enumeration of all credits allowable against federal estate tax and state death taxes and calculations of the amount.
2. Option upon voluntary transfer.
2.1. Notice of transfer. If a shareholder intends to transfer shares to any person other than the spouse or a lineal descendant of the shareholder or to the Corporation, he or she shall give _________ days written notice to the Corporation and the remaining shareholder of the intention to transfer. The notice, in addition to stating the fact of the intention to transfer shares, shall state (i) the number of shares to be transferred, (ii) the name, business and residence address of the proposed transferee, (iii) whether or not the transfer is for a valuable consideration, and, if so, the amount of the consideration and the other terms of the sale.
2.2. First option to purchase. Within _________ days of the Corporation’s receipt of the notice, the Corporation may exercise an option to purchase all or any portion of the shares proposed to be transferred for the price and upon the other terms provided. If the Corporation does not exercise its option to purchase all or any portion of the shares, each remaining shareholder within _________ days of the Corporation’s receipt of the notice of the proposed transfer, may exercise an option to purchase that proportion of unpurchased shares, which equals the proportion which the number of the shares owned by each remaining shareholder at the time of the Corporation’s receipt of notice is of the total number of the shares then owned by all remaining shares. The purchase option granted in this paragraph is sometimes referred to as the “First Option.”
2.3. Second option to purchase. If neither the Corporation nor a shareholder exercises its or his or her First Option to purchase shares, each remaining shareholder who is granted and who exercises a First Option may within ten days after the expiration of the _________-day option period provided for in paragraph 2.2 exercise an option to purchase the shares with respect to which the Corporation or shareholder has failed to exercise the First Option (the “option shares”). In the case of a single remaining shareholder the option shall be to purchase all of the option shares. In the case of two or more remaining shareholders, each remaining shareholder’s option shall be to purchase the number of option shares which bears the same proportion to the total number of the option shares as the number of shares owned by each remaining shareholder at the time of the Corporation’s receipt of the notice provided for in paragraph 2.2 bears to the total number of shares then owned by all remaining shareholders, provided that all remaining shareholders may by agreement among themselves determine the proportions in which some or all of their number may exercise the option granted in this paragraph 2.2. The purchase option granted by this paragraph is sometimes referred to as the “Second Option.”
2.4. The Corporation and the remaining shareholders must in the aggregate exercise their options to purchase all of the shares proposed to be transferred or forfeit their options.
2.5. If a shareholder who proposes to transfer shares dies prior to the closing of the sale and purchase contemplated by this paragraph 2, the shares shall be the subject of sale and purchase under paragraph 1.
3. Option upon involuntary transfer. If other than by reason of a shareholder’s death shares are transferred by operation of law to any person other than the Corporation (such as but not limited to a shareholder’s trustee in bankruptcy, a purchaser at any creditor’s or court sale or the guardian or conservator of an incompetent shareholder), the Corporation of the remaining shareholders, within _________ days of the Corporation’s receipt of actual notice of the transfer in the case of a First Option and within _________ days of that event in the case of a Second Option may exercise an option to purchase all but not less than all of the shares so transferred in the same manner and upon the same terms as provided in paragraph 2, with respect to shares proposed to be transferred.
4. Exercise of options and effect of nonexercise of options.
4.1. The Corporation and the shareholders who exercise the First Option or Second Option granted in paragraph 1, 2 or 3 shall do so by delivering written notice of their exercise of the options within the times provided in those paragraphs to the personal representatives of a deceased shareholder’s estate in the case of paragraph 1 option, or to the proposed transferor in case of a paragraph 2 option, or to the transferee in the case of a paragraph 3 option, and to the remaining shareholders in either case.
4.2. If the purchase options are forfeited or not exercised in compliance with paragraph 1, 2 or 3, then in the case of a proposed transfer under paragraph 2, the shares may be transferred within ten days after the expiration of the _________-day Second Option period granted to each remaining shareholder under paragraph 2, and upon the terms stated, free of the terms of this agreement; and in the case of shares owned by the estate of a deceased shareholder as contemplated in paragraph 1, or a transfer of shares under paragraph 3, the shares, after the expiration of the _________-day Second Option period granted to each remaining shareholder under paragraph 1 or 3, shall in the hands of the estate or transferee, be free of the terms of this agreement.
4.3. If in the case of a paragraph 2 transfer, the transfer is not upon the terms or is not to the transferee stated in the notice required of the transferring shareholder by paragraph 2, or is not within the _________-day period, or the transferor, after the transfer, reacquires all or any portion of the transferred shares, the shares transferred shall remain subject to this agreement as if no transfer had been made.
4.4. The personal representative of a deceased shareholder’s estate in the situation contemplated by paragraph 1, a proposed transferor of shares under paragraph 2 or a transferee of shares under paragraph 3, either, or both, as a shareholder or director of the Corporation, shall vote in favor of the Corporation’s exercise of the purchase options granted to it by this agreement at any meeting of shareholders or directors called for that purpose, unless the purchase by the Corporation of shares to which the option relates would be illegal.
5. Purchase price. The purchase price of shares shall be determined in accordance with the provisions of Exhibit A.
6. Pledge of shares prohibited. No shareholder shall encumber or use any of the shares as security for any loan, except upon the written consent of all of the parties to this agreement.
7. Payment of the purchase price.
7.1. The purchase price for shares shall be paid in cash except that at the option of the purchasing party or parties _________ percent of the purchase price may be deferred and _________ percent paid at the closing.
7.2. The deferred portion of the price shall be evidenced by the promissory note of each purchasing party made payable to the order of the selling party. The note of a purchasing party shall be in substantially the form of that set forth in Exhibit B.
7.3. Notwithstanding paragraph 7.1, if the Corporation or other purchasing party is the owner and beneficiary of any insurance on the life of a deceased shareholder from whose estate the Corporation or other purchasing party is purchasing shares, an amount equal to the death benefits payable to the beneficiary under the policy or policies shall be paid in cash to the estate of the deceased shareholder on account of the purchase price of the shares, and only the balance, if any, may be deferred as provided in paragraph 7.1. If the insurance proceeds exceed the purchase price of the shares, the excess is the property of the Corporation or other purchasing party.
7.4. If the Corporation is prohibited by law from using all or any portion of the proceeds of the insurance policy or policies it owns on the deceased shareholder’s life, paragraph 7.3 shall apply only to insurance proceeds which the Corporation may, by law, use to apply on the purchase price of the shares.
8. The closing. Unless otherwise agreed by the parties, the closing of the sale and purchase of shares shall take place at the general offices of the Corporation.
8.1. In the case of a purchase of shares from a deceased shareholder’s estate under paragraph 1, the closing shall take place _________ days after the appointment of a personal representative for the deceased shareholder’s estate. In the case of a purchase of shares under paragraph 2 or 3, the closing of the sale and purchase shall take place _________ days after the delivery to the selling shareholder of written notice by the last of the purchasing party or parties to deliver notice of its, his, her or their exercise of the option or options to purchase the selling shareholder’s shares. In either of these cases, if the determination of the net worth of the Corporation by a certified public accounting firm is required, under Exhibit B, the closing shall take place _________ days after the date on which the firm files with the parties the determination, if that day is later than either of the dates specified above.
8.2. Upon the closing of the sale and purchase, the selling and purchasing parties shall execute and deliver to each other the various documents which shall be required to carry out their undertakings hereunder including the payment of cash, the execution and delivery of notes and the assignment and delivery of stock certificates. Upon the closing the selling shareholder shall deliver to the Corporation his or her resignation and that of his or her nominees, if any, as officers and directors of the Corporation and any of its subsidiaries.
8.3. The sale and purchase of shares which the surviving or remaining shareholders are to purchase shall take place immediately prior to the sale and purchase of shares, if any, which the Corporation is to purchase.
9. Legend on certificate.
9.1. All shares owned by the shareholder, except as provided in paragraph 4, shall be subject to the provisions of this agreement and the certificates representing them shall bear the following legend:
The sale, transfer or encumbrance of this certificate is subject to an agreement dated _________[date], among the Corporation and certain of its shareholders. A copy of the agreement is on file in the office of the Corporation. The agreement provides, among other things, for certain obligations to sell and to purchase the shares of stock evidenced by this certificate, for a designated purchase price. By accepting the shares of stock evidenced by this certificate the holder agrees to be bound by that agreement.
10.1. This agreement and all restrictions on stock transfers created shall terminate on the occurrence of any of the following events:
(a). The bankruptcy or dissolution of the Corporation.
(b). A single shareholder’s becoming the owner of all of the shares of the Corporation, which are then subject to this agreement.
(c). The execution of a written instrument by the Corporation and all of the shareholders who then own shares subject to this agreement which terminates it.
10.2. Upon termination of this agreement, by reason of the occurrence of any of the foregoing events, each shareholder shall have the right within 30 days after termination to purchase from the Corporation, or from any other shareholder (including the personal representative of a deceased shareholder’s estate) who owns an insurance policy, or policies, on his or her life, the policy or policies, for cash in the amount of the cash surrender value and the unearned net premiums both amounts as of the date of the termination of the agreement.
10.3. This agreement shall also terminate upon the death of all of the shareholders within a period of 30 days of each other, in which case, the termination shall be effective as of the day preceding the day of the death of the first
shareholder to die, and the shares and any insurance policies owned by the Corporation or any deceased shareholder’s estate shall be owned free of the terms of this agreement.
10.4. The termination of this agreement for any reason shall not affect any right or remedy existing prior to the effective date of termination.
10.5. If under paragraph 2 or 3, all of a shareholder’s shares are transferred free of the terms but the transfer does not terminate this agreement, then within _________ days from the date of transfer the transferor of the shares shall have the right to purchase for cash, policies of insurance on his or her life from the Corporation or the other shareholders owning the policies, and the latter shall within _________ days have the right to purchase for cash, policies of insurance on each of their lives from the transferor of shares owning the policies. The purchase price of each policy shall be the cash surrender value plus the unearned premium, both amounts as of the date the transferor’s shares become free of the terms of this agreement.
11. Insurance on shareholder’s lives. The Corporation may desire to insure, or partially insure, its promise in this agreement made to purchase from a deceased shareholder’s estate shares which he or she owned prior to death. Therefore, the Corporation may purchase, and be the owner and beneficiary of and may, from time to time, but shall not be obligated to continue in force, insurance policies on the lives of the shareholders.
12. General provisions.
12.1. Governing law. This agreement shall be construed pursuant to the laws of the State of _________.
12.2. Remedies for breach. The shares are unique and each party to this agreement shall have the remedies which are available for the violation of any of the terms of this agreement, including, but not limited to, the equitable remedy of specific performance.
12.3. Notices. All notices provided for by this agreement shall be made in writing (a) either by actual delivery of the notice into the hands of the parties entitled, or (b) by the mailing of the notice in the United States mails to the last known address of the party entitled, registered mail, return receipt requested. The notice shall be deemed to be received in case (a) on the date of its actual receipt by the party entitled and in case (b), on the date of its mailing.
12.4. Descriptive headings. Titles to paragraphs are for information purposes only.
12.5. Binding effect. This agreement is binding upon and inures to the benefit of the Corporation, its successors and assigns and to the shareholders and their respective heirs, personal representatives, successors and assigns, and the shareholders by signing direct their personal representatives to open their estates promptly in the courts of proper jurisdiction and to execute, obtain and deliver all documents, including, but not limited to, appropriate orders of the _________ Court (or court of comparable jurisdiction) and estate and inheritance tax waivers, as shall be required to effectuate the purpose of this agreement.
In witness, the Corporation and the shareholders have executed this agreement on the date set forth above.
By: _________(Its _________)
[Names and signatures of shareholders.]
Determination of the Purchase Price
1. The price of shares to be purchased under this agreement shall be the greater of the following:
(a) _________ percent times their fair market value on the valuation date as defined below;
(b) _________ times the average pretax earnings for the previous _________ fiscal years;
(c) The price determined under paragraph 6 if that determination was made within _________ months of the valuation date.
2. The term “fair market value” as used in paragraph 1 of this Exhibit A shall be an amount which bears the same proportion to the amount of the net worth of the Corporation as the number of shares to be purchased bears to the total number of the Corporation’s shares outstanding on the valuation date.
3. The valuation date, as used, shall be:
(a) in the case of a purchase under paragraph 1 of this agreement, the last day of the month preceding the month in which the death of the deceased shareholder occurred;
(b) in the case of a purchase under paragraph 2 of this agreement, the last day of the month preceding the month in which the Corporation received the notice of the proposed transfer as provided in paragraph 2; or
(c) in the case of a purchase under paragraph 3 of this agreement, the last day of the month preceding the month in which the Corporation received actual notice of a transfer of shares;
provided, however, that, if the date so determined follows by less than two calendar months the close of the Corporation’s last preceding fiscal year, then the last day of the fiscal year shall be the valuation date.
4. Subject at all times to paragraph 6 of this Exhibit A the term “net worth” as used in paragraph 2 of this Exhibit A shall be an amount equal to the amount of the Corporation’s assets, less the amount of its liabilities, on the valuation date as disclosed by the Corporation’s books of account regularly maintained in accordance with generally accepted accounting principles consistently applied but adjusted as follows:
(a). Insurance, if any, owned by the Corporation on the life of a deceased shareholder whose shares are the subject of purchase under paragraph 1 of this agreement shall be valued at its cash value on the valuation date and not its face value.
(b). No adjustment shall be made on account of any event occurring subsequent to the valuation date, whether the event constitutes an adjustment to the federal or state income tax liability of the Corporation or otherwise.
(c). Reserves for contingent liabilities shall not be treated as liabilities.
(d). No amount shall be included for goodwill.
5. In the case of a purchase of shares under paragraph 2 of this agreement, if the price, if any, offered to the proposed transferee is less than the purchase price determined under paragraph 4 or 5 of this Exhibit A, that price rather than the price so determined shall be the price of shares to be purchased under this agreement.
6. The shareholders and the Corporation, may, at any time and from time to time determine “net worth” as used in paragraph 2 by executing and filing with the Corporation a written instrument where the determination is set forth, whereupon, for the period of time stated in the instrument “net worth” so determined shall supersede “net worth” as determined in paragraph 4. This written instrument may but need not read as follows:
The undersigned, being all the parties to that certain stock purchase agreement dated _________[date], pursuant to paragraph 6 of Exhibit A to the agreement, agree that between _________[date], and _________[date], both dates inclusive, the net worth of _________ Corporation shall be an amount equal to _________.
By: _________(Its _________)
7. The value of the Corporation’s net worth, if determined, as provided in paragraph 4 above, shall be determined by the firm of certified public accountants regularly employed by the Corporation, or, if for any reason this firm does not make the determination, then the determination shall be made by any reputable firm of certified public accountants employed for the purpose of the Corporation. The determination shall be made from an examination of the Corporation’s books of account, the accuracy of which shall be assumed, a formal audit being expressly waived. The waiver of audit shall not excuse the taking of inventories if inventories are a material factor in the determination of net worth. The expense of determining the net worth shall be borne by the Corporation.
Installment Promissory Note
For value received, the undersigned promises to pay, to the order of _________ the principal sum of $_____ with interest at the prime rate of the _________ Bank on the date of payment, per annum from this date on any principal sum balance from time to time unpaid. The principal sum of this note shall be paid in equal annual installments, the first installment to be payable at the end of one year from this date on any principal sum balance from time to time unpaid. The principal sum of this note shall be paid in three equal annual installments, the first installment to be payable at the end of one year from this date and the remaining installments at the end of each succeeding year until the principal sum of this note is paid. Interest accruing from time to time on the principal sum shall be paid at the times provided above for payments of installments of the principal sum. Payments of principal sum and interest shall be made at the place which the holder of this note from time to time shall direct in writing. Upon a default by the undersigned to make any payment of principal or interest due and continuing for _________ days after written notice is given by the holder to cure, then at the option of the holder of this note, all unpaid installments of principal and accrued interest due shall become immediately due and payable.
At the option of the undersigned, all or any portion of the unpaid principal sum and accrued interest on this note may be prepaid without premium or penalty, the amount of the prepayment to be applied first to accrued interest and the remainder to unpaid principal installments as the undersigned shall designate in a written prepayment notice delivered to the holder of this note concurrently with the making of the prepayment, provided that no prepayment can be made during the calendar year in which the note is executed.
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