The Rural Voice, 1991-08, Page 16THE DEPARTING SHAREHOLDER
Family disagreements, financial
difficulties, or appreciation in the
value of farm property may all prompt
a family member to leave the family
farm. One of the benefits of incorpor-
ating the family farm is that the corpo-
ration can be structured by means of a
shareholder agreement to facilitate the
departure of a shareholder, officer, or
director, with a minimum of dispute
and disruption to the farm business.
A shareholder agreement is the
best method of not only promoting the
smooth operation of a farm business
from day to day, but also ensuring that
there is a mechanism in place to pro-
vide for the departure of a shareholder.
This mechanism, known as a buy -sell
arrangement, enables a shareholder
who wishes to leave to sell his shares
to other shareholders and absolve him-
self from any further interest in the
corporation. Such a relatively painless
option for withdrawal minimizes the
impact on the corporation and signi-
ficantly reduces the potential of future
legal problems for both the departing
shareholder and the corporation.
Generally, a shareholder agreement
contains a clause which prohibits
share transfers. Therefore, the share-
holders of the corporation may not
transfer their shares except in accor-
dance with the procedure specified in
the shareholder agreement.
There are, of course, many reasons
why shareholder agreements frequent-
ly prescribe the manner and timing for
the disposal of a shareholder's shares.
First, it is important to the corporation
that it be able to control who will be a
shareholder, a farm corporation may
choose to restrict who are the share-
holders of a family farm operation.
Second, by creating restrictions on
transfer of shares, a corporation can
ensure that each of the shareholders
always has a market to sell his or her
shares; a shareholder will always be
able to sell to the other shareholders of
the corporation. Third, shareholders
of a corporation may wish to require
mandatory share transfers in certain
circumstances; for example, when a
shareholder is no longer willing or
able to contribute to the business, or
when there has been a dispute between
shareholders.
The restrictions on share transfers
in a shareholder agreement are usually
subject to certain exceptions. Parties
to a shareholder agreement may wish
to permit shares to be pledged to cer-
tain lenders (such as a bank) as secur-
ity for loans obtained to acquire the
shares. It is also often agreed that the
shareholders should be permitted to
transfer shares to a spouse, to a child,
or to a corporation controlled by them.
In addition, it is important in a
shareholder agreement that provision
is made to permit the transfer of shares
on death to the shareholders' heirs.
For a family farm corporation, it is
critical for the farmer -shareholder to
not only have a will providing for the
disposition of the shares on his death,
but also a clause in the shareholder ag-
reement which allows the disposition
of shares in the corporation to heirs.
A common buy -sell provision in a
shareholder agreement permits the
transfer of shares on a restrictive basis
pursuant to a "right of first refusal."
This type of agreement represents a
trade-off between the concern of the
shareholders to be able to sell their
shares and the desire to restrict per-
sons who may become shareholders of
the corporation. Basically, existing
shareholders are given the first oppor-
tunity to buy the shares if a sharehol-
der wishes to sell, but if the existing
shareholders are unable or unwilling
to purchase the shares for sale, then a
third party is permitted to acquire the
shares, provided the third party is wil-
ling to be bound by the terms of the
original shareholders' agreement.
Often, a right of first refusal will
apply not only when a shareholder
wishes to sell his shares voluntarily,
but also if a shareholder is obliged to
sell some or all of his shares on an in-
voluntary basis, such as when a credi-
tor wishes to realize on the shares as
security for a debt.
In a shareholder agreement con-
taining a right of first refusal, the
agreement usually provides that the
person wishing to sell his or her shares
must give notice to the corporation
that they wish to sell, and the number
of shares and the price of the shares
that are to be sold. Each of the other
shareholders of the corporation are
then given a chance to purchase shares
on the terms as set out by the person
wishing to sell shares.
A shareholder agreement protects
both the departing shareholder and
those who remain. There are no gene-
ral rules for shareholder agreements; a
shareholder agreement must be cus-
tom tailored to fit the requirements of
the particular farm business and the
individuals concerned. A lawyer can
best assist you in determining the
value of a shareholder agreement to
your business and how the agreement
may be structured to accommodate the
needs of the shareholders.0
Agrilaw is a syndicated column pro-
duced by Cohen, Melnitzer, a full
service London law firm. Marlene
McGrath, an associate lawyer, spec-
ializes in corporate and commercial
law, wills, and estate planning. Agri -
law is intended to provide information
to farmers on subjects of interest and
importance. The opinions expressed
are not intended as legal advice.
Before acting on any information
contained in Agrilaw, readers should
obtain legal advice with respect to
their own particular circumstances.
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