The most useful mechanism in a shareholder agreement for dealing with shareholder oppression is a well-written Buy-Sell provision. Because shareholders in closely-held corporations have no market to sell their shares, they are subject to being squeezed-out or frozen-out. It is the ability to sell and exit the enterprise that is necessary to protect a shareholder from oppressive conduct. A Buy-Sell agreement potentially provides such an exit. A Buy-Sell agreement provides (generally) for the corporation to purchase the shareholder’s shares upon the happening of certain events. Commonly, Buy-Sell agreements provide for the purchase in the event of the shareholder’s death, disability, retirement, or termination of employment. They can also be written as an option that can be triggered by either party at will or upon a certain vote of the shareholders or directors. Such agreements can provide an effective resolution to situations of shareholder dissension and disagreement. However, the extent to which such an agreement because it functions to protect shareholder oppression. Often, the outcome depends on how the agreement is written. In practice, Buy-Sell agreements more often enable oppression than provide a solution to it.
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By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Shareholder Attorney