Most shareholder agreements include an option to buy out a shareholder if certain events happen, for example:
- if the shareholder dies (you probably don’t want to be in business with that shareholder’s estate);
- if the shareholder becomes disabled for a certain period of time;
- if the shareholder gets divorced and the ex-spouse would otherwise be entitled to own some shares in the company (you absolutely don’t want to be in business with your business partner’s ex-spouse!); or
- if a shareholder becomes bankrupt.
There may be other situations that also trigger the option to buy out a shareholder.
The option to buy out can might say that the remaining shareholders will be the buyers, or that the corporation will be the party buying back the shares from the exiting shareholder, or it might even be a combination of the two. Some of the details can vary from agreement to agreement, but generally you will see some type of buyout option in most shareholder agreements.