The formation of business partnerships and corporations is typically accompanied by a rush of excitement and positivity from the founding partners and shareholders of the organization. During the beginning stages of a company’s life, shareholders and partners often spend a significant portion of their time outlining the plans of the business’ operations under the pretense that the entity will continue in perpetuity without changes to the organization’s original ownership structure. In reality, the divestiture of a partner/shareholder’s interest is a common occurrence many partnerships and corporations go through every year. There are a number of reasons why a partner or shareholder may want or need to divest his or her ownership interest. Ideally, a buyout agreement should be created during the formation of a partnership/corporation in order to avoid disagreements between partners and shareholders during the divestiture process. For partnerships, in the event that a buyout agreement has not been established prior to the divestiture process, the liquidation of a partner’s interest will typically adhere to uniform federal laws and regulations. Corporate shareholders should default to applicable state law in cases where their corporation has not established a buyout agreement.
When it comes to the process of divesting ownership interest, the best approach is a proactive approach. Incorporating a buyout agreement into a partnership/corporation’s operating agreement is the most effective means to avoid potential conflicts between owners during the divestiture process. A buyout agreement is a legally binding provision that serves to establish the parameters and circumstances under which an owner may divest his or her ownership interest. Buyout agreements may be customized to satisfy the will of the company’s owners. Listed below are some of the more common parameters addressed under a buyout agreement:
A member of a partnership that has not adopted a formal buyout agreement provision may choose to divest of their partnership interest in accordance with regulations established under the Revised Uniform Partnership Act (the Act). Under the Act, partners may “disassociate” themselves from a partnership by transferring their interest to an individual or entity of their choosing without the consent of the other partners in the partnership. However, it is important to note that the incoming partner (transferee) will only be entitled to the profit, loss, and distribution rights of the outgoing partner (transferor); managerial rights and responsibilities are not considered transferable interest under the Act. Unlike partnerships, there are no uniform regulations for corporations that do not have a formal buyout agreement in place. Therefore, shareholders wishing to liquidate their ownership interest will adhere to the laws of the state in which the corporation is incorporated.
While the termination of a partner or shareholder’s ownership interest may be untimely, the divestiture process does not have to be a difficult one. Consensus between the partners and shareholders during the entity’s formation guarantees a smoother transition in the event a partner or shareholder wishes to forego their ownership stake in the company.
For more information contact Kamal Eko at 301.231.6200.