Toronto's Business Lawyer Blog

Businesses are constantly evolving, although not always for the better. Whereas the original vision and leadership may have worked well during the business' early years, as the company evolves and the market shifts, the corporate dynamics undergo significant changes. The same holds true for the personalities involved in the ownership and leadership of the company. For with time, personal aspirations and motivations change, as do friendships and family influences. As such, corporate changes are relatively common and often require a drastic shift in the leadership and ownership of the company.

To facilitate these business changes, it is often necessary to initiate corporate buy-out procedures. Undertaking a buy-out of the other owners / shareholders / partners, greatly benefits from the existance of a shareholders' agreement or partnership agreement. But even in the absecnce of such written arrangements, negotiating a buy-out is preferable to allowing you and/or the company to continue suffer, on a variety of angles (financially, expansion, emotionally, etc.).

Buy-outs in corporate agreements (whether a shareholders' agreement or partnership agreement) are generally structured in one of two forms: a 'shot gun' arrangement or put-call provisions.

The shot gun arrangement requires one one shareholder / partner (the "initiating party") to put forth an irrevocable purchase offer to the other shareholder(s) / partner(s), setting forth the exact dollar amount for which they seek to buy-out the other side. The other side has the option of either countering the offer by buying the initiating party's shares at the buy-out price or selling their shares at the buy-out price. Either way the sale is going to happen.

The other common buy-out arrangement is the put-call. The put arises where the shareholders / partners are allowed to force the acquisition of their shares by the other shareholders / partners (generally with a mark-down and paid over a period of time). The call arises where a shareholder / partner seeks to acquire his fellow shareholders / partners interest in the company (generally with a mark-up and paid out immediately). As with the shot gun arrangement, the put-call arrangement is designed to force a conclusive buy-out, if initiated and followed through. 

However, it should be noted these buy-out arrangements are intended to be default provisions, such that the parties to the agreement are able to negotiate alternate terms that are more suited to their particular circumstances. However, in the event that those negotiations fail, the fall back is the written buy-out arrangements that will require the other side to proceed to completion if they are initiated and pursued.