When starting a business, it`s important to establish clear guidelines and agreements among the shareholders. One essential document for this purpose is the shareholder agreement, which outlines the rights and responsibilities of each shareholder. A put clause is a critical provision in the shareholder agreement that dictates when and how shareholders can sell their shares.
A put clause, also known as a buyout clause, gives a shareholder the right to force the other shareholders to buy their shares at a predetermined price. This clause protects the shareholder from being stuck with shares they no longer want, but it also ensures that all shareholders are treated fairly. The put clause can be triggered by a specific event, such as a change in control of the company or the death of a shareholder, or it can be exercised at any time.
The put clause is especially important for minority shareholders who may not have control over the company`s decisions. If a minority shareholder wants to exit the company, the put clause gives them a way to sell their shares without the risk of being bought out at a low valuation. The put clause can also prevent disputes among shareholders by providing a clear process for selling shares.
When drafting a put clause, it`s important to consider the following factors:
1. Price: The price at which shares can be sold should be fair and reasonable. This can be determined by an independent valuation or by using a pre-determined formula.
2. Timing: The put clause should specify when the shareholder can exercise their right to sell their shares. For example, it may be triggered by a specific event or can be exercised at any time.
3. Buyer: The put clause should specify who is responsible for buying the shares, whether it`s the other shareholders, the company itself, or a third-party investor.
4. Payment: The put clause should specify how the payment will be made, whether it`s in cash or through some other form of consideration.
In summary, the put clause is a critical provision in the shareholder agreement that protects shareholders from being stuck with unwanted shares and ensures a fair process for selling shares. When drafting a put clause, it`s important to consider factors such as price, timing, buyer, and payment. A well-drafted put clause can prevent disputes among shareholders and provide an exit strategy for minority shareholders.