10.2 Redemption and Cross-purchase Agreements

• Library: A Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner (ABA) (2018 Ed.)

10.2 Redemption and Cross-Purchase Agreements

10.21 General Considerations

The redemption agreement simply involves the entity (whether a corporation, a limited liability company, or a partnership) buying the stockholder's, member's, or partner's interest. For explanatory purposes it will be assumed that a corporation is the entity involved; however, the same considerations apply to partnerships and limited liability companies. Special considerations for partnership and limited liability company buy-sell agreements are discussed in 10.35.

Basically, all that is necessary in a redemption agreement is a contract to be entered into between the corporation and the various stockholders. The agreement should provide for the purchase of stock by the corporation in all possible events. Thus, events of death, disability, retirement, or a stockholder's desire to sell for any reason should be considered. The difficult issues of sales price, terms of payment, and the method of making those payments must be considered.

A cross-purchase agreement involves the same considerations as does a redemption agreement. The primary difference is that the individual stockholders purchase the stock of the deceased or withdrawing owner rather than the entity being the purchaser, as in a redemption agreement. As with a redemption agreement, a contract is entered into among the various owners specifying the terms of sale, such as sales price, terms of payment, and the method of making those payments.

In either type of agreement, various other matters should also be considered. Among them may be covenants not to compete; agreements not to divulge or use business secrets, including client or customer lists; and security...