Building the Better Buy-Sell Agreement

Apple is one of the largest and most celebrated companies in the world. Apple, like so many start-ups, began with three friends in a garage, Steve Jobs, Ronald Wayne and Steve Wozniak, who founded Apple Computer on April 1, 1976. The least known member of the trio is Mr. Wayne, who purportedly wrote the three men’s original partnership agreement and originally owned 10 percent of what would eventually become the most valuable company in the world. However, less than two weeks into the life of the enterprise, Mr. Wayne relinquished his equity for less than $1,000. So how and why did he sell equity that would eventually be worth $70 billion for less than $1,000? As the story is told, the why was Mr. Wayne’s concerns about assuming personal liability for the debts of Apple (if not paid, creditors may generally enforce their debt claims against the personal assets of general partners). The how is explained by a commonly used business arrangement called a “buy-sell” agreement.

‘Buy-Sell’ agreements, the business pre-nup: Buy-sell agreements are arrangements between owners of a business where one or more owners agree that they will purchase the interest of an owner who withdraws or becomes deceased. Often the agreements may include transfer restrictions which prohibit transfers of stock to outsiders without the consent of the other owners or provisions that commit each owner to sell, and the business or the other owners to buy, ownership interests at a fixed or determinable price upon the occurrence of specific events in the future. Essentially, a buy-sell agreement is similar to prenuptial agreement between business owners, which details the financial aspect of the unwinding of the business relationship. In lieu of a separate agreement, buy-sell provisions for closely held corporations may be included in shareholders’ agreements or organizational documents for the corporation. Buy-sell provisions are among the most fiercely negotiated provisions of such documents and often the subject of litigation among shareholders when the provisions are invoked. More often than not, the method of establishing the purchase price is the central issue in the debate or dispute.