Don’t Let an Impasse Stop You
No Impasse Required
Conventional Wisdom? Shareholder differences can paralyze and destroy a business. Even without economic justification, conventional wisdom recommends an “impasse” to exercise a “push-pull,” “Texas shootout or showdown,” “Russian roulette” or similar “reversible” buy-sell provision. Too often disputes destroy working relationships long before the shareholder or director impasse trigger is reached.
No Fault Divorce. An easily exercised push-pull prevents bitter feuds rivaling the epic “no holds barred” divorce battle in “The War of the Roses” movie. Rather than damaging the business and share value, push-pull provisions should avoid standards requiring business impairment. Legal documents cannot adequately capture concepts such as disgruntled, recalcitrant or uncooperative – yet each of these underlying conditions can damage a business and the value of the ownership interests before an impasse finally occurs.
Mechanics. When a push-pull provision is exercised, one of the shareholders is leaving. The reversible nature of the offer insures fairness. The party proposing the buyout submits the price and terms on which it would buy the other owner’s shares or, at the election of the receiving party, sell its own shares.
Don’t Overlook. Taking a lesson from the multi-decade Hatfield and McCoy feud, push-pull mechanisms should include the seller’s affiliates and permitted transferees (typically family members) as part of the selling group. Since push-pull provisions typically use a “price per share” offer approach, a shareholder making a disproportionate cash infusion needs to consider loaning the funds with appropriate loan documents. Other arrangements in these provisions should include mutual releases, repayments of amounts owed between the Company and the departing shareholder(s), and indemnification for corporate obligations which have been guaranteed by the departing shareholder(s). For additional considerations, see Legal Landmines – Partnerships and Sinking Ships.
Neither this post nor any other content on this website creates an attorney-client relationship or constitutes legal advice for any particular situation.
JD
