Mandatory Buy-Out Agreements for Stock of Closely Held Corporations

A buy-out of a shareholder's stock is a sale of his stock holdings in a specific corporation pursuatnt to a pre-existing contract. In recent years such arrangements have, deservedly, become an increasingly popular planning device for shareholders in closely held corporations; they make it possible to limit the class of potential shareholders, provide liquidity for the estate of a deceased shareholder, and establish a value for stock which has no active market. There are two popular categories of buy-out plans. If the prospective purchaser of a decedent's shares is the corporation that issued them, the plan is called an "entity purchase" plan, a "stock retirement" plan, or a "stock redemption" agreement.

If the surviving shareholders are to purchase the decedent's stock, the plan is referred to as a "cross-purchase" agreement. A given plan may combine both types by providing that the corporation will redeem some of the shares and that the surviving shareholders will purchase the remainder.