To alleviate concerns over the continued control over closely held companies, shareholders often enter into a Stock Restriction and Purchase Agreement, thereby restricting lifetime transfers. Such agreements often require that a shareholder interested in selling his or her shares, or the estate of a deceased shareholder, sell his, her, or its shares in the company only to the company or to the other existing shareholders of the company.

Another variation is to allow the selling shareholder, or an estate, the opportunity to sell shares to a third party only after the company and the non-selling shareholders have first declined to acquire such shares. In addition, a Stock Restriction and Purchase Agreement can be helpful in assuring that the shareholders receive the fair value of their labor.

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A Stock Pledge Agreement documents the pledge of a fixed number of shares of common stock by a shareholder as security for payment of a promissory note. The security interest continues as long as the note is outstanding. The secured party is authorized to take conveyance of the shares in the event of default under the note. During the period of time the pledge is outstanding, the party pledging the shares as security under the note continues to exercise the voting rights incidental to the shares. After the pledge is made, the voting rights transfer in full to the pledgee.

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A Stock Exchange Agreement is a written contract, signed and executed by representatives of two or more companies, whereby the participants in the agreement agree to exchange stock, usually as a precursor to the signing of a merger or acquisition agreement by and between the parties. When one person or entity owns more than 50% of a company’s outstanding stock, that person or entity is said to be the “controlling shareholder” of the company. Typically, stock exchange agreements will involve more than 50% of one of the companies’ outstanding stock, so that the other party becomes a controlling shareholder. Also known as “share exchange agreements”, these contracts are common in the world of corporate law and finance and are generally governed by the laws of Delaware or state where the two corporations maintain their headquarters or principal place of business.

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SmartRules provides step by step guides to local rules and civil procedure for state courts & federal courts throughout the country.

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