When two parties want to agree on a transfer, sale, or purchase of stocks, and when one or more of the parties wants to restrict the other party’s use of that stock for a certain period of time, a Stock Restriction Agreement may be called for. Usually connected with larger-scale transactions such as mergers and acquisitions, these agreements limit a stockholder’s ownership rights in consideration for some service or financial compensation that is provided. When drafting a Stock Restriction Agreement, transactional attorneys should take note of the following provisions:
Recitals. Here the drafter should, in a list of recitals beginning with “Whereas,” list the central purposes of the agreement; why each party has chosen to enter into it, what they hope to gain from it, and who specifically (Board of Directors, Employee) are involved.
Defined Terms. Key terms such as “cause”, “change in control”, “common stock”, “good reason”, and “restricted stock” must be defined with specificity.
Restrictions. Here the drafter must specify the restrictions being placed on the stock. This can be done in the body of the agreement, if there are few, or in an addendum, if there are many. Often the agreement will restrict an employee’s ability to sell or transfer the stock if he voluntarily terminates his or her employment. Such a restriction may be drafted in this manner:
“Notwithstanding anything herein to the contrary, if Stockholder terminates service with the Company or a Subsidiary as an employee or consultant for any reason other than his termination by the Company or such Subsidiary without Cause or his voluntary termination for Good Reason, all Restricted Stock as to which the Restrictions have not lapsed according to Section 5 hereof as of the date of such termination shall immediately be forfeited and shall be transferred to the Company for no additional consideration.”
Any other restriction on the use, sale, or transfer of the stock must be listed. In preface to these restrictions, it should also be noted that the stockholder shall “have all rights and privileges of a stockholder of the Company with respect to the Restricted Stock, including voting rights and the right to receive dividends paid with respect to such shares, except that the following Restrictions shall apply.”
Lapse or Restrictions. The drafter should include a section outlining if and when the restrictions will lapse. For instance, the restrictions, in part or in whole, may lapse after six-months, or a year. It is here that drafters can use their creativity in order to draft a deal that is beneficial to both parties.
These are the most important provisions of a Stock Restriction Agreement. Provisions covering Adjustments to Shares, Severability, Modification, Governing Law, and Binding Arbitration should be addressed as well. To consult actual Stock Restriction Agreements, visit the Agreements section in www.RealDealDocs.com.
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