Buy-Sell Agreement

Term Main definition
Buy-Sell Agreement

A contract that sets forth the conditions under which a shareholder can transfer shares and usually provides that the shareholder must first offer his or her shares for sale to the other shareholders before being allowed to sell to persons or entities outside the company.

Buy-Sell Agreements are commonly used by private companies and usually terminate automatically when a company goes public because the purposes of the buy-sell agreement have been served and its usefulness ends.  Once the shares are free trading, each of the parties in theory can sell the shares into a public market. With illiquid private company stock, the buy-sell agreement could provide the liquidity, but only under specific circumstances.  Once the company is public, the markets also favor companies that are controlled by independent directors and adhere to the principle of one share, one vote.  The major purpose of the buy-sell agreement is often to provide continuity of ownership and continuity of management.  The owners of shares of public companies need to be able to freely transfer the shares, and the owners need the ability to vote their shares for their choice of directors.