Legal Question in Business Law in Massachusetts

Articles of Incorporation, proper place for stock buy back provisions

Myself and a couple of friends (leading experts in the industry) have a plan for starting a biotech company, place of business Massachusetts, incorporated in Mass. We want to make sure that if one of us suffers a massive head injury or dies, gets divorced (we don't want ex-wives showing up at the shareholder meetings and trying to run the show) or tries to sell his shares to a bus driver, that the corporation will have the first right of refusal to buy back the shares.

My question: is it best to have the provisions for the first right of refusal in the Articles of Organization, the By-Laws, or as a private agreement between shareholders, or some combo? As we have it written know, the Articles of Organization contains a clause saying that as provided for in the By-laws, when issuing shares, the Directors may decide to attach a first right of refusal for the repurchase of the shares in the event the shareholder intends to transfer the shares or dies or is incapacitated. That way we have given notice that shareholders should go look to the By-laws to check out exactly how the buy-back program works.


Asked on 11/23/05, 2:08 pm

3 Answers from Attorneys
Barry Levine Law Office of Barry R. Levine

Re: Articles of Incorporation, proper place for stock buy back provisions

You should have a separate agreement(s) that provide for a buyout of the deceased shareholders shares. You should also consider purchasing life insurance for each principal to fund the buyout. Valuations issues may be tricky, but it is worth providing for it ahead of time. I would be pleased to discuss this further at a mutually convenient time. You may contact me at the email address noted below.

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Answered on 11/23/05, 2:24 pm
Lawrence Graves Coolidge & Graves PLLC

Re: Articles of Incorporation, proper place for stock buy back provisions

These issues are customarily addressed in a stockholders' agreement -- although they can be put into the articles, this is not ordinarily done as any amendment then has to be filed with the state (rather than simply signed by the owners).

You and your friends REALLY ought to consult with an attorney and a CPA before you set up a company, as it is far more expensive to fix mistakes than to prevent them.

Best wishes,

LDWG

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Answered on 11/23/05, 2:47 pm

Re: Articles of Incorporation, proper place for stock buy back provisions

If you form a corporation, you should have a separate agreement between the shareholders and the corporation and/or the other shareholders. You might consider funding the buy-out by using life insurance.

If you from a LLC the buy-out provisions can be part of the Operating Agreement. You should sit down with an attorney and make sure you have a clear understanding of your alternatives and options in setting up the company.

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Answered on 11/23/05, 6:29 pm


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