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Using Buy-Sell Agreements to Prevent Shareholder Lawsuits

Business Law

Running a business is risky. One way to mitigate this risk for private companies is a Buy-Sell Agreement among the owners (also commonly called a Shareholder Agreement). Private companies often use Buy-Sell Agreements to protect owners’ interests in the company in the event of death, disability, retirement, or sale. These agreements are also often a cornerstone of any succession plan. However, many Michigan companies are unaware that Buy-Sell Agreements may also be used to avoid shareholder lawsuits.

Minority oppression lawsuits can be destructive to private companies, family businesses, and small businesses. Both the Michigan Business Corporation Act, MCL 540.1489, and the Michigan Limited Liability Company Act, MCL 450.4515, allow for lawsuits by owners of private companies against other shareholders, members, directors, officers, or others in control for illegal, fraudulent, or willfully unfair and oppressive conduct when the continuing course of conduct or significant action or series of actions substantially interferes with the interests of the owners as a shareholder or member of the company. Minority oppression claims regularly arise during intra-corporate disputes such as when firing or modifying an owner’s employment or benefits package, altering voting rights, self-dealing, capital calls or distributions, and freeze-outs or sale of a stock or membership interest. Michigan courts have powerful discretionary powers to fashion remedies for minority oppression claims.

Unbeknownst to many Michigan private companies, family businesses, and small businesses, their already existing Buy-Sell Agreements and other corporate documents can be expertly modified to mitigate and avoid the risk of minority oppression lawsuits. Actions specifically authorized by the Articles of Incorporation, Operating Agreement, and other written agreements may limit the basis for a minority oppression action. Therefore, if a company does not have an Operating Agreement, Buy-Sell Agreement, or Shareholder Agreement, the company should create a carefully crafted and tailored document to meet its needs. If a company does have these documents, they should be reviewed and updated to add further protection.

This article is by no means an exhaustive explanation of the advantages of Buy-Sell Agreements, but a carefully crafted agreement can protect private companies and their owners from lawsuits regarding these minority oppression claims which are expensive and disruptive. As always, please contact the expert business attorneys at Shinners & Cook with any questions or need for legal advice regarding your Michigan private company, family business, or small business.