Buy-Sell Agreements in the Articles of Incorporation

Buy-sell in CaliforniaUnder the Corporations Code, if there is a suit for involuntary dissolution, or if there is an election to dissolve voluntarily by shareholders representing only 50% of the voting power of the stock, the dissolution of the corporation and the appointment of a receiver can be avoided by purchasing the shares owned by the shareholder (or shareholders) initiating the dissolution. The purchase can be by the corporation or by other shareholders owning 50% or more of the stock.

The ability to avoid dissolution by a purchase can be eliminated by a provision in the articles of incorporation. Effective January 1, 2018, the Corporations Code section 2000 was amended to allow such provision in the articles to be simply “a reference to a separate written agreement between two or more shareholders pertaining to the purchase of shares.” In other words, the provision in the articles that eliminates the ability to avoid dissolution by a purchase need not spell out the terms of a buy-sell agreement. It can simply refer to a separate buy-sell agreement that eliminates the ability to avoid dissolution by a purchase (and thus make the terms of the buy-sell agreement controlling).

The principal reason for this change was to eliminate the need to spell out in the articles the terms of a buy-sell agreement that would control in the event of a dissolution.

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