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Maverick
Maverick, Attorney
Category: Business Law
Satisfied Customers: 3431
Experience:  13+ years of experience
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Hi, Im Brian - In 2013 I plan to sell 1/2 of my 60% stake

Customer Question

Hi, I'm Brian - In 2013 I plan to sell 1/2 of my 60% stake in a mfg. co. to a current 30% owner. The company is a S corp. and I understand that only one classification of stock is allowed. My intention is to carry the contract for him and will be required by the bank to sign on our credit line.
My question is, can I retain the voting rights of the stock I'm selling him until it's paid in full and still have one classification of stock. If so, exactly how ?
Submitted: 4 years ago.
Category: Business Law
Expert:  Maverick replied 4 years ago.

My intention is to carry the contract for him

 

Can you please explain what it is that you mean by the above statement or give more background info so we may better assist you. Thank you.

Customer: replied 4 years ago.
The sale of the stock would be approx. 20% down and I would carry an approx. 10yr note on the balance.
Expert:  Maverick replied 4 years ago.

I am still not clear on the exact nature of the transaction that you are trying to perform. 1. Are you not already on the credit line as a signatory?

2.Are you there as a guarantor for the S corp or just in the capacity of an officer of the S corp?

3. How many shares are issued and outstanding?

4. What are you going to receive in exchange for selling your 50% of the shares?

5. Need any other information you could provide to help fill in the gaps.

Customer: replied 4 years ago.

1. I am, but I'll be going from a majority position to a minority position.

2. As a guarantor for the S corp. - also a personal guarantee.

3. All shares are issued - there are 500 total. I own 300 - He owns 150 and another person owns 30.

4. TBD - estimated at high six figures.

5. Basically, while I'm selling him the first 30% of the stock I want to let him manage the business but keep the voting rights in case something goes wrong.

After the first stock sale is paid in full, my intention is to sell him the remaining 30% of the stock. At that time I would not be required to sign on the credit line so I would probably carry another note with very limited resrictions

Expert:  Maverick replied 4 years ago.

Okay, that helps.

 

Now, it sounds like what you are trying to do is give him profits as if he owns 60% of the stock but you retain voting rights at 60% until he pays you in full for the first 50% of the shares that you conveyed to him. In other words, you are getting a promissory note in exchange for transferring your shares to him. You are not getting cash all at once. Is this a correct understanding of what is happening?

Customer: replied 4 years ago.
Yes
Expert:  Maverick replied 4 years ago.

5. Basically, while I'm selling him the first 30% of the stock I want to let him manage the business but keep the voting rights in case something goes wrong.

 

In light of your statement above and the law on 1 class of stock, the proper way for you to do this is to obtain a promissory note from the buyer of your 50% of the share. Then you will need to secure the promissory note with a security agreement that grants you an interest in the shares that you are conveying to him in exchange for the promissory note. You will need to file a UCC-1 statement with the Sec of States' office showing that you have a security agreement in those share to perfect your interest and maintain priority.

 

If you want to be extra careful, you can use a trustee to hold the share until payment is completed. Much like how a deed of trust works in when money is loaned in exchange for an interest in someone's home.

 

Since he cannot manage the company as majority shareholder unless you convey the share or quasi convey the share through a trustee, splitting the voting rights and profits does not seem to be a workable or legal possibility here.

 

 

Please click "Accept" so that I can get credit for this answer. We can continue our conversation after that at no additional charge. Thank you.

 

You may be able to find an attorney in your area to further assist you by going to http://www.martindale.com/ or http://www.lawyers.com/.

Maverick, Attorney
Category: Business Law
Satisfied Customers: 3431
Experience: 13+ years of experience
Maverick and 6 other Business Law Specialists are ready to help you
Customer: replied 4 years ago.

Any creative ideas to make this transaction short of converting to a C Corp. or just giving it to him ?

Also, I'm having trouble printing the first two paragraphs of your last response. Can you just e-mail it to me at XXXXX@XXXXXX.XXX Thank You

Expert:  Maverick replied 4 years ago.

There is no way for us to email as this site automatically blocks out personal info such as emails, phone numbers, fax numbers, etc. However, I have copied the answer again below to see if you are able to print this time.

 

The idea that I have offered to is not that difficult and there really is no need to convert to a C corp. Use the links below as go bys to draft a promissory note, security agreement, and file a UCC form. Use a local lawyer's help if you have to. Should not cost you more that $400 or so and think it would be worth doing.

 

 

http://www.expertlaw.com/library/business/promissory_note_form.html

 

http://www.ilrg.com/forms/securityagree.html

 

Your security interest is going to be in the stock certificates which are identified by number on the certificate.

 

http://www.findlegalforms.com/product/oregon-ucc-1-financing-statement/

 

 

 

 

 

5. Basically, while I'm selling him the first 30% of the stock I want to let him manage the business but keep the voting rights in case something goes wrong.

 

In light of your statement above and the law on 1 class of stock, the proper way for you to do this is to obtain a promissory note from the buyer of your 50% of the share. Then you will need to secure the promissory note with a security agreement that grants you an interest in the shares that you are conveying to him in exchange for the promissory note. You will need to file a UCC-1 statement with the Sec of States' office showing that you have a security agreement in those share to perfect your interest and maintain priority.

 

If you want to be extra careful, you can use a trustee to hold the share until payment is completed. Much like how a deed of trust works in when money is loaned in exchange for an interest in someone's home.

 

Since he cannot manage the company as majority shareholder unless you convey the share or quasi convey the share through a trustee, splitting the voting rights and profits does not seem to be a workable or legal possibility here.

 

Customer: replied 4 years ago.
I understand the sale portion and am fine with that. It's not being able to keep the voting rights that's the problem for me.
Expert:  Maverick replied 4 years ago.

As you may know that shares can be classified as voting and non voting. However, at that point you have two classes of stockholders.

 

With proposal that I am stating when used in connection with a trustee, if the buyer defaults, you regain your 50% of the stock and thus control immediately upon default.

 

 

Customer: replied 4 years ago.
I didn't know that there can be differences in voting rights - which I just read in my Small Business Owner's Guide. That means I can accomplish my goals. Thanks - I'm good.
Expert:  Maverick replied 4 years ago.
Sure.

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