Stock Redemption Agreement

A stock redemption agreement is an agreement between a shareholder and a corporation for the corporation to repurchase that shareholder’s stock, effectively buying out the shareholder. Upon the buy-out, the shares are then absorbed back into the corporation’s authorized shares, but are thereafter considered to be unissued. Sometimes such shares are referred to as treasury stock of the corporation. A redemption is a way to remove a specific shareholder in the corporation and preserve ownership amongst the remaining shareholders. One of the biggest issues in the redemption, particularly in small businesses, is what the appropriate valuation of the stock should be. Often the seller values the stock higher than the buyer (the corporation). That is, unless the shareholders already have in place a method to value the shares. Such a method is typically set forth in a shareholders agreement, and common methods include using a book value, capitalized earnings value, or agreeing upon a third party business appraiser to come in and conduct a valuation of the shares. A redemption agreement can also be contrasted with a stock purchase agreement between stockholders in a corporation, which is a way for one or more shareholders to individually buy the shares of one or more other of the shareholders in the corporation.