Mercer Capital: “Promissory notes are used frequently as a funding mechanism when buy-sell agreements are triggered. However, most buy-sell agreements reflect very little thought or negotiation regarding the promissory notes that they contain. . . . Promissory notes issued pursuant to the operation of buy-sell agreements are fairly common and often do not provide equivalent fair market value for the stock that is sold by shareholders. This raises a number of issues:
- For companies. The promissory note found in your buy-sell agreement may provide flexibility to the company if and when issued in a transaction. However, the question remains, is it “fair” and reasonable for all shareholders?
- For shareholders who remain after a transaction. You will benefit from the repurchase with favorable (to the company) financing for the purchase. That’s positive, perhaps.
- For the selling shareholder. Selling shareholders do not receive what they bargained for, i.e., the fair market value of their stock when sold at a trigger event. That’s certainly not positive from their perspectives.
- For all shareholders. There is risk here since no one knows in advance who will be the selling shareholder.