How Should Founders Draft Spousal Buy-Sell Terms?
Introduction
Marriage can affect the ownership, transfer, and control of shares in a startup. Without a carefully drafted shareholders’ agreement, a founder’s spouse, heirs, or creditor may later assert an interest in shares that the remaining founders intended to keep within the company or among the original ownership group.
A well-drafted spousal buy-sell provision allows the founders to agree in advance on what will happen if a shareholder marries, separates, dies, transfers shares to a spouse, or becomes subject to a property dispute. The provision should protect the company’s continuity without improperly defeating rights granted by Philippine family and property law.
Why Spousal Share Transfers Require Careful Drafting
Shares of stock are generally personal property, but their transfer may be affected by the spouses’ property regime. The Civil Code restricts sales between spouses, subject to specified exceptions, including separation of property agreed upon in the marriage settlements or judicial separation of property (R.A. No. 386, Article 1490).
The Family Code requires marriage settlements and modifications to be in writing, signed by the parties, and executed before the celebration of marriage. They do not prejudice third persons unless properly registered in the relevant civil and property registries (Executive Order No. 209, Article 77).
Accordingly, a shareholders’ agreement should not assume that a private corporate contract can determine the spouses’ property relations in all circumstances. It may regulate transfers of shares and establish contractual purchase rights, but it should be coordinated with the applicable marriage settlement, property regime, succession rules, and court orders.
Legal Foundations for a Buy-Sell Provision
Under the Revised Corporation Code, restrictions on the transfer of shares in a close corporation are enforceable against a purchaser in good faith only when they appear in the articles of incorporation, bylaws, and certificate of stock. The restriction must also be reasonable and generally cannot be more onerous than giving the corporation or existing stockholders an option to purchase the shares on reasonable terms and within a stated period (R.A. No. 11232, Section 97).
This requirement is important for startup drafting. A restriction stated only in a shareholders’ agreement may bind the contracting shareholders, but it may not fully protect the corporation against a third-party purchaser who had no notice of the restriction. Founders should therefore align the shareholders’ agreement with the articles of incorporation, bylaws, and stock certificates.
SEC-OGC Opinion No. 19-09, dated 2019, recognizes that although shares are generally transferable personal property, transfers between spouses remain subject to the restrictions and exceptions under the Family Code and Civil Code. It also indicates that the corporate secretary’s duty to record a transfer is generally ministerial when the transfer appears prima facie valid.
Events That Should Activate the Buy-Sell Mechanism
The agreement should identify the events that give rise to a purchase option or mandatory sale. The following events are commonly addressed:
- Marriage of a shareholder, especially where the spouse may acquire an interest under the applicable property regime;
- Transfer or attempted transfer of shares to a spouse by sale, donation, assignment, or other arrangement;
- Legal separation, annulment, declaration of nullity, or divorce recognized under Philippine law, where applicable to the parties;
- Death of a shareholder, when shares may pass to the surviving spouse or heirs;
- Marital property liquidation or judicial partition involving the shares; and
- Attachment, levy, or sale of shares arising from a spouse’s personal obligation.
The parties should distinguish between an event that merely creates a purchase option and one that automatically requires a sale. Automatic transfer provisions may be challenged if they disregard mandatory legal rights, lack a determinable price, or operate without the required consent or authority.
Recommended Structure of the Provision
1. Define the Covered Shares and Persons
Identify the shares covered by the provision, including shares issued after signing, shares acquired through stock options, restricted stock, conversion instruments, or other equity arrangements. Define “Spouse” carefully and address whether the term includes a spouse acquired after the agreement is signed.
The agreement should also identify whether the purchase right belongs first to the corporation, then to the remaining shareholders, or directly to designated founders. The order of priority should be consistent with the corporation’s constitutional documents and applicable law.
2. Require Notice of a Triggering Event
The shareholder should be required to notify the corporation and the other shareholders within a stated period after learning of a triggering event. The notice should describe the event, the shares affected, the proposed transferee, and any court, settlement, or property document relevant to the transaction.
The agreement should state when the notice period begins. For example, the period may begin upon marriage, receipt of a transfer document, service of a court pleading, death, or receipt of a notice of levy.
3. Establish a Right of First Refusal or Purchase Option
A right of first refusal allows the corporation or existing shareholders to purchase the shares before they are transferred to a spouse or another third party. A purchase option may be exercised upon the occurrence of a defined marital or property event, even without a prior third-party offer.
The provision should specify the order in which the purchase right may be exercised, such as:
- the corporation;
- the non-transferring shareholders pro rata; and
- the remaining shareholders or a designated founder by agreement.
If the corporation is given the first option, the agreement should be reviewed against corporate law restrictions on the acquisition of its own shares and the corporation’s available unrestricted retained earnings.
4. Set a Defensible Valuation Method
Price disputes can defeat an otherwise useful buy-sell mechanism. The agreement should state whether the purchase price will be based on fair market value, book value, an agreed formula, a recent financing valuation, or an independent appraisal.
A balanced provision may use different methods depending on the event. For example, a voluntary transfer may be priced at fair market value, while a compulsory purchase following a breach may use a stated discount, provided that the discount is reasonable and legally defensible.
The valuation clause should address:
- the valuation date;
- whether minority or lack-of-marketability discounts apply;
- the treatment of company debt and contingent liabilities;
- the effect of pending financing or acquisition offers;
- the identity and qualifications of the appraiser; and
- the procedure for resolving disagreement between appraisers.
5. Provide Payment Terms
The agreement should specify whether the purchase price will be paid in cash, installments, or a combination of both. It should also state the interest rate, security, payment schedule, consequences of default, and whether the buyer may set off valid claims against the seller.
Installment payments may be appropriate where the startup lacks sufficient liquidity. However, the agreement should not leave the spouse or estate without a clear and enforceable payment obligation.
Addressing Different Marital Property Regimes
Absolute Community of Property
For marriages governed by absolute community of property, assets acquired during marriage may generally form part of the community, subject to statutory exclusions and other applicable rules. A founder should not represent that shares are exclusively personal property without reviewing the date and manner of acquisition, the marriage settlements, and the applicable law.
Conjugal Partnership of Gains
Under a conjugal partnership regime, the analysis may depend on whether the shares were acquired before or during marriage, the source of funds, and whether income or proceeds connected with the shares became part of the partnership. The agreement should require the shareholder to disclose material facts relevant to the shares’ classification.
Complete Separation of Property
Where complete separation of property was validly agreed upon and properly documented, the shareholder may have greater capacity to deal with shares independently. This does not eliminate the need to comply with corporate transfer restrictions or other legal requirements.
The agreement should require the shareholder to identify the governing property regime and to provide reasonable proof when the status is material to a proposed transfer.
Consent, Joinder, and Spousal Acknowledgment
Founders should consider requiring the spouse to sign a limited acknowledgment or joinder. The document should explain that the spouse has received notice of the transfer restrictions and agrees, to the extent legally permissible, to honor the corporation’s and shareholders’ purchase rights.
A spousal acknowledgment should not falsely state that the spouse has waived rights that cannot legally be waived. It should also avoid treating the spouse as a shareholder unless the shares have been validly transferred and recorded.
The agreement should distinguish between:
- acknowledgment of notice;
- consent to a specific transfer;
- agreement to be bound by valid transfer restrictions; and
- waiver of a property claim, if legally valid and supported by proper consideration.
Protecting the Corporation from Unwanted Ownership Changes
The agreement should prohibit a shareholder from voluntarily transferring, donating, pledging, or otherwise encumbering shares without complying with the notice and purchase procedures. It should also require the shareholder to ensure that any transferee signs an assumption agreement before the transfer is recognized.
For close corporations, the transfer restrictions should be reflected consistently in the articles of incorporation, bylaws, and certificates of stock. Section 97 of R.A. No. 11232 makes this consistency important when the corporation seeks to enforce the restriction against a purchaser in good faith.
The corporate secretary should maintain complete records of the restrictions, notices, purchase elections, transfer instruments, and board or shareholder approvals. A secretary should not reject a facially valid transfer solely because a marital dispute exists, but should refer disputed or incomplete documents to counsel before recording the transaction.
Typical Scenarios
Founder Marries After Signing
A founder may be required to notify the company of the marriage and provide the relevant property-regime information. The agreement may give the company or the other founders an option to purchase shares proposed to be transferred to the spouse, subject to valuation and applicable law.
Spouse Claims Shares During Separation
If a spouse asserts that shares form part of the community or partnership property, the company should avoid taking sides in the marital dispute. It should preserve the corporate records, require formal documentation, and recognize only a transfer supported by valid instruments, proper authority, and compliance with the shareholders’ agreement.
Founder Dies and Shares Pass to the Estate
The agreement may provide for a purchase option upon death, with a price payable to the estate or lawful successor. The provision should be coordinated with the founder’s estate plan and should not purport to dispose of shares in a manner inconsistent with compulsory heirship rules.
Shares Are Levied for a Spouse’s Debt
The company should promptly obtain legal advice upon receiving a levy or garnishment notice. A buy-sell provision may provide an opportunity to purchase the shares, but its enforceability will depend on the nature of the obligation, the validity of the levy, the timing of the restriction, and the rights of the creditor.
Drafting Errors to Avoid
Founders should avoid the following provisions:
- an automatic forfeiture of shares upon marriage;
- a fixed price that bears no reasonable relation to the shares’ value;
- a restriction appearing only in a private agreement and nowhere in the corporate records;
- a clause declaring that a spouse has no rights without considering the governing property regime;
- a power given to one founder to determine the price without an independent review process; and
- a provision that requires the corporate secretary to decide disputed marital or estate claims.
The objective should be to regulate ownership and preserve business continuity, not to create a device that improperly defeats family-property rights or due process.
Recommended Drafting Checklist
Before signing a shareholders’ agreement, the founders should confirm that:
- the transfer restrictions appear in the articles, bylaws, and certificates of stock where required;
- the agreement defines marriage-related triggering events;
- the notice and exercise periods are definite;
- the valuation method is objective and workable;
- payment terms are clear;
- the spouse’s acknowledgment is limited to rights that may legally be addressed;
- the provision is consistent with the founders’ marriage settlements and estate plans;
- the company’s authority to repurchase shares has been reviewed; and
- dispute-resolution, governing-law, and interim-relief provisions are included.
Conclusion
A spousal buy-sell provision can prevent a marital or estate dispute from paralyzing a startup, but it must be drafted as part of a broader corporate and family-property plan. The provision should establish a clear purchase process, reasonable valuation, definite deadlines, proper corporate documentation, and safeguards for the rights of spouses, heirs, creditors, and the corporation.
Founders should review the clause whenever there is a marriage, financing round, issuance of new shares, transfer of equity, death, separation, or material change in the company’s ownership. Early legal review is generally less costly than attempting to resolve an ownership dispute after the shares have already been transferred or a court proceeding has begun.
About Nicolas and De Vega Law Offices
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