A cross-purchase agreement is a legal contract between the shareholders or owners of a company that outlines the terms of a potential buyout or sale of an ownership interest in the company. The agreement is designed to provide protection to the shareholders in the event that one of them decides to sell their stake in the company.

In a cross-purchase agreement, the remaining shareholders agree to purchase the shares of the shareholder who wants to sell their ownership interest. The price for the shares is typically determined by an independent valuation of the company, and the terms of the purchase are outlined in the agreement.

This type of agreement is often used by small businesses, family-run companies, and closely held corporations. It provides a mechanism for a smooth transition of ownership and management in the event that a shareholder wants to sell their stake in the company. Without a cross-purchase agreement in place, a sale of a shareholder`s stake could lead to dissension and disagreements among the remaining shareholders.

Cross-purchase agreements are typically funded through life insurance policies. Each shareholder takes out a life insurance policy on the other shareholders, with the coverage amount equaling the value of their ownership interest in the company. If a shareholder were to pass away, the life insurance payout would be used to fund the purchase of their shares by the remaining shareholders.

There are a few things to consider when drafting a cross-purchase agreement. First, it`s important to determine the valuation method for the company and agree on the terms for determining the price of the shares. Second, the agreement should specify the process for transferring ownership of the shares and outline any legal requirements that may be necessary. Finally, it`s important to ensure that the life insurance policies are in place and that the coverage amounts are sufficient to fund the purchase of the shares.

In conclusion, a cross-purchase agreement is a legal contract between the shareholders of a company that outlines the terms of a potential buyout or sale of an ownership interest in the company. It provides a mechanism for a smooth transition of ownership and management in the event that a shareholder wants to sell their stake in the company. By funding the agreement through life insurance policies, the remaining shareholders can ensure that they have the resources necessary to purchase the shares of a departing shareholder.