Trigger events & departure provisions — the comprehensive taxonomy, the discounts and premiums, and the S-Corp trap.

Every partnership ends. The question is whether the agreement defines the ending or the courts do. A modern agreement covers the comprehensive trigger taxonomy — standard, defensive, and termination-based — and prices each trigger with explicit discounts or premiums. Older agreements typically cover death and disability and miss the rest. That gap is the most common deal-readiness defect.

§ 01 · General transfer prohibition and standard triggersThe structural foundation.

General Transfer Prohibition. No Shareholder may directly or indirectly sell, assign, transfer, mortgage, encumber, pledge, or otherwise dispose of any Stock without first obtaining written consent of the Corporation and other Shareholders, or first complying with the agreement's transfer terms. Any purported transfer in violation is null and void. Enforcement is via the stock certificate legend.

Death. Mandatory purchase by surviving Shareholders (or, if they decline, by the Corporation). Most commonly funded with cross-purchase or entity-owned life insurance.

Permanent Disability. Mandatory purchase by surviving Shareholders (or, if they decline, by the Corporation). Funded with disability buy-out insurance. The buyout typically occurs one year after the date of Permanent Disability unless otherwise agreed.

Voluntary Retirement / Withdrawal. Mandatory purchase by the Corporation. Subject to discounts for short notice and short tenure.

§ 02 · Defensive triggersDivorce, bankruptcy, burnout.

Divorce. Prevents an ex-spouse from receiving voting agency shares as part of a marital settlement. The agreement should grant the Corporation (or remaining Shareholders) a right of first refusal at the CAUV price.

Bankruptcy / Involuntary Transfer. If a Shareholder's stock is subjected to legal process — encumbrance, attachment, transfer to a trustee, sale to a creditor, levy by judgment holder — the Corporation should have an option to purchase at the CAUV price. This option typically lapses 60 days after the Corporation receives written notice. If the Corporation declines, remaining Shareholders typically have 15 days thereafter.

The "Burnout" Trigger. For partners who simply want to quit early. The agreement should specify a penalty valuation (e.g., 80% of fair market value) to discourage premature exits that hurt the remaining partners.

§ 03 · Termination-based triggersFor Cause vs Without Cause.

Involuntary Termination for Cause. The Corporation and remaining Shareholders have an option to purchase with a discount applied to the price. Cause is broad — the agreement should explicitly enumerate the Cause list: material default (with cure period), engaging in a competing insurance business, failure to comply with Corporation policies, failure to perform duties competently, unprofessional or fraudulent conduct, insurance license revocation, conviction of stealing assets above a stated threshold, failure to meet sales goals in 2 of 3 consecutive years.

Involuntary Termination Without Cause. The Corporation must purchase the shares with a 25% premium added to the price. This is a strong protection against arbitrary firing of partner-level employees.

§ 04 · The S-Corp tax trapThe single most dangerous transfer rule.

For agencies organized as S-Corps, the transfer-restriction provisions must do double duty: they govern who can become a partner AND they prevent inadvertent termination of S-Corp tax status. S-Corp status is automatically terminated if ownership transfers to most types of corporations, most partnerships, non-resident aliens, or trusts not qualifying under IRC Section 1361. A single inadvertent transfer can trigger retroactive C-Corp tax treatment, including double taxation of distributions.

The agreement should explicitly prohibit any transfer that would terminate S-Corp status, and should require unanimous Shareholder agreement to revoke S-Corp election voluntarily. For inadvertent termination, the agreement should require the Corporation and Shareholders to use best efforts to obtain an IRS waiver under the Inadvertent Termination provisions of Section 1362. The agreement should also specify that the Corporation will distribute, within 30 days after fiscal year end, an amount not less than net income × maximum federal tax rate so Shareholders have cash to pay their pass-through tax liability.

§ 05 · Discounts, premiums, and closing mechanicsPricing the triggers.

Each trigger carries its own pricing adjustment:

Death, Permanent Disability, Voluntary Retirement (with full notice): None — full CAUV. Voluntary Withdrawal (short notice): Discount for lack of notice. Voluntary Withdrawal (short tenure): Additional tenure discount. Termination for Cause: Negotiated discount (often material). Termination Without Cause: 25% premium on CAUV. Burnout: Penalty valuation (e.g., 80% of CAUV). Bankruptcy: CAUV (with potential discount).

Medical exception: discounts for lack of notice or short tenure should not apply when the withdrawing Shareholder is leaving for documented serious medical reasons — for themselves or their spouse. The agreement should state this explicitly.

Closing window: within 60 days after the later of the triggering event or the determination of fair market value. Death and disability triggers commonly use insurance proceeds for the down payment; promissory note for the balance. Disability benefits continue for 12 months or until return to work, whichever is less.

Sellers should pre-LOI: confirm comprehensive trigger coverage (most older agreements miss divorce, bankruptcy, burnout, termination-without-cause); confirm explicit S-Corp transfer restrictions; confirm EBITDA-based CAUV. Each pre-LOI step removes a post-close indemnification fight and earns the Stability Premium within the readiness band.

◆