Oklahoma buy-sell agreements: what fails at death, divorce, or dispute

As of late June 2026, the document we most often find missing, unsigned, or twenty years stale in an Oklahoma closely held company is the buy-sell agreement. Owners know they should have one. They also know it forces a conversation about mortality and about falling out with a partner, so the draft sits in a folder. Then one of those events happens, and a document that would have cost a few weeks of attention becomes a valuation fight and a governance standoff with an estate tax bill attached.

A buy-sell agreement is a contract among the owners of a company, and usually the company itself, that says what happens to an owner's interest when a defined event occurs. Who can buy it, who must buy it, at what price, and with what money. This piece walks through the three events that test the agreement hardest, using the questions we'd ask an owner who calls after the fact.

When an owner dies without an agreement

Start with what actually happens. The deceased owner's shares or membership units pass through the estate to whoever the will or trust names, or to heirs under Oklahoma's intestacy rules if there's no plan. Nothing about that transfer asks the surviving owners whether they wanted a new partner, and the estate holds an illiquid asset with no buyer other than the people across the table. In an Oklahoma LLC, the operating agreement generally controls whether a transferee becomes a full member with voting rights or holds only an economic interest, and many operating agreements are silent on death. In a corporation, the shares carry their votes with them unless a shareholder agreement says otherwise.

The tax question the estate can't avoid

Federal estate tax turns on the fair market value of the interest at death, and the basis of the interest in the heirs' hands resets to that same fair market value under the federal basis rule for property acquired from a decedent. A well-drafted agreement can fix that value in a way the IRS will respect. A missing agreement leaves the value to an appraisal fight, and a badly drafted one can be ignored entirely.

The rule that governs whether the IRS respects a buy-sell price is Internal Revenue Code section 2703. Its general rule is that for estate and gift tax purposes, the value of property is determined without regard to any option, agreement, or right to acquire the property at less than fair market value, and without regard to any restriction on the right to sell or use it. The exception, in subsection (b), requires an agreement to meet all three of the following: it's a bona fide business arrangement; it's not a device to transfer the property to members of the decedent's family for less than full and adequate consideration; and its terms are comparable to similar arrangements entered into by persons in an arm's-length transaction.

Treasury's regulation adds two points that decide most real cases. First, if more than half of the value of the property is owned by individuals who aren't members of the transferor's family, the three requirements are deemed met. That's why an agreement among unrelated partners rarely draws a section 2703 challenge, and an agreement among a parent and two children frequently does. Second, a substantial modification of the agreement is treated as creating a new right or restriction, tested as of the modification date.

What Connelly changed about funding

Most buy-sell agreements are funded with life insurance, and the structure of that insurance matters more than it did before June 2024. In Connelly v. United States, decided by the Supreme Court on June 6, 2024, two brothers owned a building supply corporation. Their agreement required the corporation to redeem a deceased brother's shares, and the corporation held life insurance on each of them to fund it. When the majority owner died, the estate valued his shares without counting the insurance proceeds, on the theory that the corporation's obligation to redeem offset them.

The Court unanimously disagreed. It held that a corporation's contractual obligation to redeem shares is not necessarily a liability that reduces the corporation's value for federal estate tax purposes, and that a hypothetical buyer would treat the life insurance proceeds used for the redemption as a net asset. The effect was to include the insurance in the value of the company and, through that, in the value of the decedent's shares, producing a deficiency the estate hadn't planned for.

Notably, the Court pointed to the alternative. Under a cross-purchase agreement, the shareholders agree to buy each other's shares at death and the insurance is owned by, and paid to, the purchasing shareholders rather than the company. The proceeds never sit on the corporate balance sheet, so they don't inflate the company's value. Two years on, the practical consequence is that any entity-purchase (redemption) agreement funded with company-owned insurance deserves a second look, and the review has to weigh the cross-purchase structure's own costs, chiefly more policies and uneven premium burdens when owners differ in age.

The insurance trap inside the insurance

There's a second federal rule sitting under company-owned policies that gets missed even more often. Under section 101(j), death benefits from an employer-owned life insurance contract are taxable income to the employer to the extent they exceed the premiums paid, unless an exception applies. The exceptions cover situations like an insured who was an employee within the twelve months before death, or proceeds used to purchase an equity interest from the insured's family or estate, but they only apply if the notice and consent requirements were met before the policy was issued. The insured had to receive written notice that the employer intended to insure their life and the maximum face amount, consent in writing, and be told that the employer would be a beneficiary and that coverage could continue after employment ended.

We've seen files where a company bought policies on its founders years ago and no signed consent exists. In that situation the agreement may be fine while the funding is exposed to income tax.

When an owner divorces

Divorce tests a different clause. Oklahoma is an equitable distribution state, and a business interest acquired or built during the marriage is generally marital property subject to division. The court can award the interest, or a share of its value, to the non-owner spouse. Without a buy-sell agreement, the other owners can wake up with an ex-spouse as a co-owner, or with a court-ordered valuation they had no part in.

A buy-sell agreement handles this with an involuntary transfer trigger. When an interest would pass to a former spouse by decree or settlement, the agreement gives the company or the remaining owners the right, and sometimes the obligation, to buy that interest at the agreement's price. Some agreements go further and require spousal consent at signing, so the non-owner spouse has already agreed to be bound by the price and procedure. That consent is the clause that turns a divorce court's valuation fight into a contract question.

Here's where valuation method matters in a way owners don't anticipate. If the agreement's price is a formula that produces a number well below appraised fair market value, a divorce court isn't bound by it when dividing marital property; it may treat the formula price as one piece of evidence. The owner-spouse can end up buying out the ex-spouse at a court-determined value while the agreement caps what the owner would receive from the company. A formula that felt protective on the day it was signed can leave the owner squeezed between two valuations.

When the owners can't stand each other

The third trigger is the quietest and the most common: a dispute. One owner wants to sell the company; the other wants to run it for thirty years. One owner has stopped showing up but keeps taking distributions. Two 50/50 owners can't agree on anything and the company has no tie-breaker.

A buy-sell agreement addresses this with voluntary transfer and deadlock provisions. The most familiar is a right of first refusal, under which an owner who wants to sell to an outsider must first offer the interest to the company or the other owners on the same terms. The more decisive tools are put and call rights, which let an owner force a sale or a purchase at the agreement's price after a defined event, and shotgun clauses, under which one owner names a price and the other chooses whether to buy or sell at it.

Without any of this, the dispute plays out under default law. Minority owners in Oklahoma have limited exit rights, and majority owners have fiduciary duties that a litigator will examine line by line. The fallback is usually a lawsuit for dissolution or for breach of fiduciary duty, and the company pays for both sides of it one way or another. A dispute that a buy-sell agreement would have resolved with a valuation and a promissory note instead becomes a case.

The buy-sell agreement valuation clause, dissected

Every trigger above lands on the same clause, so it deserves its own section. In our experience the price mechanism is where agreements fail most often, and they fail in one of a few predictable ways.

• The fixed price nobody updated. The agreement says the owners will set a value annually and attach a certificate. They did it once, in the year the agreement was signed, and never again. A fifteen-year-old number is now the contract price, and it bears no relationship to the company.
• The formula that stopped fitting. A multiple of book value made sense for a company with hard assets. It makes no sense once the value is in contracts, people, and recurring revenue. Book value formulas also ignore the balance-sheet effect that Connelly just made expensive.
• The appraisal with no procedure. The agreement says "fair market value as determined by appraisal" and stops. Whose appraiser, at whose cost, with what standard of value, with or without discounts for minority interest and lack of marketability, and with what happens if the parties' appraisers are far apart. Each blank is a lawsuit.
• The price that section 2703 won't honor. For a family-controlled company, a price below fair market value that's binding at death but not during life, or that no unrelated party would accept, fails the arm's-length test. The estate then pays tax on a value it can't collect from the buyer.

The counter-consideration is that every improvement in precision costs something. A full appraisal at each trigger is accurate and expensive. An annually updated fixed price is cheap and requires discipline the owners may not have. A formula is predictable and ages badly. We tend to favor a hybrid: an agreed value the owners revisit each year, with a formula or appraisal that takes over automatically if the agreed value is more than a set number of months old. The mechanism matters less than the fact that it runs without anyone having to cooperate at the worst moment.

Funding is not a detail

An agreement that obligates the company to buy a deceased owner's interest at fair market value and provides no money to do it is a promise the company may not be able to keep. Owners tend to treat funding as an insurance-agent question. It's a structural one.

Insurance-funded agreements have to choose between the entity-purchase structure that Connelly put under pressure and the cross-purchase structure the Court endorsed, and the choice has consequences for the surviving owners' basis as well as for the estate. Under an entity redemption, the survivors' percentage ownership rises but their basis in their own interests doesn't. Under a cross-purchase, the survivors buy the interest with their own funds and get basis for what they paid. That basis difference shows up years later, when the survivors sell.

The practitioner's edge: read the operating agreement first

The wrinkle we see most often is a good buy-sell agreement that contradicts the operating agreement or bylaws it sits on top of. The operating agreement says transfers require unanimous consent; the buy-sell agreement gives a right of first refusal that assumes transfers are otherwise permitted. The bylaws let the board issue new shares; the buy-sell agreement's price formula assumes a fixed share count. One document was drafted in year one and the other in year eight, by different lawyers, and nobody reconciled them. When a trigger fires, the fight is about which document controls before it's about anything else.

Ask a simple question of the file: if an owner died tonight, could a stranger read the governing documents and know, without a meeting, who buys, at what price, with what money, and by what date? If the answer is no, the agreement isn't done.

A buy-sell agreement is one of those places where the business, tax, and dispute problems are the same problem. If your company's agreement is missing, hasn't been read since it was signed, or funds a redemption with company-owned insurance, we'd welcome the chance to look at it with you. Reach our Oklahoma City office through the contact page. Reviewing the agreement while every owner is alive and still speaking to one another is far less expensive than reconstructing it after one of those things changes.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.