Restrictions on stock transfers are often used in close corporations both to control who can become a business associate and to insure that a stockholder will be able to recover his investment if he decides to sell his stock.
The validity of stock transfer restrictions are generally upheld if adopted for a lawful purpose. In general, preventing outsiders from obtaining ownership and maintaining the proportionate interests of shareholders are considered valid purposes for such restrictions.
Any restriction on transfer must be set forth in the articles, the by-laws, or a separate agreement, and must be noted conspicuously on the share certificates.
Generally, shareholders may not enter into agreements determining matters usually reserved for directors' discretion. This rule may not apply to close corporations where shareholders (who are often also directors and/or officers) may enter into enforceable agreements controlling such matters at least so long as:
- all of the shareholders are parties to the agreement;
- the agreement is reasonable in length and scope; and
- there is no harm to outsiders (e.g., creditors).
Most statutes require that such agreements be included in the articles of incorporation.
Some states even allow a close corporation to do away with a board of directors entirely and have the shareholders run the corporation as though they were directors.
A “first option” agreement obliges the stockholder to offer shares first to the corporation or other shareholders before they may be sold to outsiders.
A buy-sell agreement requires the offeree shareholders or corporation to buy the stock upon the triggering event (e.g., death, disability, termination of employment, or proposed sale). |
