Restrictions on Transferring Shares in New York
Unreasonable restraint on the alienation of shares
New York law does not allow restraints on the alienation of shares to be unreasonable. Alienation of shares refers to an agreement made by a shareholder to not sell, transfer, pledge encumber or otherwise dispose of any company shares or those of a subsidiary under their ownership between the date of the agreement and that of the closing. This is because New York law regards shares as personal property, as opposed to a chose of action. This latter refers to a right of personal things granting the owner a mere right of action for their possession, but not possession itself.
The court does allow for reasonable restrictions to be placed on the transfer of shares, although outright prohibitions on doing so – in contrast to restrictions – are never deemed reasonable.
First right and consent restrictions
To the extent that they are reasonable, restrictions may be imposed which would require a shareholder to first offer their shares to other shareholders or to the company prior to offering these to another.
However, should the sale of shares require consent from other shareholders or the company, which could be withheld for any reason or none whatsoever, this would constitute an outright prohibition on the shareholder’s alienation rights. As such, it would be deemed unreasonable.
The only exception to the above would involve shares held by a tenant shareholders of a cooperative apartment corporation. In such a case, the duty to obtain this consent may be imposed on the shareholder.
Can price restrictions be unreasonable?
A price cap on how much a selling shareholder may ask for their shares under a first option restriction must be reasonable. Yet, the court does not require that this be predicated on any “abstract notion of intrinsic fairness.” A disparity between the option price and the current value will not suffice to deem the price restriction unreasonable, effectively invalidating it, if it is agreed upon by the parties.
Where must the restrictions appear?
Restrictions on the transfer of shares can be stipulated in the certificate of incorporation, the company bylaws or in a separate document.
Is notice important?
A person must have actual knowledge of a restriction for it to be enforceable against them. As such, the court deemed that this must be conspicuously “noted,” (set forth or referred to) on the share certificate.
Repurchasing corporate shares
A corporation or its shareholders may enforce an agreement made by the former to repurchase its own shares. This, however, is subject to modification in the bylaws.
Shareholder purchase
The court ruled that an agreement made by one shareholder to purchase the shares of another should be enforced as an ordinary contract.
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