Share transfer restriction

What it means

In a closely held company the succession plan usually is the transfer restriction. It can oblige a shareholder to offer the shares to the company or the other shareholders first, oblige or permit the company to buy them, or require a transfer to be approved — and it can sit in the articles, the bylaws, a shareholders' agreement, or an agreement between the shareholders and the company.

Its force depends on notice rather than on its existence. A restriction is enforceable against a holder or a transferee only where it is noted conspicuously on the front or back of the certificate, or is contained in the statutory information statement. Where it is not, it does not bind somebody who had no knowledge of it.

It also does not reach shares issued before it was adopted, unless those holders were party to it or voted for it — so a company that has issued shares over many years can have blocks under different rules.

The practical consequence at a death is that two documents have to be read, and the one everybody looks at is not the decisive one. The agreement says what was intended; the certificate decides whether it binds.

Why it matters

It cuts both ways. An unnoted restriction can free an heir from a buy-out nobody told them about, and can equally leave a company unable to keep shares out of hands it never wanted them in.

It is also where the money is. A right of first refusal at a formula price decides what an inherited stake is actually worth, whatever the business is worth.

When you are likely to meet it

• When shares in a family or private company pass to an estate.
• When a company tells an heir they must sell, or must not.
• When a share certificate is found and nobody knows whether an agreement applies to it.

How this varies by state

The notice requirement and the permitted purposes come from each state's business corporation act, most of which follow the same model.

Related terms

• DissociationA partner ceasing to be a partner — by death, by incapacity, or by leaving — without the partnership ending.
• Fair market valueWhat a willing buyer would pay a willing seller, neither under pressure and both knowing the facts.
• Governing instrumentWhichever document actually controls an asset — a will, a trust, a beneficiary form, a deed, a partnership agreement.
• Operating agreementThe document setting out how a limited liability company is run — including what happens to a member's interest when they die.
• Specific bequestA gift in a will of a particular thing — a named account, a ring, a car — rather than a share of what is left.

Sahvelo guidance that uses this

• Business succession