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Rights in the Transferability of Shares

Minority shareholders have fundamental property rights in the transferability of shares.

transferability of sharesShare Transferability

In Turner v. Cattleman's Trust, the Texas Supreme Court has held that fundamental rights of property ownership include “the right to the capital value, including alienation… [and] the power of transmissibility by gift, devise, or descent.” The framers of the Texas Constitutions, beginning with that of the Republic, have believed in an unrestrained power to convey or transfer property, and thus have written into the Bill of Rights this provision against perpetuities, primogeniture and the entailment of estates. “Alienability is a legal incident of property, and restraints against it are generally contrary to public policy.” 

“Transferability is the primary value-imparting characteristic of most property interests,” including stock ownership.  Texas courts have held: “Sound corporate jurisprudence requires that courts narrowly construe
 rights of first refusal and other provisions that effectively restrict the free transfer of stock.” “Generally speaking, corporate shares of stock are property which may be freely sold and delivered.”

Section 21.211 of the Texas Business Organizations Code provides:

(a) Without limiting the general powers granted by Sections 21.210 and 21.213 to impose and enforce reasonable restrictions, a restriction placed on the transfer or registration of transfer of a security of a corporation is valid if the restriction reasonably:
(1) obligates the holder of the restricted security to offer a person, including the corporation or other holders of securities of the corporation, an opportunity to acquire the restricted security within a reasonable time before the transfer;
(2) obligates the corporation, to the extent provided by this code, or another person to purchase securities that are the subject of an agreement relating to the purchase and sale of the restricted security;
(3) requires the corporation or the holders of a class of the corporation's securities to consent to a proposed transfer of the restricted security or to approve the proposed transferee of the restricted security for the purpose of preventing a violation of law;
(4) prohibits the transfer of the restricted security to a designated person or group of persons and the designation is not manifestly unreasonable;
(5) maintains the status of the corporation as an electing small business corporation under Subchapter S of the Internal Revenue Code;
(6) maintains a tax advantage to the corporation;
(7) maintains the status of the corporation as a close corporation under Subchapter O;
(8) obligates the holder of the restricted securities to sell or transfer an amount of restricted securities to a person or group of persons, including the corporation or other holders of securities of the corporation; or
(9) causes or results in the automatic sale or transfer of an amount of restricted securities to a person or group of persons, including the corporation or other holders of securities of the corporation.
(b) A restriction placed on the transfer or registration of transfer of a security of a corporation, on the amount of the corporation's securities, or on the amount of the corporation's securities that may be owned by a person or group of persons is conclusively presumed to be for a reasonable purpose if the restriction:
(1) maintains a local, state, federal, or foreign tax advantage to the corporation or its shareholders, including:
(A) maintaining the corporation's status as an electing small business corporation under Subchapter S of the Internal Revenue Code;
(B) maintaining or preserving any tax attribute, including net operating losses; or
(C) qualifying or maintaining the qualification of the corporation as a real estate investment trust under the Internal Revenue Code or regulations adopted under the Internal Revenue Code; or
(2) maintains a statutory or regulatory advantage or complies with a statutory or regulatory requirement under applicable local, state, federal, or foreign law.

While restrictions on the transferability of shares are permitted, they must be reasonable, consented to by the stockholder, clearly disclosed, and not violative of public policy. A transfer restriction that was adopted prior to the shareholder obtaining his stock is binding on him, but only if clearly disclosed. A transfer restriction adopted after the shareholder obtained his stock is binding on him only if he voted for it or is a party to the agreement creating the restriction. Interference with the right of transferability may result in a cause of action for stock conversion.

Houston_Business_Lawyer_Eric_Fryar.jpg About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

 

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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