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I wanted to know if a Share Holder agreement that does not…

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I wanted to know if...
I wanted to know if a Share Holder agreement that does not allow shareholders to sell to anyone is legal. (What if the minority shareholder signed into this aggreement...? is he bound for life). Does the board have a fiduciary responsability to let him sell his shares (or at least buy it themselves) if he has a bonafide offer,
Submitted: 8 years ago.Category: Legal
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6/9/2010
Lawyer: Loren, Attorney replied 8 years ago
Loren
Loren, Attorney
Category: Legal
Satisfied Customers: 39,260
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Yes, a shareholder agreement may create a restraint on the transfer of shares. It can, but is not required, create a procedure, usually involving a right of first refusal, if the owner has a valid offer. You are bound for so long as you are a shareholder or the agreement is otherwise validly amended.
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Customer reply replied 8 years ago
So if the minority shareholder has a valid offer for his stock, he still must maintain his investment indefinitly with no renumeration.
Lawyer: Loren, Attorney replied 8 years ago
Yes. If that is what the shareholder agreement provides.
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Customer reply replied 8 years ago

If he petitions the board do they have any fiduciary responsability to consider the interest of one minority shareholder if it does not impact the rganization

Lawyer: Loren, Attorney replied 8 years ago
No. They only have to be sure the terms of the shareholder agreement are being complied with.
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Customer reply replied 8 years ago

The essence of the fiduciary relationship is best described in a 1972 court decision which held that a franchisor owes a fiduciary duty to a franchisee:

    ...a fiduciary relationship is one founded on trust or confidence reposed by one person in the integrity and fidelity of another...the rule embraces both technical fiduciary relations (i.e. trustees, executors) and those informal relations which exist whenever one man trusts in and relies upon another...A fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other...

Thus, the placement of one's trust, confidence and responsibility in another person or persons is the hallmark of a fiduciary relationship. The investiture of such trust, confidence and responsibility in the fiduciary bestows upon him or her a position of influence and superiority over the person(s) with whom he deals. As such, he is charged with an extraordinary degree of moral accountability to these people. The scope of this moral accountability is most dramatically described by Judge Cardozo in the classic case of Meinhard v. Salmon:

    A trustee (i.e. fiduciary) is held to something stricter than the morals of the marketplace. Not honesty alone but the punctilio of an honor the most sensitive is then the standard of behavior...

Thus, certain types of conduct which might be permissible in the context of ordinary business dealings are off limits to a fiduciary because of the special attributes (i.e. power and influence gained by virtue of the repose of trust) of his relationship with his dependents.The courts have articulated two basic precepts of fiduciary conduct which define the contours of what Justice Cardozo referred to as the punctilio of honor standard: The duty of undivided loyalty by a fiduciary to those under his care; and the duty of a fiduciary to exercise the utmost of good faith towards his dependents.

Lawyer: Loren, Attorney replied 8 years ago
What you cite has no relevance whatsoever tot he application of a shareholder agreement. It is well established that restraints on alienation of shares are allowed in shareholder agreements (in fact, it is the main reason many small corporations have the agreements in the first place). The directors have a fiduciary duty to see the obligations contained in the shareholder agreement are applied to the shareholders. End of game. You have to comply with the terms of the agreement. It is not a fiduciary duty issue, it is a contract issue.
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Customer reply replied 8 years ago

What About this article:

Our English common-law heritage includes what's known as the rule against unreasonable restraints on alienation. Law students first encounter the rule in their property class, where they learn about the abolishment of the feudal "fee tail" which restricted the transfer of real property to a specific line of male heirs. Basically, our laws and public policy strongly favor the right of persons to freely dispose of their property both real and personal. Agreements that place ownership of property in the hands of one person and the right to alienate, i.e., sell or otherwise convey the property, in the hands of another, are unenforceable.

The rule is not absolute. It only prohibits unreasonable restraints on alienation. For instance, where a niece agreed to pay $15,000 to her uncle and aunt for a $100,000 farm that was in the family for generations on condition that, during the uncle's and aunt's lifetimes, the niece wouldn't mortgage the farm or convey it to her husband, a court enforced a reversion clause in the recorded deed giving the property back to her relatives when the niece placed mortgages on the farm that subsequently were foreclosed. The court found it reasonable to enforce the restraint to preserve family ownership of the farm for a limited duration. Moreover, the niece's interest in free alienation was outweighed by her agreement to the restraint in consideration for a drastically reduced price. (Example taken from Alby v. Banc One Financial, 128 P3d 81 [Sup. Ct. Wa. 2006].)

What's this got to do with shareholder and operating agreements?

As mentioned, the rule also applies to personal property. Certificated and uncertificated shares in a corporation are considered personal property as are membership interests in a limited liability company (see LLC Law Section 601). One of the main purposes of shareholder agreements for closed corporations and LLC operating agreements is to restrict the transfer of shares and membership interests. Sometimes the restrictions are designed to keep ownership in the family if it's a family-owned business. More generally, such restrictions emulate a partnership model in which the owners are actively involved in company management and therefore need to maintain control over the admission of new owners.

Restrictions that effectively prohibit share transfer are not enforceable. As New York's highest court stated in Wildenstein & Co. v. Wallis, 79 NY2d 641 (1992), factors in assessing reasonableness of the restriction include price, duration and purpose. For example, in Lam v. Li, 222 AD2d 290 (1st Dept 1995), the court invalidated a provision giving one party a perpetual option to purchase 50% of the corporation's shares for $10. In Rafe v. Hinden, 29 AD2d 481 (2d Dept), aff'd, 23 NY2d 759 (1968), a stockholder successfully invalidated a provision requiring him to get written permission from the other stockholder before selling to a third party where the other shareholder retained the arbitrary power to forbid a transfer.

Lawyer: Loren, Attorney replied 8 years ago
You are correct, the restraint can not be unreasonable. Sue the board for oppression of the minority shareholder and see if the court will award damages in addition to allowing you to sell your shares. If there is no alternate means of conveying the shares to the other shareholders if you are not allowed to sell to your buyer, you may prevail. Without seeing the agreement, it is difficult to assess its reasonability.
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