798 N.E.2d 44
SYNOPSIS: Plaintiff creditor filed suit against defendants, a corporation and its shareholders, seeking a declaratory judgment, dissolution of the corporation, injunctive relief against alleged fraudulent practices, and monetary damages. The trial court granted the creditor's motion for partial summary judgment. The Indiana Court of Appeals held that the transfer restrictions barred only voluntary transfers.
-Three couples, two of whom were the children of the third and their respective spouses, each transferred a farm and related machinery to the corporation in exchange for common stock.
-The board of directors of the corporation adopted restrictions on the transfer of shares.
-At the time, the creditor was married to one of the children.
-As part of the dissolution of their marriage, the child was awarded all of the stock and the creditor was awarded a monetary judgment secured by a lien on her shares.
-After the corporation emerged from bankruptcy, the creditor sought a writ of execution on his lien. -The creditor argued that the corporation's attempt to cancel the shares was invalid, that the creditor properly retained ownership of the shares, and that the shares were unencumbered by restrictions and were freely transferable.
The supreme court held that the restriction requiring approval of transfer by the board was valid and that neither the corporation nor the stockholders could exercise their right of first refusal against the creditor after he had taken title to the shares since they were aware of the foreclosure sale and never tried to exercise said right.
Indiana, like virtually all jurisdictions, allows corporations and their shareholders to impose restrictions on transfers of shares. The basic theory of these statutes is to permit owners of a corporation to control its ownership and management and prevent outsiders from inserting themselves into the operations of the corporation.
OUTCOME: The trial court's ruling that the corporation did not cancel the shares prior to the sheriff's sale and that the transfer restrictions did not prevent the sheriff's sale and remained applicable to the shares in the creditor's hands were affirmed. The trial court's ruling that the disputed transfer restrictions were unreasonable and unenforceable was reversed. The case was remanded.
-In a family owned close corporation, restrictions on corp. share transfer may require approval of the transfer by the corporation’s board of directors.
-For a party to be bound by share transfer restrictions, that party must have notice of the restrictions.
Interested in learning how to get the top grades in your law school classes? Want to learn how to study smarter than your competition? Interested in transferring to a high ranked school?