Opinion ID: 852970
Heading Depth: 3
Heading Rank: 3

Heading: Restrictions on Transfer with Board Approval

Text: The restrictions adopted in paragraphs (1) and (4) are more problematic. Indiana's statute, reflecting the common law, requires that restrictions on share transfers be reasonable. I.C. § 23-1-26-8(c)(3), (d)(3), and (d)(4). The general common law doctrine surrounding evaluation of the reasonableness of restrictions is well established. A restriction is reasonable if it is designed to serve a legitimate purpose of the party imposing the restraint and the restraint is not an absolute restriction on the recipient's right of alienability. Bernard F. Cataldo, Stock Transfer Restrictions and the Closed Corporation, 37 Va. L.Rev. 229, 232-33 (1951). The Indiana statute is somewhat more generous in allowing restrictions on classes of buyers unless manifestly unreasonable. I.C. XX-X-XX-X(d)(4). Several factors are relevant in determining the reasonableness of any transfer restriction, including the size of the corporation, the degree of restraint upon alienation; the time the restriction was to continue in effect, the method to be used in determining the transfer price of shares, the likelihood of the restriction's contributing to the attainment of corporate objectives, the possibility that a hostile stockholder might injure the corporation, and the probability of the restriction's promoting the best interests of the corporation. 18A Am.Jur.2d Corporations § 683 (1985). At one extreme, a restriction that merely prescribes procedures that must be observed before stock may be transferred is not unreasonable. State ex rel. Howland v. Olympia Veneer Co., 138 Wash. 144, 244 P. 261 (1926). At the other end of the spectrum, restrictions that are fraudulent, oppressive, unconscionable, Tourtelott v. Chestnuts Salon, No. 00-5496 2001 R.I.Super. LEXIS 19 at  6 (R.I. Sup.Ct. Jan. 17, 2001), 2001 WL 91393, or the result of a breach of the fiduciary duty that shareholders in a close corporation owe to one another, will not be upheld. Cressy v. Shannon Cont'l Corp., 177 Ind.App. 224, 378 N.E.2d 941, 945 (1978); 12 Fletcher § 5455 (1996). The restrictions on F.B.I.'s shares, like most, are somewhere in the middle. They impose substantive limitations on transfer, but are not alleged to be the result of fraud or breach of fiduciary duty. The trial court, in its order granting partial summary judgment, concluded that the restriction precluding transfer without Board approval was reasonable at the time that it was adopted, but the lengthy and difficult history between the parties had rendered the restriction unreasonable. Under basic contract law principles, the reasonableness of a term of a contract is evaluated at the time of its adoption. First Fed. Sav. Bank v. Key Mkts., 559 N.E.2d 600, 603 (Ind. 1990). The same is true of share transfer restrictions. As a result, evaluating the reasonableness of the restrictions in light of subsequent developments is inappropriate. For that reason, we do not agree that the restriction requiring director approval became unreasonable based upon events and disputes within the family that occurred after the restrictions had been adopted. To be sure, the parties find themselves in a difficult dispute as is sometimes the case in a family business following a dissolution. But when F.B.I. was formed and the family farms were effectively pooled, the shareholders agreed that the Board would be permitted to restrict access to the shares. To the extent that restriction devalues the shares in the hands of any individual shareholder by reason of lack of transferability, it is the result of the bargain they struck. The policy behind enforcement of these restrictions is to encourage entering into formal partnerships by permitting all parties to have confidence they will not involuntarily end up with an undesired co-venturer. Presumably for that reason, the statute permits a restriction that requires a transferee to be approved by the Board of Directors, and to that extent may severely limit transferability. A consent restriction such as this has been considered unreasonable by some courts. 2 Cox, Hazen, O'Neal Corporations § 14.10 (2002); Harry G. Henn & John R. Alexander, Laws of Corporations, § 281 (1983). However, the General Assembly has allowed precisely this type of restriction in Indiana Code section 23-1-26-8(d)(3). That section provides that transfer restrictions may require the approval of the corporation, the holders of any class of its shares, or another person before the shares may be transferred. Board approval is one permissible way of implementing approval by the Corporation under this section. See also Wright v. Iredell Telephone Co., 182 N.C. 308, 108 S.E. 744, 747 (1921) (upholding a restriction requiring the approval of the corporation's directors).