Potential Illegalities with sale of securities

Question 1

When can shareholders sell their shares?

Answer 1

Usually, can sell to ANYONE at ANY time for ANY price

EXCEPTIONS: 1) closely held corporations 2) federal restrictions

Question 2

What are closely held corporations and what are their sale restrictions?

Answer 2

Corps with small numbers of shareholders (usually under 100)

They impose their own private restrictions on sale of securities

Question 3

Requirements for notice of sale restrictions by closely held corps?

Answer 3

Must be CONSPICUOUSLY NOTED on stock certificate OR must contain statement saying that there are restrictions to be provided upon request

Question 4

WHY do closely held corps restrict sales ? Two reasons

Answer 4

1) Prevent outsiders from becoming involved

2) so intial shareholders can retain control

Question 5

Enforceability of sale restrictions by closely held corps?

Answer 5

Usually, restrictions are enforceable

BUT restrictions may not be used against someone with no KNOWLEDGE (unless restriction is certified and conspicuous)

Question 6

Types of sale restrictions by closely held corps?

Answer 6

1) outright prohibition on transfers
2) requires company’s consent
3) company has option to buy
4) company has right of first refusal

Question 7

Challenges to sale restrictions by closely held corps: argument and test

Answer 7

ARGUMENT: Usually made on basis of restraint of alienation

TEST: reasonability

Question 8

Who is bound by sale restrictions by closely held corps?

Answer 8

ANYONE who agrees (almost any shareholder in closely held corp)

Question 9

Is maintaining status a reasonable purpose for sale restrictions by closely held corps?

Answer 9

YES