Part 10- Corporations, Chapter 42: Organization and Financial Structure of Corporations, Doc 5

Key Points Summary 1. Share Transfer Restrictions in Close Corporations: o Transfer Restrictions: Close corporations use various transfer restrictions to prevent shifts in control and maintain stable ownership. Restrictions may include:  Right of First Refusal: Allows current shareholders or the corporation to match an outside offer to buy shares.  Buy-and-Sell Agreements: Require certain shareholders to buy others’ shares upon specific events (e.g., death, retirement), often for a preset or calculated price. o Legal Framework: Most states allow these restrictions if they are reasonable, clearly documented in corporate governing documents, and provided on share certificates to inform purchasers. o Coyle v. Schwartz Case: The court upheld a buy-sell agreement that set a fixed price for shares, despite the shareholders not updating the price. This ruling underscores the importance of regularly updating buy-sell provisions to avoid potential losses. 2. Statutory Solutions for Share-Transfer Problems: o Some states have statutes for close corporations that provide solutions to share-transfer issues, such as restricting transfers that would jeopardize the corporation's status as a close or S corporation. However, statutory support for specific buy-sell agreements remains limited, so these should be custom-designed. 3. Nonprofit Corporation Financing: o Nonprofits fund operations through member contributions, donations, grants, and sometimes debt financing (like loans or issuing notes). Types of nonprofits include:  Public Benefit Corporations: Rely on government grants and public donations (e.g., public TV).  Religious Corporations: Supported by member contributions (e.g., churches).  Mutual Benefit Corporations: Membership fees from clubs or associations. o Memberships in public benefit and religious nonprofits are generally non-transferable, while mutual benefit memberships can be transferable with restrictions if stipulated in bylaws or articles. 4. Practical Problem Scenarios: o Formation and Preincorporation Agreements: If a corporation is not yet formed, founders must avoid signing contracts to prevent personal liability. Alternatively, they should make contracts contingent on the corporation’s future formation. o Securities for Investors in Closely Held Corporations: For a startup needing investor capital but where founders want control, issuing preferred shares with fixed dividends can satisfy investors seeking regular returns while limiting their voting rights. o Right of First Refusal in Mergers: In some cases, mergers may trigger rights of first refusal if shareholders wish to acquire shares from others. Courts may uphold this right if it aligns with the purpose of maintaining control among existing shareholders. o Proper Consideration for Issuing Shares: Shares issued for future promises or services may be permissible, but must align with statutory rules and offer the corporation clear value. 5. Incorporation Resources: o Online services offer support for incorporation, typically providing tools like corporate kits with sample bylaws and share certificates. Using such resources ensures compliance with statutory requirements and assists in organizing essential documents like a corporate seal for legal purposes. Conclusion Corporations, especially close and nonprofit ones, use share transfer restrictions and financing strategies to maintain ownership control and ensure adequate funding. Legal cases and real-life examples demonstrate the importance of carefully crafted agreements and compliance with corporate statutes, particularly regarding share issuance and transfer rules.