Transfers of Corporate Securities

The Business Transactions Solution chapter on Transfers of Corporate Securities (BTS §§ 38:1 et seq.) covers routine changes in the composition of the ownership group of a corporation which occur as a result of transfers of corporate securities. Each sale and transfer of shares should be memorialized in a stock purchase or transfer agreement that addresses the following key terms: 

  • The identity of the parties to the agreement (e.g., the seller and the purchaser and perhaps the corporation and/or the remaining owners, when consent of those parties is required), including full names and addresses;
  • A description of the specific shares being sold (i.e., the entire interest of the seller in the business or some portion of the interest);
  • Desired changes in any shareholders' agreement which are deemed necessary in connection with the admission of the new shareholder (e.g., amendments to reflect the rights of the new shareholder to participate in the management of the business); and
  • The purchase price for the shares being purchased and sold, the terms of payment, and the creation of any security interest in favor of the seller in the event that the purchase price is to be paid in installments. Typically, the security takes the form of a security interest in the shares being sold.

In some cases, one or both of the parties may also be required to deliver certifications or legal opinions regarding issues such as their legal status to enter into the agreement; good and clean title to the shares; and the enforceability of the agreement.

A sale and transfer of a large block of securities may be conditioned upon satisfaction of certain conditions. If so, the parties may provide for escrow of a portion of the purchase price and for delay of the closing until the escrow agent has received appropriate evidence that the condition for the transaction has been satisfied. See BTS Specialty Form at § 38:70.  Conditions may vary depending on the situation. For example, the sale may be made subject to approval by the corporation's board of directors. See BTS Specialty Form at § 38:71. Or, the transaction may be subject to compliance with a co-sale agreement involving other shareholders, in which case the agreement should include procedures for purchasing shares from other shareholders electing to exercise their co-sale rights. See BTS Specialty Form at § 38:72.

The parties may also include restrictions on the ability of the purchaser to attempt subsequent sales and other transfers of the shares covered by the agreement without complying with the procedures included in the agreement such as a right of first refusal in favor of the corporation that has issued the shares.  The issuing corporation is also a party to this agreement in order to enforce its rights with respect to the right of first refusal and the covenants made the purchaser not to transfer the shares in a manner that will violate applicable securities laws and/or impair any public market for the corporation’s securities.  See BTS Specialty Form at § 38:71.50.

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