Why do closely held corporations impose restrictions on the transfer of stock?
1. The owners of the business may desire to limit who can become a partner in the business. This is typical where the company is family-owned. Allowing an outsider non-family member is often unappealing to the original stockholders.
2 Venture capital firms and private equity firms investing in privately held corporations often use restricted stock as a device to retain key employees. These restrictions on transfer usually go hand in hand with vesting schedules intended to tie key employees to the company. Thus, restrictions on transfer prevent employees from transferring stock after it has vested but before certain investors realize a return on their investment through some form of liquidity event.
A prudent person receiving stock, whether as an employee grant, investor, or as a result of a merger or other corporate transaction should carefully analyze all stock transfer restrictions so that they can fully understand what they have bargained for.
Attorney Adler focuses his practice on estate planning, wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.