Definitions in Shareholder Agreements Matter When Transferring Family-Owned Business Stock

Owners and shareholders of a family-owned corporation will often enter into contractual arrangements limiting to whom an owner may transfer their shares. Many times, these agreements provide the company or other shareholders the right of first refusal if a shareholder desires to sell their ownership stake in the company. If the language in the contract is unclear, there is potential for possible challenges to a transfer of stock.

A current case in which this was the predominant issue is Saccani v. Saccani. This California Court of Appeal decision saw two nephews challenge their uncle’s right to exercise an option to purchase their father’s stock from a trust upon his death. For the nephews, a court decision in their favor would have forced their uncle to return the stock to the corporation, granting them a one-half interest in the company instead of the one-third interest they held. The question for the court was whether the language in the contract, specifically language dealing with the term “transfer”, was defined broadly enough to allow for a transfer of stock through the exercise of an option to purchase. The court noted that the definition of the term “transfer” was very liberally defined in the original agreement and interpreted it to allow the purchase. While the uncle was the victor in both the trial and appellate courts, this case serves as a reminder that definitions are extremely important when parties draft a shareholder agreement.

See Michael P. Connolly, Definitions in Shareholder Agreements Matter When Transferring Family-Owned Business Stock, The National Law Review, August 8, 2017.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.