Restrictions on Stock Transfer in Corporate By-Laws Did Not Bar Transfer By Will

On December 11, 2020, Justice Emerson of the Suffolk County Commercial Division issued a decision in Lambro Indus., Inc. v. Chai Found., Inc., 2020 NY Slip Op. 51470(U), holding that restrictions on stock transfers in corporate by-laws did not bar the transfer of stock by will, explaining:

As a broad general principle, it may be stated that provisions which restrict a stockholder's right to sell or transfer his stock are regarded with disfavor and are strictly construed. Such restrictions generally apply only to voluntary sales and do not apply to judicial sales or other transfers by operation of law. The draftsman of such a restriction must be very careful if it is the intention of the incorporators to bind the estate of a stockholder. In order to bind the estate, the restriction must not only be reasonable, it must also be clearly expressed as intended to bind the estate. A restriction concerning a transfer of stock has generally been held not to include the passing of title by operation of law through a personal representative to the distributees or beneficiaries of a deceased stockholder. If the certificate of incorporation specifically excludes stock passing by will or intestacy, the restrictive clause will not be applicable to such passage by will or intestacy. If silent as to the contingency of death, a restrictive clause is not valid and enforceable against the estate.

Lambro's certificate of incorporation dated August 29, 1967, and restated certificate of incorporation dated May 5, 2002, are both silent on the issue of stock passing by will or intestacy. Moreover, § 10.1 (a) of Lambro's by-laws provides that shares of the corporation's stock may not be acquired by any person other than an employee or ESOP or other than by involuntary transfer upon the death of a shareholder. The 6,500 shares of Lambro stock that were transferred to Chai upon Berger's death clearly fell within the exception carved out by § 10.1(a) for involuntary transfers upon the death of a shareholder.

Lambro attempts to split the transfer of Berger's stock into two separate transactions: the initial transfer to the trustees of the trusts and the subsequent transfer to Chai. Lambro contends, without citing any authority therefor, that the second transfer was not directed either by the will or any governing law.

Lambro's attempt to split the transaction has no basis in law or fact. Berger's will clearly provided for the establishment of two charitable trusts to be administered under Article Third of the will. The trusts were merely the vehicles through which the stock was transferred to the beneficiary of Berger's estate. Contrary to Lambro's contentions, the transfer to Chai was a transfer by operation of law to which the restriction did not apply.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.