Delaware Business Litigation Report

Court of Chancery Declares Stock Transfer Restrictions are Valid if they are a Reasonable Means to Achieving a Legitimate Corporate Purpose

The Capital Group Companies, Inc. v. Armour, 2005 WL 678564 (Del. Ch. Mar. 15, 2005). A Delaware corporation brought suit against the two trustees of a trust, who are husband and wife, seeking a declaration that certain contractual stock transfer restrictions alleged to apply to shares of its common stock owned by the trust were valid and enforceable. The two defendants were parties to a divorce proceeding and, in connection with that proceeding, the wife claimed an interest in the stock owned by the trust. The issue was whether the stock transfer restrictions could reasonably operate to prevent the transfer to, or disposition in favor of, the wife of any legal or beneficial interest in the stock. Defendants argued that the transfer restrictions were unreasonable and, thus, unenforceable. The corporation countered that under Delaware law, a stock transfer restriction need not be reasonable. The court disagreed with defendant's argument and found that a reasonableness inquiry was required when restrictions on the transfer of stock were contested. After determining that the restrictions were reasonable, the court then questioned if these restrictions were reasonable to achieve a legitimate corporate purpose; namely, restricting the number of record shareholders to avoid public company reporting and filing requirements. The court found that not having to comply with burdensome and costly filing and disclosure requirements was a valid corporate purpose. Therefore, the court concluded that the corporation was entitled to declaratory relief and that the restrictions on stock transfer barred any disposition of ownership right in the stock to defendant. Share