While corporations are often touted for the ease of transferring shares, this benefit isn’t always as straightforward as it seems. The ability to freely transfer ownership can be complicated by contract law, potentially leading to unexpected and costly consequences.
Many believe that corporate shares can be transferred without impacting the business. For example, unlike a general partnership where selling over 50% interest can terminate the partnership, corporate share transfers supposedly have no such restrictions. However, this assumption overlooks a critical aspect of business: contracts.
Contract law supersedes general business entity laws. Most companies include clauses in their contracts that automatically void the agreement if a certain percentage of shares are transferred. This is because businesses want to know who they are dealing with. Imagine contracting with a corporation because of its team of expert engineers. You wouldn’t want those engineers to sell their shares and leave mid-contract, voiding the very expertise you sought.
Therefore, shareholders in small businesses must carefully review all contracts for share restriction language before selling. Failing to do so can lead to lawsuits from disgruntled buyers who find that the corporation’s contracts have been terminated due to the share transfer. Don’t let dreams of retirement turn into legal nightmares. Always examine contract language before selling your corporate shares to avoid significant financial repercussions.