While corporations are often touted for the ease with which shares can be transferred, this ‘benefit’ is frequently overstated and can lead to significant complications. The assumption that corporate shares can be freely transferred without consequence often clashes with real-world contractual obligations.
Unlike partnerships, where transferring a controlling interest (typically over 50%) can dissolve the entity, corporate law doesn’t inherently restrict share transfers. However, general contract law takes precedence.
Many business contracts include clauses that trigger termination upon a significant change in company ownership. This is because companies want assurance about who they are dealing with. For example, a company might contract with a corporation specifically for the expertise of its key engineers. They wouldn’t want those engineers to sell their shares and leave mid-contract, voiding the agreement.
Therefore, shareholders in small businesses must carefully review all existing contracts for share transfer restrictions before selling their stock. Failing to do so can lead to lawsuits from disgruntled buyers who find that the corporation’s contracts have been terminated due to the sale. Don’t let dreams of early retirement turn into legal nightmares. Always check the fine print of your corporate contracts before selling your shares.