Transfer Restrictions

For an ownership agreement to work effectively it must limit the marketability of ownership interests involved in the agreement. Otherwise, the agreement is avoided simply by an owner with a marketable interest selling that interest to a party not bound by the agreement. If this can be done, it will prejudice the economic interest of minority ownership interests who will not have marketable interests.

On the other hand, there is a policy in common and statutory law against restrictions on alienation of property. While these concepts come mostly from the law of real property, it has generally been held that an absolute prohibition on transfer of ownership interest or a restriction on transfer of ownership interest that requires consent of the other owners is invalid.

Therefore ownership agreements involving buy-sell provisions typically have given the other owners, either acting on behalf of the business entity or in their own interest, the first option, right of first refusal, or first opportunity to purchase the interest at an agreed upon price.

Chapter 18 of Business Succession Planning deals with Transfer Restrictions and some of the issues involved with drafting and enforcing these restrictions.