In the case before the Indiana Supreme Court, F.B.I. Farms, Inc. and its shareholders, including Linda Moore and her ex-husband Birchell Moore, are involved in a dispute over share transfers and associated restrictions. The court affirmed that corporate share transfer restrictions typically require Board of Directors' approval, particularly in family-owned corporations. While such restrictions are enforceable against informed purchasers, they cannot prevent a creditor from foreclosing on shares. However, a purchaser at a foreclosure sale who is aware of these restrictions will still acquire the shares subject to them. Furthermore, if shares are subject to a right of first refusal and the holder is notified of the foreclosure, that holder cannot exercise their right against the foreclosed purchaser after the title transfer without objection.
F.B.I. Farms, formed in 1976 by the Burger family, included Birchell Moore as a shareholder through a 180-acre farm deeded jointly with Linda. In 1977, the Board instituted transfer restrictions, requiring Board approval for any stock transfer and granting the corporation and existing shareholders the first right to purchase shares at book value. Following Linda's divorce from Moore in 1982, she retained the shares while Moore received a monetary judgment secured by a lien on those shares. After F.B.I. declared bankruptcy in 1989, Moore sought to execute his lien in 1998. The corporation demanded payment for the shares, leading to a sheriff's sale in 2000, where Moore purchased all shares owned by Linda.
In December 2000, Moore filed a lawsuit against F.B.I., its shareholders, and Linda, seeking a declaratory judgment regarding the invalidity of the attempted cancellation of his shares, asserting that he retained rightful ownership, and that the shares were freely transferable without restrictions. Moore sought dissolution of the corporation, injunctive relief against alleged fraudulent activities by the defendants, and monetary damages. The trial court granted Moore partial summary judgment, concluding that the shares were unlawfully canceled, affirming Moore's ownership of the stock, and determining that two transfer restrictions in the agreement were manifestly unreasonable and unenforceable. The court's decision was appealable as a final judgment under Indiana Trial Rule 54(B).
On appeal, the Court of Appeals ruled that the transfer restrictions applied only to voluntary transfers, allowing Moore, who purchased the shares through a sheriff's sale, to acquire them despite the restrictions. The court noted that future stock transfers would still be bound by these restrictions while affirming that the two disputed restrictions were unreasonable due to the prior conflicts between the parties.
The case also discusses the Indiana statute on share transfer restrictions, which permits such restrictions in articles of incorporation, bylaws, or shareholder agreements, provided they are clearly noted on share certificates or in required statements. Restrictions are enforceable only if authorized by the statute and applicable to informed parties. They are permissible to maintain corporate status, preserve legal exemptions, or for other reasonable purposes.
A restriction on the transfer or registration of shares may require shareholders to first offer the shares to the corporation or other designated persons, obligate the corporation or others to acquire the shares, mandate approval for the transfer if reasonable, or prohibit transfers to specific individuals, provided such prohibitions are not manifestly unreasonable. Shares are considered personal property, and while common law typically disallows restrictions on alienation, Indiana law permits such restrictions to maintain control over corporate ownership and management. These restrictions are treated as contracts between shareholders or between shareholders and the corporation, enforceable under state law. Restrictions must be clearly stated and cannot be expanded beyond their plain meaning. A party must have notice of these restrictions to be bound by them, and in this case, the buyer at a sheriff's sale was deemed to have such notice, thus binding him to the restrictions. A closely held corporation, defined as one owned by a limited number of individuals or a single family, has a legitimate interest in maintaining its structure through transfer restrictions. The specific restrictions in question granted rights of first refusal to F.B.I. and its shareholders, and any transfer violating these restrictions is voidable by the corporation.
Moore was not considered a shareholder until he purchased shares at a sheriff's sale, and thus he contends he lacked the authority to offer the shares to F.B.I. or its shareholders. However, it was established that Linda was required to offer her shares to F.B.I. and other shareholders before transferring them. Moore was aware of this requirement and had the right to compel Linda to follow the process for exercising or waiving the right of first refusal. Despite this, F.B.I. and its shareholders did not assert their right of first refusal during the sheriff's sale and cannot later claim a right to purchase on the same terms as Moore. Legal precedents indicate that failure to exercise preemptive rights or to act upon known restrictions can result in a waiver of those rights. Consequently, the sale to Moore proceeded as if the shares had been offered and declined by the corporation.
Regarding transfer restrictions requiring board approval, Indiana law mandates that such restrictions must be reasonable and serve a legitimate purpose without being an absolute barrier to alienation. Factors influencing the reasonableness of transfer restrictions include the corporation's size, the extent of alienation restraint, duration of the restriction, transfer pricing methods, and the potential impact on corporate objectives and hostile takeovers. Restrictions that simply outline procedural requirements for stock transfers are generally deemed reasonable.
Restrictions on share transfers in a close corporation, such as requiring Board approval, are evaluated for reasonableness at the time they are adopted. In State ex rel. Howland v. Olympia Veneer Co., the trial court found a transfer restriction reasonable when adopted but later deemed it unreasonable due to the parties' contentious history. However, the appellate court disagreed, asserting that subsequent disputes do not affect the original reasonableness of the restriction. The restriction's purpose is to maintain control within the family business and prevent unwanted co-venturers, supported by Indiana law allowing such transfer restrictions.
Additionally, a blood-member restriction that limits share transfer to family members was recognized as enforceable due to the interest in preserving family ownership, as seen in Mathews v. United States. All parties involved were either direct descendants or spouses of family members, establishing their eligibility under this restriction.
Regarding Linda's shares, F.B.I. claimed they were canceled due to unpaid subscription prices, but the trial court rejected this cancellation claim, upholding the validity of her shares.
F.B.I.'s attempt in 1989 to cancel shares prior to a sheriff's sale lacks merit, as the shares were issued in 1977 for substantial consideration—a 180-acre farm contributed by Linda and Moore. The Court of Appeals determined that restrictions on Linda's shares did not apply to the sheriff's sale, allowing Moore to acquire the shares; however, the court's rationale was based on a doctrine that involuntary transfers only fall under restrictions if specifically mentioned. This doctrine, established in cases involving intestate transfers and marital dissolutions, was applied here to classify the sheriff's sale as an involuntary transfer.
The restrictions in question did not explicitly mention involuntary transfers but broadly prohibited any transfer of shares. The parties intended to restrict ownership to a designated group and prevent all means of transfer. While involuntary transfers, such as those from intestacy, pose unique concerns, they should not override clear transfer restrictions unless such restrictions unreasonably infringe on the rights of third parties, such as spouses or creditors. The court concluded that the sheriff's sale could transfer shares despite the restrictions, as allowing such transfer is necessary for creditor recourse.
Moore's acquisition of shares was contingent upon the knowledge of existing restrictions; thus, he could not gain more rights than Linda possessed. The shares retained their restricted valuation, ensuring fairness to Linda's creditors, who would not be deprived of their rights due to the foreclosure sale.
Restrictions on shares may render them unmarketable; however, creditors can bid at the sale and potentially acquire the shareholders' interests, along with the debtor's assets used as collateral. If creditors desire unrestricted collateral, they must negotiate such terms at the beginning of their arrangement. The trial court's ruling that F.B.I. Farms did not cancel the shares before the sheriff's sale is affirmed, as is the finding that transfer restrictions did not impede the sale and remain enforceable in Moore's possession. The court reverses the trial court's determination that two transfer restrictions were unreasonable and unenforceable, concluding that the director-approval and blood-member restrictions are reasonable and enforceable. The case is remanded for further proceedings. The Indiana statute indicates that restrictions are valid if included in corporate documents, yet none were properly adopted in this case. Nonetheless, since Moore, as a director, approved the restrictions and was aware of them, they are considered a contract for shareholders who consented to their adoption. Courts treat buy-sell restrictions as contractual agreements, upheld as valid even if not formally adopted, especially among shareholders who participated in their establishment.
