In Capital Group Companies, Inc. v. Armour, the Delaware Chancery Court ruled on the validity of restrictions on stock transfer in a Stock Restriction Agreement for a private company and barred the disposition of that stock in a divorce proceeding without the express prior written consent of the private company, the Capital Companies, Inc. The company had redemption rights and was permitted to enforce the restriction on non-authorized transfers. The privately held company involved (“CGC”) required all persons purchasing shares of its common stock to become parties to a Stock Restriction Agreement (“SRA”) which included a general restriction on transfer and a right to redeem at a formula price upon transfer to a non-authorized transferee. Armour, an Executive Vice President of CGC, and Nina Ritter were married in 1984. In 1998, for tax planning reasons, and with the consent of CGC, Armour and Ritter placed stock owned by Armour into a trust called the Ritter-Armour Revocable Trust (“the Trust”). Ritter is a trustee of the Trust. The Trust provides that no stock held by the Trust may be transferred without the consent of CGC. As trustees of the Trust, Armour and Ritter both signed a Joinder Agreement agreeing to be bound by the SRA.
In June 2003, Armour filed for divorce in California. The stock held by the Trust represents the bulk of the value of the community property from the marriage. Despite the transfer restrictions in the SRA, Ritter plans to ask the California divorce court for an award of an interest in the stock held by the Trust.
CGC sued Armour and Ritter in Delaware Chancery Court for declaratory judgment asking the court to uphold the validity of the stock transfer restrictions and to bar any such transfer. Specifically, Ritter will ask the divorce court in California for �? of all dividends from the stock and �? of any net sale proceeds that Armour may realize from the sale of the stock, if and when he sells it (the “Requested Distribution”).
Procedurally, it is instructive to note that after denying a motion by Ritter to dismiss for personal jurisdiction reasons, CGC filed a Motion for Summary Judgment and although Ritter did not file a cross-motion, the court treated the response of Ritter, as well as the motion for summary judgment by CGC as cross-motions for summary judgment based on both a request by Ritter to do so and the inherent power of the court to grant sua sponte summary judgment against a party seeking summary judgment. (See citations in footnote 16 of decision.)
The court held that a requested interest by Ritter in the dividends of the stock owned by Armour and a percentage of the proceeds from the sale of stock owned by Armour were prohibited by the SRA.
The court engaged in a thorough discussion of the reasonableness requirement for stock transfers and how that term is defined for purposes of reviewing the validity of a stock transfer. In sum, the court found that it was reasonable for a company to maintain discretion and to retain the right to redeem shares to prohibit transfer beyond its employees. The court held that the Requested Distribution and any disposition of an ownership right to Ritter were barred by the SRA without the express prior written consent of CGC. This case is a useful reminder of the enforceability generally of stock transfer restrictions.