In a broad sense, ownership interests of corporations can be transferred. Shareholders can sell or transfer their stocks during their lifetime or through a will. Nevertheless, there are instances where original shareholders may place limitations on the transfer of stock. These stock transfer restrictions (STRs) are typically outlined in the corporation's articles or bylaws, although they can also be stipulated through contractual agreements between the corporation and its shareholders or among the shareholders themselves.

1. Why are Stock Transfer Restrictions Imposed?
   
   In the realm of public corporations, Stock Transfer Restrictions (STRs) are employed to maintain the exemption of a stock issuance from the necessity of registration for public trading. These restrictions are frequently observed in closely held corporations, where they serve the purpose of restricting external involvement. In such corporations, typically characterized by familial or friendly relationships among founders akin to those in a partnership, the personal dynamics among stakeholders are paramount, and the avoidance of external interference is desired. There are two common forms of STRs:
   
   

   (1)

   right of first refusal One common form of STR is the “right of first refusal,” which mandates that a shareholder must first offer their shares to the corporation or existing shareholders before selling them to an external party. This provision serves to safeguard the S Corporation's status for income tax purposes, including compliance with the stipulation that an S Corporation must not exceed 100 shareholders.

   (2)

   " buy-sell" agreement Another common STR in close corporations is the buy-sell" agreement, which mandates either the corporation or fellow shareholders to purchase a shareholder's stock. This provision proves beneficial in scenarios such as a shareholder's retirement from the corporation or in the event of a shareholder's passing. Given the absence of a public market for the stock of a close corporation, a buy-sell agreement facilitates the departing shareholder or their estate in obtaining a return on their investment.

   
   
2. Requirements of Stock Transfer Restrictions
   
   Currently, the majority of states have established laws regarding the enforceability of STRs. For example, the MBCA (2016) explicitly states in Article VI that:
   
   

   (1)	Restrictions are permitted to maintain a corporation's status when that status depends on the number or identity of shareholders and retains exemptions from federal or state securities laws.
   (2)	STRs are permitted for "any other reasonable purpose. "
   (3)	A right of first refusal is expressly permitted.
   (4)	Buy-Sell agreements are permitted.
   (5)	Sections 6.27(d) (3) and (4) list two types of restrictions - consent restrictions (requiring corporate approval of transfers) and prohibited restrictions (prohibiting transfers to certain persons) - that are valid if "not manifestly unreasonable."
   (6)	A reference to any STR restriction imposed in corporate documents be noted on the front or back of each stock certificate that is subject to the restriction is required. This does not usually require that the entire text of the restriction appear, but only that its fact be noted.

   
   Suppose a shareholder transfers stock to a third party in violation of a valid STR. The third party is not obligated to adhere to the restriction if they were unaware of its existence or were not deemed to have knowledge of it. A conspicuous notation of the existence of the STR on the stock certificate will charge the third party with such knowledge.
   
   In most cases, statutory regulations do not establish a specific timeframe for Share Transfer Restrictions (STRs), Restrictions may terminate before any stated term either by express agreement of the shareholders involved (e.g., when all decide to sell their shares to an outside purchaser despite a restriction against such a sale) or by abandonment. If shares are transferred in breach of an STR without objection from other shareholders, a court may determine that the restriction is no longer valid. Isolated sales in violation of the restriction may not support such a conclusion, though a person objecting to the current sale may be estopped if he or she participated in an earlier transaction.
   
   
3. Buy-Sell Agreement
   
   A reference to any STR restriction imposed in corporate documents be noted on the front or back of each stock certificate that is subject to the restriction is required. This does not usually require that the entire text of the restriction appear, but only that its fact be noted.
   
   

   (1)

   Stock purchased by the corporation Often, it is advantageous for a corporation to opt for purchasing stock. This approach offers the company easier access to funds and does not alter the ownership proportions of other shareholders. Such a repurchase by the corporation is a distribution and will need to satisfy the legal requirements for such transactions. Some close corporations carry life insurance on the shareholders. In the event of a shareholder's death, the company can use the life insurance proceeds to repurchase the decedent's stock.

   (2)

   Stock purchased by the other shareholders Buy-sell provisions that mandate the purchase of shares by other shareholders can lead to problems. Such as situations where a shareholder is unable or unwilling to buy the shares. In such cases, the agreement may stipulate that the shares must be offered to other willing shareholders in proportion to their ownership. Another issue that may arise is determining the price of the shares in buy-sell agreements. Given the absence of a market price for stock in closely held corporations, alternative valuation metrics must be employed. There are various options, including a stated price, or the best offer by an outsider.

   
   A common method of valuation is “book value,” which is calculated by dividing the balance sheet value by the total number of outstanding shares. While book value is a straightforward calculation, it may not accurately reflect the true value of the stock, as accounting principles typically dictate that assets be valued at historical cost rather than at current market rates.
   

Reference:
[1] Richard D. Freer. The law of corporations in a nutshell. West Pub. Co, 2020.