Allen v. Biltmore Tissue Corp.

FACTS:  Kaplan had purchased Biltmore (Defendant) shares that were subject to certain restrictions on alienation.  One such restriction required that the SH wishing to sell give Biltmore the opportunity to 1st purchase his shares at the same price for which he had purchased them from the corp.  Another provided that if a SH dies, Biltmore had the right to purchase his stock from the legal rep of the deceased for the original purchase price or to empower an existing SH to make such a purchase.  If such action was not taken w/in 90 days, the legal rep had the right to dispose of the stock as she saw fit.  Kaplan died, and Allen (Plantiff), an executor of his estate, refused to allow Biltmore to purchase the shares as per the aforementioned option it enjoyed.  Allen, who brought suit to compel Biltmore to accept surrender of the old certificates and issue new ones to the executors, claimed the option constituted an unreasonable restraint on alienation and was therefore unenforceable.  The Special Term held Biltomore could enforce and exercise its repurchase option, but the appellate division reversed.

ISSUE:  Are reasonable restraints on the transferability of shares valid and enforceable?

HOLDING:  Yes, even if stock certificates are considered personal property rather than contractual action, reasonable restraints on alienation are enforceable.  Therefore, a restriction imposed on the transfer of stock is enforceable.  It set forth a price formula agreed upon by the parties and did not attempt to preclude sale of the shares but only to postpone sale for a fixed time while Biltmore decided whether to exercise its option.  Reversed.

There were earlier cases which characterized all stock transfer restrictions as illegal restraints on alienation.  Even though some restrictions are now recognized as valid, the courts tend to interpret them strictly when faced with the task of ascertaining if a particular disposition fell w/in the scope of a particular restriction.  In close corp.’s, first option restrictions are often used to give the partner-like SH’s the chance to “veto” the admission of a new participant.

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