F.B.I. Farms, Inc. was formed by Ivan and Thelma Burger, their children, Linda a
ID: 393684 • Letter: F
Question
F.B.I. Farms, Inc. was formed by Ivan and Thelma Burger, their children, Linda and Freddy, and the children’s spouses. Each of the three couples transferred a farm and related machinery to the corporation in exchange for common stock. At the time, Birchell Moore was married to Linda. The board of directors of F.B.I. adopted the fol- lowing restrictions on the transfer of shares: (1) F.B.I. and its present shareholders held a right of first refusal to purchase at book value and (2) if F.B.I. or its shareholders did not exercise their right of first refusal, any “blood member” of the family could pur- chase at book value. When Linda’s marriage to Moore was dissolved, she was awarded all of the F.B.I. shares and Moore was awarded a monetary judgment in the amount of $155,889.80, secured by a lien on Linda’s shares. Ultimately, a sheriff’s sale was held and Moore, who was aware of the restrictions, purchased all of Linda’s shares for $290,450.67. Moore now claims that the transfer restrictions are not enforceable because they are unreasonable. Should the court invalidate the transfer restrictions because they are unreasonable? Explain.
Explanation / Answer
In the given case, any voluntary transfer of share could have been considered unreasonable. If Linda had transferred her shares voluntarily to Moore, the company law could have invalidated the same.
However, the sheriff’s sale had caused an involuntary transfer of share to Moore. The company law became inapplicable in such case. So, the transfer of the shares is valid in this case and the court cannot invalidate the transfer restrictions.
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