The Bankruptcy Appellate Panel for the Sixth Circuit handed down a decision recently that at first blush might give business lawyers pause. In re Hake, 2009 Bankr. LEXIS 3825 (November 4, 2009) holds that an agreement among shareholders requiring the consent of the other shareholders before stock can be transferred is an unreasonable restraint on alienation under Ohio law. Curiously, the decision was rendered on the basis of a 1945 Ohio Court of Common Pleas opinion and a 1910 Ohio Supreme Court opinion without referencing the Ohio corporate law statute. What the panel fails to point out is that this restriction was voluntarily entered into by the owners of the enterprise and was now being undone by the court. What about freedom of contract?
Iowa lawyers have no reason to fear this decision, however. We here in the Hawkeye state take a much more modern view of stock or unit transfers. The new Iowa LLC Act only makes one reference to transfer restrictions. In 489.502(6) the law says “A transfer of a transferable interest in violation of a restriction on transfer contained in the operating agreement or another agreement to which the transferor is a party is ineffective as to a person having notice of the restriction at the time of transfer.” Restrictions are thus implicitly recognized in Chapter 489 and since 489.110 dictates that the operating agreement governs the relations of members as members it is safe to say that the operating agreement restrictions on transfer will control. In addition, unlike Ohio, I could not find an Iowa court opinion striking down a stock transfer restriction on the basis of restraint of alienation. And Iowa corporate law offers strong evidence that requiring the consent of the other members/shareholders before a transfer is valid would be upheld in Iowa.
Iowa Code Section 490.627 says that the articles, bylaws or agreement among the shareholders may impose restrictions on stock transfers so long as the restriction is for a reasonable purpose and lists as one persmissable restriction requiring the corporation, the holders of shares or another person to approve the transfer “if the requirement is not manifestly unreasonable.”
Not sure how to balance “reasonable purpose” against a restriction that is not “manifestly unreasonable” but it seems to me that a restriction recognized by statute has to be given a presumption of validity and not wanting unknown outsiders to become part owners of a company is certainly reasonable and one of the main underlying reasons for entering into such restrictive agreements.
So, what does manifestly mean? One author has noted, although "numerous cases apply the concept they rarely explain why a provision is found manifestly unreasonable.” The Official Comments to the UCC suggest that a "manifestly unreasonable" provision might be equated to an "obviously unfair" provision. Other commentators say it is falls somewhere between "unreasonable and unconscionable" or "passing beyond the outer limits of permissiveness." Perfectly clear, right?
-Marc Ward
Comments