Legal Question in Business Law in California

Re: Sale of Stock

No. By definition, privately held shares can't be freely sold. Typically, the corporation bylaws and state laws require the sale be approved by the corporation [the shareholders and directors], and the shares normally must be offered to them by 'first right of refusal'.

Re: Sale of Stock

There are two categories of problems to be concerned about.

The first is corporate restrictions on sale or other forms of alienation of interests. You should look at the certificate itself to see if it bears any legend about transferability. Next, review the bylaws and Articles of Incorporation. Then, review or recall any agreements the shareholders made among themselves when the corporation was formed, reorganized, or when the stock was issued. Many times the founders will enter into a contract regarding transferability. For example, there may be a right of first refusal or a buy-sell agreement in place.

The next category of problem is regulatory. The securities laws restrict transferability of unregistered (unlisted) shares. Generally, a single isolated private transaction between business associates or family members will be exempt from regulation. Be sure the buyer is well informed about the company and its prospects. Obviously, you cannot advertise the stock or engage in numerous transactions or act like a stock broker or securities dealer.

Finally, remember that the sale would have to be reported to the corporate secretary so the records can be updated, the old certificate cancelled and a new one issued. For this reason, it's really impractical to do such a sale in secret.