Allen v. Biltmore Tissue Corporation

New York Court of Appeals · 1957 · Corporations

2 N.Y.2d 534 (1957)

Updated August 22, 2026

CorporationsStock transfer restrictionsClose corporationsbylaw restrictionstock certificate legendPersonal Property Law section 176first optionrestraint on alienation

Facts

Defendant corporation's bylaws gave the corporation a right, upon a shareholder's death, to purchase the shares from the legal representative at the same price the corporation originally received for them, and each stock certificate stated that it was issued subject to restrictions in specified bylaw sections. Kaplan bought 20 shares over time, and after his death his executors asked the corporation whether it wished to acquire the shares and sent in the certificates while requesting reissuance to the estate or executors. Within 30 days of being informed of the executors' status, the board voted to exercise the option under the death-transfer bylaw and notified the executors' attorney, offering more than the original purchase price. The executors refused and claimed the legend was insufficient under section 176 of the Personal Property Law and that the bylaw was an unreasonable restraint on transfer.

Issue

Whether the stock certificate legend sufficiently stated the transfer restriction under section 176 of the Personal Property Law, and whether a bylaw giving the corporation a 90-day option to purchase a deceased shareholder's stock at the original issue price was an unreasonable restraint on alienation. A further issue was whether the corporation exercised that option within the required time.

Rule

A restriction on transfer of corporate shares is sufficiently stated on a stock certificate under section 176 when the certificate bears a legend that the stock is issued subject to specified bylaw restrictions and indicates where the full text may be found. Such a restriction is valid if it is reasonable: the law permits a first-option arrangement that merely postpones transfer for a limited period, but not a provision that effectively prohibits transferability. The validity of such a restriction does not depend on abstract fairness of the option price; disparity between option price and current value alone is insufficient to invalidate it.

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North Harbor Packaging, a closely held corporation in Buffalo, adopted a bylaw giving the corporation 75 days after a shareholder's death to buy the shares at the original issue price, after which the estate may sell freely. Leah Moreno bought shares years later, and each certificate stated on the front, "Issued subject to transfer restrictions in Bylaw Sections 14 and 15; full text available at the corporation's office." After Leah died, her executor sought transfer of the shares to the estate and argued the restriction was unenforceable because the certificate did not print the bylaw's substance.

How should a court rule on the executor's notice argument?

Explanation. The majority rule is that the restriction need not be set out verbatim or in substance on the certificate. Adequate notice is enough, and incorporation by reference suffices when the legend states that the shares are issued subject to specified bylaw restrictions and indicates where the full text may be found. Actual reading is not required if the certificate gives the requisite notice. (Derived from Allen v. Biltmore Tissue Corporation (1957).)