An Overview of Transferring Share Rights and What Isn’t Permissible with Transfers
By: Barry E. Haimo, Esq.
February 28, 2025
Did you know that some entities allow for the slicing and dicing of rights with respect to shares of ownership? That means, for example, that you can not only own both voting rights and economic rights, you can also separate those two rights for individual shares.
The key words there, however, are “some entities.” Other entities do not have that type of flexibility, and this is where you want to be careful, because you can end up attempting to make transfers that aren’t allowed – and in some cases may even constitute fraud..
Because of these issues, you want to ensure that your agreement is very tight on transfers and how they work. Specifically, you want to be sure they are buttoned up for when they are permitted and how the agreement treats transfers that are not permitted.
Let’s dig a bit deeper into this.
Understanding and Dealing with Improper Transfers
Listen to the below for some of the more unusual things you may be able to do when transferring shares, as well as how to draft a transfer agreement that clearly covers what’s allowed, what’s not, and what happens if a transfer is found to be improper.
Read Transcript
Hi. Thanks for tuning in to another dose of Bite-sized Bits of Knowledge, where we give you meaningful information in a short amount of time. This is the last of the transfer video segment of the series.
There’s two things I want to cover today. One is, you know, I mentioned in another video that you can transfer all or part of your shares. That means all of them, part of the total of them. So, you have 100 shares, you can sell 100, you can sell less than 100.
But you also, theoretically, depending on what your agreement says, you could sell different rights of the shares. Like, for example, you could sell the economic portion of a share of stock without selling the right to participate in the management portion of the stock or the shares of the units – whatever it is.
So you can actually kind of slice and dice the rates that a share of stock has in certain kinds of entities and transfer that. So that needs to be thought through as well. And the second thing that I want to mention was, you know, we did discuss in another video that certain transfers can be either prohibited – they can be subject to approval of, you know, all the shareholders, the board, or a lesser threshold of approval from whoever to permit them.
But now, what happens if there’s a transfer that’s improper? So if you have all these roles set up and you have a shareholder who goes rogue and says, “I don’t care. I’’m just gonna transfer. I’m gonna sell them to my neighbor anyway.”
Well, the agreement will address that, and it will basically say that transfer is void. And a really good agreement will not only just say that the transfer is void – and I’ll spare you the legal language of how that’s worded, but basically it’s void, it’s nullity. But a really good agreement will say something to the effect of, “You can’t be a member or a shareholder and participate in the management and operations of the business until you sign the agreement.
And in some cases the approval that you need – that we just talked about – also signs the agreement. So it really makes it kind of an elevated level of difficulty to be able to transfer. And even if it’s done wrong, it’s limiting the consequence to the business and to the existing partners if that happens.
All I can say in this respect is I have seen it litigated where this stuff is not done right. Someone goes on and grabs what appears to be a decent online template of an operating agreement. For example, they download it. They plug and chug. They think they have something good. And boy does that blow up in your face. There’s gonna be a lot of holes.
This is a major one, and it can cause a lot of – as I always say – a lot of chaos, court, costs, and conflict. So do it right from the beginning. It will save you a lot of trouble.
I hope you found the transfer segment of the series very helpful. Don’t forget to download our business planning stress test. It’s free. It’s in the description. There’s a Florida corporate formation chart as well, which I think you’ll also find very helpful, and some other links to some helpful resources as well.
Thank you again for stopping by, and stay tuned for more.
Of course, those types of transfers and rules are just about protecting your company and creating clear boundaries. What happens if a transfer is not only improper, but potentially fraudulent?
The Difference between Improper Transfers and Fraudulent Transfers
Don’t confuse someone’s improper transfer with one that is legally found to be fraudulent. While improper ones can typically just be voided as long as you have strong, clear rules in place, fraudulent transfers may leave you – not just the business, but you – open to liability claims from debtors.
Here’s how they work.
What is a fraudulent transfer?
The Florida Statute on this is long and complicated, but the basic definition of a fraudulent transfer is one that is conducted in order to protect assets and avoid paying a creditor, particularly if you are unable to pay off your debt by other means.
The two types of fraudulent transfers.
Actual – If someone intentionally transfers their assets in an attempt to evade creditors, this is considered actual fraud.
Constructive – If a debtor who is insolvent or becomes insolvent transfers their assets to another party without getting equivalent value back – reasonably speaking – this can be considered constructive fraud.
Why is this so bad for businesses and business owners?
The short version? As mentioned above, business owners and officers may be personally liable in fraudulent transfer cases. In other words, you could get sued and find yourself on the hook for not only what you owe, but potentially fines, penalties, and damages.
And businesses want no part of this because the court has previously ruled in favor of creditors piercing the corporate veil if they prove grounds for doing so in order to obtain judgments against company officers or shareholders. No company wants this.
Staying Away from Wrongful and Fraudulent Transfers
To avoid fraudulent transfers, individuals and businesses must carefully evaluate asset transfers and their effect on creditors. A clear understanding of Florida’s fraudulent transfer laws can help safeguard assets and mitigate legal risks.
Creating a strong agreement with clear rules won’t completely prevent these kinds of bad transfers from occurring, but it should certainly reduce the chances of them happening. Reach out to us to get help drafting an agreement that gives you the most possible protection from legal action.
Download our FREE:
Business planning stress test
https://legacy.haimolaw.com/Business-Planning-Stress-Test
Florida business entity comparison chart
https://legacy.haimolaw.com/business-entity-comparison-chart
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Originally published 03/22/2022. Updated 02/28/2025.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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