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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

DGCL Sec. 202 - Restrictions on transfer of stock

When a board issues new shares, in addition assigning voting rights to the shares, the board may also, pursuant to ยง202, place reasonable restrictions on the ability of stockholders to transfer or sell such shares.  There are a variety of common restrictions placed on shares, particularly shares of private corporations. For example, a board might include a right of first refusal restriction on shares it issues to ensure that existing stockholders the opportunity to purchase any shares that a stockholder would like to sell. Another common restriction prevents accumulation of shares by any one stockholder. For example, the Green Bay Packers restrict any one shareholder from owning more than 5% of the outstanding shares of the corporation. The ability of boards to design restrictions on the transfer of stock is fairly broad. Of course, this power is not without limits. For example, restrictions against selling stock to based on racial or gender categories would run afoul of Federal law and thus not be enforceable.