Can we restrict the transfer of our corporation’s shares through a provision in the bylaws?

When entrepreneurs incorporate their business with just one or two other colleagues, they often want to restrict who the shareholders can transfer their shares to, so that there are no surprises (such as a sale to one of the company’s competitors) if one of the owners decides to move on. The owners may adopt such restrictions by including in the company’s articles of incorporation or bylaws a provision setting forth a “reasonable” restriction on the shareholders’ right to transfer their shares. See Cal. Corp. Code §§ 204(b) (articles of incorporation), 212(b)(1) (bylaws). If there is any hesitation about the restriction, or if it is not included in the original articles, it is best placed in the bylaws, since it can be adopted, amended, or repealed by the shareholders or the board of directors without having to go through the more complicated procedure of amending the articles, including filing a certificate of amendment with the secretary of state.

A “reasonable” restriction on the right to transfer shares includes a bylaw reserving a right of first refusal in other shareholders or the corporation when one of the shareholders decides to sell her shares. In California, as in some other states, it used to be that a shareholder who was issued shares before such a restriction was adopted would still be bound by the restriction. But the unfairness of that result was changed, and the statute now provides that a share-transfer restriction in the bylaws or articles is binding as to shares issued before the restriction was adopted only as to shareholders who voted in favor of the restriction. Cal. Corp. Code § 204(b).