## Facts

- Biltmore Tissue Corporation was a closely held New York corporation whose by-laws restricted share transfers.
- Harry N. Kaplan acquired 20 shares of Biltmore stock over time and held certificates bearing a conspicuous legend stating the shares were subject to specified by-law sections restricting transfer.
- The by-laws (1) required a selling shareholder to give the corporation or other shareholders an opportunity to repurchase at the original issuance price and (2) provided that, upon a shareholder’s death, the corporation had a 90-day option to purchase the shares from the legal representative at the original issuance price (or, if the corporation did not or could not buy, the board could authorize existing shareholders to do so), after which the representative could dispose of the shares freely.
- Kaplan died on October 25, 1953.
- In February 1954, the executors sent the certificates to the corporation, requested transfer into the executors’ names, and asked whether the corporation wished to purchase the shares.
- On March 4, 1954, the board voted to exercise the death-option and offered to buy the shares at $20 per share, which exceeded Kaplan’s purchase prices.
- The executors refused to sell and demanded transfer; the corporation refused, invoking the option.

## Issues

1. Whether a by-law granting the corporation (and secondarily designated shareholders) a time-limited option to purchase shares upon a shareholder’s death at the original issuance price is an unreasonable restraint on alienation and therefore unenforceable.
2. Whether a stock certificate legend that refers to specific by-law sections restricting transfer provides legally sufficient notice to bind the shareholder and successors.
3. When the 90-day option period begins to run for purposes of determining whether the corporation exercised its option timely.

## Decision

- The Court of Appeals of New York reversed the Appellate Division and reinstated judgment for the corporation.
- The court held the death-contingent purchase-option by-law valid and enforceable in a closely held corporation.
- The court held the certificate legend referencing the restrictive by-law sections sufficiently satisfied the statutory notice requirement, binding the shareholder and the estate.
- The court held the option was timely exercised because the 90-day period ran from notice to the corporation of the shareholder’s death and the identity of the legal representative, not from the date of death.

## Legal Principles

- Reasonable, time-limited share transfer restrictions in closely held corporations are generally enforceable as contractual arrangements among shareholders and the corporation when assented to through acquisition and holding of shares subject to the restrictions.
- A post-death purchase option that expires after a fixed period and then permits free disposition is not an absolute or indefinite restraint on alienation.
- A price formula tied to original issuance price does not, by itself, render a close-corporation transfer restriction invalid where the arrangement is part of the shareholders’ agreement and serves legitimate ownership-control objectives.
- Statutory requirements that transfer restrictions be “contained in or referred to” on a stock certificate are satisfied by a clear legend directing the holder to the specific by-law provisions where the restriction’s terms can be found.
- A decedent’s estate generally takes shares subject to the same transfer restrictions that bound the decedent.

## Conclusion

The court enforced Biltmore’s by-law option to purchase a deceased shareholder’s stock, concluding the restriction was reasonable and contractually binding in a closely held corporation, the certificate legend provided adequate notice by incorporation by reference, and the corporation exercised the option within the permissible period measured from notice of death and the legal representative’s identity.


Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534 (N.Y. 1957)