## Facts

- The Capital Group Companies, Inc. (CGC) was a privately held Delaware corporation that required purchasers of its stock to sign a Stock Restriction Agreement (SRA).
- Timothy Armour was an executive vice president of a CGC subsidiary and acquired CGC stock through his employment, subject to the SRA.
- The SRA broadly restricted any transfer of CGC shares (and any interest in those shares) to nonemployees and gave CGC a right to repurchase shares transferred to an unauthorized transferee at a formula price.
- For tax planning, Armour and his wife, Nina Ritter, created a revocable trust to hold CGC shares and to purchase additional shares.
- The trust terms required CGC’s approval for any distributions of the trust’s CGC shares and permitted CGC to repurchase shares if, upon revocation, shares were distributed to someone other than Armour.
- Armour and Ritter executed a joinder agreement as trustees, agreeing to be bound by the SRA’s transfer restrictions.
- Armour later filed for divorce in California, and the CGC stock held in the trust represented a major part of the marital property at issue.
- In the divorce proceeding, Ritter indicated she would seek (among other relief): (1) a direct or indirect interest in the trust, (2) one-half of dividends paid on the CGC shares, and (3) one-half of any proceeds from any future sale of CGC shares.
- After learning of Ritter’s requests, CGC filed a Delaware Court of Chancery action against Armour and Ritter (individually and as trustees) seeking declaratory relief that the SRA prohibited awarding Ritter any direct or beneficial interest in the CGC shares.
- The case came to the Court of Chancery on summary judgment practice, with the court resolving the merits as cross-motions for summary judgment.

## Issues

1. Whether Delaware law requires a court to evaluate the reasonableness of contested stock-transfer restrictions contained in a stock restriction agreement.
2. Whether CGC’s SRA restrictions were a reasonable means of accomplishing a legitimate corporate objective, including limiting ownership to avoid federal public-company reporting obligations.
3. Whether the SRA and related trust provisions could bar a divorce-related award that would give a nonemployee spouse a direct or beneficial interest in the restricted shares, including rights to dividends and sale proceeds.

## Decision

- The court held that when stock-transfer restrictions are contested, Delaware law calls for a reasonableness inquiry.
- The court determined that CGC’s transfer restrictions served a legitimate corporate objective and were reasonable in operation.
- The court concluded that the SRA and related trust restrictions could operate to prevent any transfer to, or disposition in favor of, Ritter of a legal or beneficial interest in the CGC shares.
- The court granted declaratory relief to CGC and entered summary judgment in CGC’s favor, effectively barring Ritter from obtaining the requested interest in dividends and sale proceeds tied to the restricted shares.

## Legal Principles

- A contested restriction on the transfer of corporate stock is evaluated for reasonableness under Delaware law.
- A stock-transfer restriction is enforceable when it is a reasonable means to accomplish a legitimate corporate end, such as maintaining a limited shareholder base to avoid federal reporting and disclosure duties associated with public-company status.
- Transfer restrictions may reach more than formal record ownership; they may also bar arrangements that confer a prohibited beneficial or economic interest in the restricted shares to an unauthorized transferee.
- Where governing agreements restrict distributions from a trust holding corporate shares and condition distributions on the corporation’s approval (with repurchase rights on unauthorized distribution), those provisions may be enforced through declaratory relief to prevent an impermissible disposition of share-related rights.
- Summary judgment and declaratory judgment are appropriate tools to determine the enforceability and effect of stock-transfer restrictions when the material facts are not genuinely disputed and the dispute turns on contract interpretation and Delaware corporate law.

## Conclusion

In *Capital Group Companies, Inc. v. Armour*, the Delaware Court of Chancery enforced CGC’s employee-focused stock-transfer restrictions and related trust provisions against efforts in a California divorce to award a nonemployee spouse rights tied to the restricted shares. Applying a reasonableness analysis, the court found the restrictions justified by CGC’s legitimate interest in controlling its shareholder base and avoiding federal public-company reporting duties, and it granted declaratory and summary judgment relief confirming that neither direct ownership nor a beneficial interest (including dividend and sale-proceeds rights) could be awarded to Ritter under the challenged arrangements.


Capital Group Companies, Inc. v. Armour, 2005 WL 678564 (2005)