Protectively titling your corporate shares to a Limited Partnership or
similar protective entity is one of the best methods to make your stock
less attractive to a prospective litigant. However, this alone may not
be enough. You must make use of other tactics that can reduce the value
of your corporate shares to a creditor.
One method is to issue irrevocable proxies which assign your right to vote
your shares. If you issue a proxy to a relative, for example, a creditor
who seizes your shares can’t vote your shares since you have irrevocably
assigned your voting rights to your proxy holder. If the creditor gains
no voting rights, it significantly lessens the stock’s value to
the creditor (depending upon the importance of voting control). You can
also sometimes exchange voting shares for non-voting shares, which similarly
lessens the stock’s value.
Another tactic is to allow the corporation to assess your shares. Corporate
shares that are assessable by the corporation are unattractive to a creditor
because the creditor assumes the assessment. A potentially large assessment
by the corporation correspondingly lowers the shares value to your future
potential threats and creditors.
It is also possible to dilute your stock ownership. Why allow your creditor
to control your family business? You can sell additional shares to other
family members, or to family controlled entities (trusts, limited partnerships,
etc.) to prevent your creditor from gaining control over the corporation.
Or you may redeem your shares. Another idea: title your shares to an irrevocable trust.
Finally, you may pledge your shares as collateral for loans. Of course,
you can use these tactics in any combination. The best way to protect,
redeem, transfer or encumber your shares, will depend on the corporate
restrictions and your unique situation.