Overview of Poison Pill Your Corporate Shares
What do you do as a stockholder of a smaller corporation? How can you quickly
sell your shares without it being a fraudulent transfer if you have creditors?
The answer is that you probably can't. Still, you can make your shares
nearly worthless to creditors:
— Impose transfer restrictions. Corporate restrictions on the transfer
of shares generally won't prevent creditor seizure; however, restrictions
might discourage the less-aggressive creditor. Restrictions on transfer
must be reasonable to be enforceable, but not every creditor will incur
the cost or effort to challenge unreasonable restrictions.
— Assess your shares. If you have not fully paid for your shares
or if the shares are assessable by the corporation, then a creditor who
seizes the shares takes them subject to the obligation to pay the assessment.
A potential assessment obviously reduces the value of the shares to the
creditor by the amount of the potential assessment. An assessment is particularly
effective as a poison pill and assessments are frequently included in
corporate documents as an anti-creditor tactic.
— Issue irrevocable proxies. A proxy assigns your right to vote
your shares. For example, if you issue a proxy to a relative, a creditor
who seizes your shares cannot vote your shares because you transferred
your voting powers to the proxy holder. This significantly lessens the
stock's value to the creditor, because the creditor gains no voting
rights. If you are sued, you may also exchange your voting shares for
non-voting shares, which will have less value to creditors.
— Dilute your stock ownership. Don't let a creditor seize a
controlling interest in your business. If you own a controlling interest,
dilute your ownership. Have your corporation sell additional shares to
other family members or to family controlled entities (trusts, limited
partnerships, etc.). A creditor who seizes a small ownership interest
in the corporation would not control the corporation. As a minority stockholder,
the creditors only right would be to vote his or her shares and await
future dividends, if any. It is often wise to spread the stock ownership
in a family owned corporation between family members so that no one family
member owns more than 49% of the voting shares.
— Pledge your shares. A final option is to pledge your shares as
collateral to a friendly creditor. If the amount you borrow approximates
the value of your shares, your creditor can chase only shares with no
equity. This website will show you ways to legally encumber your shares.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to