> has the moral indignity of telling its own investors that they better not be trading the assets they purchased.
The way I read this they are not "telling them" as much as reminding them that legally they are not allowed to do this.
The way I read this they are not "telling them" as much as reminding them that legally they are not allowed to do this.
Shareholders in a Delaware corporation are legally allowed to sell their private shares. The general exemption for this is Regulation D. Most restrictions are of companies’ construction.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
If an employee sells their shares in violation of a company contract, what happens? Can the company repossess the shares? Or are the shares structured so that they can be made worthless?
Can employees construct a security based on their shares and then sell that instead? Nominally the employee retains the shares, and sells a contract based on them to someone else - an asset-backed security. The contract is an option that allows the contract-owner to request the shares-owner sell their shares in the event of liquidity, and the contract owner will receive the gains. Alternatively, the share-owner simply holds onto the shares until they are transferrable (eg IPO). In exchange for this the shares-owner is paid an up front fee.
Presumably this kind of arrangement could also be prohibited in some way by the company, but if someone is willing to violate that agreement, it would be difficult to discover that the agreement exists.
The record of a private company’s shareholders are maintained by the company. If you try to buy shares in a prohibited transfer, the company won’t recognise the change of ownership. Forcing recognition would require the transacting parties to sue the company; this is frowned upon.
That said, yes, companies who block transfers tend to spawn clever financial engineerings. Because of associated legal and banking costs, these structures only make sense for larger trades.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
The organizing documents will have language that specifies the right to injunctive relief. That clause can be used by the court as a basis to order you not to complete a contemplated sale. (Obviously, only works if they catch you before it happens.)
> If an employee sells their shares in violation of a company contract, what happens? Can the company repossess the shares? Or are the shares structured so that they can be made worthless?
The organizing document will specify that shares must be registered and all transfers must be done by filing appropriate paperwork with the company. The company will refuse to process transfers that don't comply with the rules, and refuse to recognize as shareholders anyone who claims to own shares but doesn't have them registered in their name.
> Can employees construct a security based on their shares and then sell that instead? ... an asset-backed security.
Agreements that prohibit transfers often also prohibit pledging the shares as collateral, which means it couldn't be used to secure a derivative contract (making it asset-backed). But it's difficult to prohibit every possible derivative contract, so if someone really wanted to sell some transfer-restricted stock, I believe it's somewhat doable via this route. If you're interested in learning more about it, look at what SharesPost is up to, from what I understand, they buy exposure to private companies in the form of unsecured derivatives contracts.