Every so often, I get a call from a client asking if, in Arizona, the shares of stock the corporation redeemed from a former shareholder can be resold without meeting certain legal requirements for selling unissued shares. While the term “treasury stock” (or “treasury shares”) is viewed as somewhat outdated terminology by some, the subject still arises when a corporation redeems some of its previously issued and outstanding shares.
The important question is whether a corporation can sell reacquired shares for any price or consideration it wishes as contrasted with what must be paid for newly issued shares. For example, if these redeemed shares are considered as issued after redemption, then they can be resold for nominal consideration, for a promissory note or for future services, none of which is legal consideration for newly- issued shares sold by a corporation.
In 1996, Arizona law changed so that the general rule has become issued shares reacquired by the corporation are deemed to be unissued but authorized shares for all purposes going forward. This is now set out in Ariz. Rev. Stat. Annot. Section 10-631(A). Of course, as you might suspect, most every general rule has an exception or two.
Of the two exceptions to this general rule, I will just focus on one of them. If at the time of the redemption of the shares the remaining shareholders unanimously adopt a written agreement pursuant to Ariz. Rev. Stat. Annot. Section 10-732 to treat the redeemed shares as issued, but not outstanding, then the shares may be resold for whatever consideration the corporation deems appropriate. Say the corporation has a young employee that management would like to become a shareholder, but who could not afford to buy shares deemed unissued. The corporation may sell those redeemed shares declared issued, but not outstanding, to this promising employee in exchange for a promissory note with terms. This can be a win-win solution for everyone concerned.
**This content does not constitute investment advice and is not meant to determine the choices of an individual investor. This is an examination of scenarios involving closely-held corporate stock and does not apply to publicly traded common stock**
Michael W. Margrave