How Poison Pills Protect Your Corporate Shares

Making shares in a small corporation worthless to creditors is a strategy that may save your company in the event of a catastrophic financial event and also can avoid the risk of a fraudulent transfer.

Poison pills with some of these characteristics can be highly effective:

• 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.
• Assessed shares: If your shares in a corporation have not been fully paid for or if the shares are assessable by the corporation, then a creditor who seizes the shares assumes them subject to the obligation to pay the assessment. Accordingly, a potential assessment reduces the value of the shares to a creditor by the amount of the potential assessment. Assessments are particularly effective as a poison pill and are commonly included in corporate documents as an anti-creditor tactic.
• Irrevocable proxies: A proxy is an assignment of your right to vote as a shareholder. If you were to issue a proxy to a relative, a creditor that successfully seized your shares could not vote your shares because you transferred your voting powers to the proxy holder. This action significantly lessens the stock's value to the creditor because the creditor gains no voting rights and is subject to the actions of the board of directors or managing members. In the event that you are sued you may also exchange your voting shares for non-voting shares, which have substantially less value creditors in pursuit of your assets.
• Dilute your stock ownership position: If you own a controlling interest, dilute your ownership to avoid transfer to a creditor by having your corporation sell additional shares to other family members or to family controlled entities such as trusts, limited partnerships and other organizations. A creditor that seizes a small ownership interest in a corporation would not control the corporation and would be powerless to affect any asset sale. As a minority stockholder, a creditor's only right would be to vote his or her shares and await future dividends, if any. A good practice is to spread the distribution of stock ownership in a family owned corporation between numerous family members so that no single-family member owns more than 49% of the voting shares.
• Pledged shares: Another poison pill 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.

The preceding are just a few tactics used to protect wealth. This website and The Presser Firm, P.A. are dedicated to providing you with a spectrum of options that shield your assets from creditors.

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