There are many instances where an individual or corporation receives shares of stock by private placement, as opposed to purchasing the stock from the open market. Often times, the stock certificates received by private placement are stamped with a legend outlining applicable restrictions on the resale of that stock. This legend establishes the regulatory limitations surrounding the corporation or individual’s ability to resell the securities. This legend must be removed before one can legally effectuate the resale of the stock. Generally, the securities must either be registered with the Securities and Exchange Commission (SEC) or sold pursuant to an exemption from registration. Only after the securities are registered or are shown to be exempt, may a transfer agent remove the restrictive legend—and only upon the removal of the restrictive legend may the underlying securities sold.
In the United States, the resale exemption most often relied on is Rule 144 of the Unites States Securities Act of 1933. Rule 144 allows the resale of restricted stock to be sold to the public without a registration statement being filed if a number of conditions have been met. These conditions vary depending on (1) whether the issuing company is a reporting or non-reporting issuer; (2) whether the holder is arms-length, and thus considered a “Non-Affiliate”; or a director, officer or significant shareholder, and thus considered an “Affiliate”; and (3) the length of time the securities have been held.
Removing the restrictive legend involves extensive communications with the transfer agent of the issuer of the securities being held and the broker dealer where the stockholder seeks to deposit those securities. The certificate holder will need to provide a number of documents including, but not limited to, a seller’s representation letter, the original stock certificates, a medallion signature guarantee, a legal opinion letter, and in some cases, a Form 144 for the proposed transaction.
Once a securities-holder has met the requirements of Rule 144 and prepared and submitted the proper documentation, neither a corporation nor a transfer agent may unreasonably withhold its approval of transfer of shareholder’s restricted stock. In other words, a corporation may not refuse to process a transfer of its stock unless it has reasonable grounds for doing so and acts in good faith. In fact, there is a body of case law that has recognized that a wrongful refusal to transfer shares may amount to a conversion.
The attorneys at Gana, LLP are experienced in handling cases involving Rule 144 and restricted stock. Our consultations are free of charge and all inquiries are welcome.