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T RANSFER A GENT L ITIGATION AND L IABILITY : The Perils and Pitfalls of Cancelling Shares Mark A. Harmon Hodgson Russ LLP 230 Park Avenue New York, NY.

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Presentation on theme: "T RANSFER A GENT L ITIGATION AND L IABILITY : The Perils and Pitfalls of Cancelling Shares Mark A. Harmon Hodgson Russ LLP 230 Park Avenue New York, NY."— Presentation transcript:

1 T RANSFER A GENT L ITIGATION AND L IABILITY : The Perils and Pitfalls of Cancelling Shares Mark A. Harmon Hodgson Russ LLP 230 Park Avenue New York, NY

2 © 2006 Hodgson Russ LLP2 The Problem: Requests by Issuers to Cancel Shares  “The deal never closed.”  “The intended shareholder did not earn the bonus.”  “The shareholder died.”  “They breached the agreement.”  “We lost the certificate.”  “We gave the shares to him by mistake.”  “The employee benefit did not vest.”  “The shareholder committed fraud.”

3 © 2006 Hodgson Russ LLP3 The Transfer Agent’s Dilemma: The Issuer is not an “Appropriate Person”  UCC § Duty of Issuer to Register Transfer (a) If a certificated security in registered form is presented..., the issuer shall register the transfer as requested if: (1)* * * (2) the indorsement or instruction is made by the appropriate person or by an agent who has actual authority to act on behalf of the appropriate person; * * *  UCC § Whether Indorsement, Instruction, or Entitlement Order Is Effective. (a) “Appropriate person” means: (1) with respect to an indorsement, the person specified by a security certificate... to be entitled to the security. * * * (b) An indorsement, instruction or entitlement order is effective if: (1) it is made by the appropriate person; * * *

4 © 2006 Hodgson Russ LLP4 Investigating the Request to Cancel a Certificate  Under what circumstances were the shares issued?  What instructions were given by the issuer?  Did the issuer supply an opinion in connection with the issuance of the shares?  Were the shares issued in connection with a transaction?  Were the shares issued as compensation?  What instructions were given as to delivery of the certificate?  To whom were the shares delivered?  Were the delivery instructions followed?  Were the shares ever delivered to the shareholder?  Are the shares legended?

5 © 2006 Hodgson Russ LLP5 Is the Certificate Presented for Cancellation: The Protected Purchaser Problem  The issuer and transfer agent control the company’s books and records: Why not simply cancel the shares and await the eventual presentment of the certificate? The certificate is evidence of ownership. The certificate remains in the marketplace.  UCC § Protected Purchaser. (a) “Protected purchaser” means a purchaser of a certificated or uncertificated security, or of an interest therein, who: (1) gives value; (2) does not have notice of any adverse claim to the security; and (3) obtains control of the certificated or uncertificated security. (b) In addition to acquiring the rights of a purchaser, a protected purchaser also acquires the interest in the security free of any adverse claim.

6 © 2006 Hodgson Russ LLP6 Presentment for Cancellation of the Endorsed Certificate  The endorsement is evidence of the shareholder’s consent to the cancellation.  The endorsement must be by an “appropriate person.”  The signature must be guaranteed.

7 © 2006 Hodgson Russ LLP7 Presentment for Cancellation of the Unendorsed Certificate  The shares never were delivered to the shareholder.  Will the issuer supply an opinion of counsel to confirm that the shares never were delivered to the shareholder of record and explaining the circumstances for their being retained and now cancelled?  If the shares never were delivered, the shareholder may have a claim against the issuer for breach of a contractual obligation, but the likelihood of a claim against the transfer agent is diminished.  Has the shareholder claimed that the certificate is lost or stolen?  The shares were recovered from the shareholder.  Does the shareholder consent to the cancellation of the shares?  If so, why is the certificate not endorsed?  A shareholder’s interest in stock cannot be unilaterally cancelled. That is a “conversion” of his property.

8 © 2006 Hodgson Russ LLP8 The Request to Cancel an Unpresented Certificate  Risk of liability to the shareholder of record or protected purchaser.  Is the certificate really lost?  Minimizing the risk of cancelling an unpresented certificate.  Retain treasury shares to issue if the certificate is later presented.  Require an indemnity bond.  Insist that the issuer obtain an order from a court of competent jurisdiction. The shareholder of record should be made a party to any judicial proceeding concerning the stock. Otherwise, he may not be bound by the court order.The shareholder of record should be made a party to any judicial proceeding concerning the stock. Otherwise, he may not be bound by the court order.

9 © 2006 Hodgson Russ LLP9 Alternatives to Canceling an Unpresented Certificate  Place an “advisory stop” on the transfer records.  Give the issuer an opportunity to obtain an indemnity bond or an injunction.  Register the transfer if the issuer fails to obtain the bond or injunction.

10 © 2006 Hodgson Russ LLP10 Don’t Drop Your Briefcase and Run: Resignation Is Not an Option  Scenario: The shareholder makes a presentment of restricted shares and a request for removal of the legend. The transfer agent notifies the issuer and requests an opinion of counsel. The issuer responds with instructions that the shares are to be cancelled.  The transfer agent’s duty to the shareholder to register the transfer arises upon a proper presentment pursuant to UCC § That duty cannot be avoided by resignation, delegation, or even interpleader. If the duty to transfer exists, resigning or depositing the shares with a court will not excuse the failure to complete the transfer.

11 © 2006 Hodgson Russ LLP11 Resigning Can Make Matters Worse  The transfer agent loses control over the situation. In particular, it loses the ability to mitigate liability by completing the transfer.  The transfer agent may face a UCC Article 8 claim for damages for failure to perform the transfer.  Obstructing the transfer can interfere with the shareholder’s rights and expose the transfer agent to conversion damages.  If the request to transfer is to be rejected, the shares should be returned to the presenter in a timely manner. AVOID HOLDING CERTIFICATES!

12 © 2006 Hodgson Russ LLP12 Advice to the Issuer Respecting Stock that Is Likely to be Returned for Cancellation  Suggest appropriate legends be placed on certificates.  Restrictions must appear on certificates in order to be enforced.  Courts generally enforce private agreement legends.  Issuers should be cautioned against delivering certificates before all conditions are met by the shareholder.  Advise issuers to avoid, where possible, the issuance of certificates in advance. The transfer agent can issue the shares as they are earned and deliver them directly to the shareholder.  Be careful of irrevocable instructions.

13 Mark A. Harmon Hodgson Russ LLP 230 Park Avenue New York, NY Mark A. Harmon is a partner in Hodgson Russ LLP’s Business Litigation Practice Group. For over twenty years, he has represented transfer agents and issuers in connection with stock transactions and UCC Article 8 issues. Mr. Harmon is admitted to practice in the United States Supreme Court, the Second and Third Circuit Courts of Appeal, the United States District Courts for the Southern and Eastern Districts of New York and the State of New York. With more than 230 attorneys practicing in all major areas of law, Hodgson Russ is among the 200 largest law firms headquartered in the United States. Over the past year, the firm has tripled its roster of New York City-based attorneys to provide an even wider range of services and increased depth in important niche practice areas, including federal, multi-state, New York State, and local tax; bankruptcy, restructuring, and corporate reorganization; intellectual property; estates and trusts; litigation; commercial real estate; corporate and securities; immigration; employment law; and health law. Established in 1817, Hodgson Russ is among the oldest law firms in the United States. Hodgson Russ has offices in New York, Albany, Buffalo, and Johnstown, New York; Boca Raton, Florida; and Toronto, Ontario, Canada.


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