Cautions and Stops: Managing Conflicting Obligations to Issuers and Shareholders Presented By Mark A. Harmon Hodgson Russ LLP 1540 Broadway, 24 th Floor New York, NY

© 2007 Hodgson Russ LLP2 ISSUERS’ ABUSE OF STOP ORDERS Many issuers (and their counsel) believe they are entitled to have transfer agents place “stops” on particular certificates.  Issuers may or may not provide a reason for the stop.  The reasons provided may not be valid.  Lack of consideration.  Contemplated deal did not close.  Buyer’s remorse.

© 2007 Hodgson Russ LLP3 BETWEEN A ROCK AND A HARD PLACE: THE TRANSFER AGENT’S DILEMMA  Obligation to the Issuer  By contract, the transfer agent is obligated to serve the issuer.  Obligation to the shareholder  By statute, the transfer agent is obligated to the shareholder.  UCC § 8-407: A person acting as... transfer agent... for an issuer in the registration of a transfer of its securities... has the same obligation to the holder or owner of a certificated or uncertificated security with regard to the particular functions performed as the issuer has in regard to those functions.

© 2007 Hodgson Russ LLP4 DUTY TO REMAIN NEUTRAL  The transfer agent has a duty to remain neutral in disputes between issuers and shareholders.  It is in the transfer agent’s interest to remain neutral.  Transfer agent rarely has personal knowledge of facts.  The three sides to every story.  A court or jury may judge the circumstances differently.  No issuer’s indemnity is certain.

© 2007 Hodgson Russ LLP5 THE 30-DAY “ADMINISTRATIVE” STOP  Often sought by issuers and often placed by some transfer agents.  Transfer agents sometimes set limitations on 30-day stops.  Only one 30-day stop that cannot be extended.  The 30-day stop expires automatically after 30-days.  Provided by transfer agents as an accommodation to issuers.  Confusion with adverse claims.

© 2007 Hodgson Russ LLP6 THE TRANSFER AGENT CANNOT AVOID THE OBLIGATION TO THE SHAREHOLDER Once a rightful presentment is made, the transfer agent has a duty to register the transfer. Scenario: A shareholder makes a presentment of restricted shares with 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. The Moral: Embrace the obligation to remain neutral. Appeasing issuers at the expense of shareholders can mean liability for transfer agents.

© 2007 Hodgson Russ LLP7 AVOID BEING COMPLICIT IN THE MISUSE OF STOP ORDERS  Place only “advisory stops.”  Reject the practice of placing 30-day administrative stops.  There is no rule of law that condones the automatic placement of administrative 30-day stops.  A 30-day delay in completing a transfer, if without justification, can result in liability, particularly where the transfer, in fact, should have been processed as a routine item but for the administrative stop.  Be pro-active.  Inquire of the issuer as to the reason for the requested “stop.”  Inform the issuer that only an “advisory stop” will be placed.  Advise the issuer to act before the shares are presented. An indemnity bond or an injunction.An indemnity bond or an injunction.  Warn the issuer that, in the event of a rightful presentment of the shares, the transfer agent may be required by law to register the transfer in a relatively short time frame.  Register the transfer if the issuer fails to obtain a bond or injunction.

© 2007 Hodgson Russ LLP8 RECENT TRANSFER AGENT LITIGATION Limitations on warranties of transfer and medallion guarantees. Transfer Agent v. Longwood Country Garden Centers, Inc. On appeal to the United States Court of Appeals for the Fourth Circuit Securities Transfer Association as Amicus Curiae  On an instruction from Longwood, the transfer agent (TA) sold and transferred 48,961 shares. The instruction proved to be improper in that Longwood was not the true owner of the shares. The true owner sued the TA for wrongful registration of the shares. The TA was adjudged liable because Longwood’s instruction was ineffective in that it was not the true owner. See UCC § (a)(1). The TA sued Longwood to recover its loss. The TA alleged that, in issuing its instruction to sell, Longwood breached warranties provided under UCC § 8-108(e).  The warranties under UCC § 8-108(e) include that (i) the instruction is effective, and (ii) at the time the instruction is presented, the purchaser is entitled to the registration of transfer.  The federal district court denied the TA’s claim as a matter of law. It reasoned that, under the UCC, the warranties accompanying Longwood’s instruction were made only to the issuer. From the denial of its claim, the TA has appealed.

© 2007 Hodgson Russ LLP9 Transfer Agent v. Longwood (continued) Failure of Medallion Guarantee  A guarantee of the signature of the originator of the instruction does not guarantee the rightfulness of the transfer or that the instruction is made by or on behalf of the registered owner. See UCC §

© 2007 Hodgson Russ LLP10 Transfer Agent v. Longwood (continued) Cautions for Transfer Agents  The implication of the district court’s decision is that transfer agents have obligations of issuers but not the protections afforded issuers.  If transfer agents cannot depend on warranties when processing instructions, they will be required to undertake extensive investigations before processing the instruction, thereby impeding the efficient transfer of securities.  Transfer agents cannot always look to an issuer for indemnification.

© 2007 Hodgson Russ LLP11 Canyon Capital Marketing, Inc. v. Transfer Agent WL (Cal. App. 4 Dist. July 11, 2006) Issue: Whether a transfer agent owes a fiduciary duty to shareholders under Article 8 of the Uniform Commercial Code? Facts: The shareholder presented 90,000 restricted shares and a letter from its counsel opining that the shares could be sold pursuant to Rule 144. The issuer instructed the transfer agent not to remove the legend because the shareholder did not satisfy Rule 144. Thereafter, the shareholder requested copies of the issuer’s instructions to the transfer agent, and then resubmitted its request. The issuer then approved the removal of the legend. Four months had elapsed, the value of the stock had declined, and the shareholder sued the issuer and transfer agent. Holding:There is no fiduciary relationship between the transfer agent and shareholder. Dicta:The legend required that the company approve the removal of the legend. Caution:Although the case may suggest that a transfer agent can abide the instructions of the issuer respecting removal of legends, it should not be understood to mean that transfer agents may always follow an issuer’s instructions. Where it is demonstrated that the issuer is proceeding in bad faith, the transfer agent may be obligated to disregard the issuer’s instructions. See, e.g., Bender v. Memory Metals, Inc., 514 A.2d 1109 (Del. Ch. 1986) (issuer that refused to permit removal of legend acted in bad faith).

© 2007 Hodgson Russ LLP12 Dickson v. Ticketmaster, Inc Cal. App. Unpub. LEXIS 622 (Cal. Ct. App., 2d Dist. Jan. 25, 2005) Issue: Liability of successor transfer agent. Facts: Having lost certificate A-20, the shareholder applied for and obtained replacement certificate A-26. The certificate was embossed with a restrictive legend. Thereafter, the issuer retained a new transfer agent. The outgoing agent (also the issuer’s counsel) supplied the new agent with an opinion of counsel identifying restrictions, if any, on the issuer’s shares. The opinion, which also authorized the removal of legends, mistakenly referred to lost certificate A-20 instead of the replacement certificate A-26. The confusion caused by the erroneous opinion resulted in a delay in the removal of the restrictive investment legend. The shareholder sued the issuer only. Cautions: The fact pattern presents a scenario where a transfer agent relied on the books and records of the issuer as maintained by a prior transfer agent. The circumstances may not always be so simple.

© 2007 Hodgson Russ LLP13 A Hypothetical Facts:  A bank presents to TA a large block of stock for transfer.  The shares had been pledged for a loan and are in good and proper form.  The issuer’s records, however, record the shares as having been cancelled and replaced.  The issuer instructs the TA to reject the presentment. Issues:  Is the TA obligated to reregister the shares?  What if registering the shares will result in an over- issuance?

Mark A. Harmon Hodgson Russ LLP 1540 Broadway, 24 th Floor 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, Third and Fourth 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 225 attorneys practicing in all major areas of law, Hodgson Russ is among the 200 largest law firms headquartered in the United States. Established in 1817, Hodgson Russ is among the oldest law firms in the United States and is the only law firm that can count two former U.S. presidents, Millard Fillmore and Grover Cleveland, among its alumni. Hodgson Russ has offices in New York, Albany, Buffalo, and Johnstown, New York; Boca Raton, Florida; and Toronto, Ontario, Canada.