July 22, 2019

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Judge Finds That Transfer Agent's Failure To Remove Restrictive Legend May Be Actionable

Transfer agents can find themselves in a difficult position when it comes to removing restrictive legends on stock certificates.  On the one hand, the Securities and Exchange Commission may take enforcement action against transfer agents who facilitate unlawful trading.  In a case announced last year, for example, the SEC charged that a transfer agent had relied on facially inaccurate and incomplete legal opinions.  On the other hand, a transfer agent that fails or refuses to remove stock transfer legends may face liability to the stockholder.

This latter risk is illustrated by a recent ruling by U.S. District Judge Alvin K. Hellerstein in Shaw v. Empire Stock Transfer Inc., 2019 U.S. Dist. LEXIS 87213, 2019 WL 2226761.  The case involved a stockholder of a Nevada corporation who allegedly never received his share certificate despite submitting a Rule 144 opinion.  Judge Hellerstein found that NRS 104.8401 confers a cause of action for failure by a transfer agent to remove a restrictive legend.  In support, he cites the Nevada Supreme Court's opinion in Guilfoyle v. Olde Monmouth Stock Transfer Co., 335 P.3d 190, 195 (Nev. 2014).  I took issue with the holding in Guilfoyle in this post.  Judge Hellerstein's decision was not all beer and skittles for the plaintiff, however.  In fact, he dismissed the complaint with prejudice as to the plaintiff's unjust enrichment, constructive trust, and aiding and abetting claims while granting leave to amend and add a statutory claim to conversion claim.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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