December 6, 2022

Volume XII, Number 340

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December 05, 2022

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Knowledge Of Restrictions Dooms Stock Transfers

"I see nothing! I hear nothing! I know nothing!"

Two California statutes require that restrictions on transfer be included on share certificates.  Section 8204 of the Commercial Code  provides that "[a] restriction on transfer of a security . . . is ineffective against a person without knowledge of the restriction unless either of the following applies: (1) The security is certificated and the restriction is noted conspicuously on the security certificate. (2) The security is uncertificated and the registered owner has been notified of the restriction."  Section 418(b) similarly provides ""[u]nless stated on the certificate . . . no restriction upon transfer . . . shall be enforceable against a transferee of the shares without actual knowledge of such restriction."

Despite these provisions, failure to include the restrictions on a share certificate does not necessarily mean that the restrictions are unenforceable.  In United States v. Shipley, 2022 WL 3722133 (N.D. Cal. Aug. 29, 2022), an attempt to foreclose a tax lien on some shares was opposed by the intervenors on the basis that the tax debtor had transferred the shares to themselves.   The tax debtor had acquired the shares pursuant to stock purchase agreement with the issuer which included a typical restricted securities warning.  A similar warning was included in the agreements pursuant to which the intervenors purportedly acquired the shares from the tax debtor.

The intervenors argued that "the restrictions on the transfer of Shipley's [the tax debtor's] shares — namely the need to get an opinion of counsel or otherwise satisfy DSGI [the issuer] that purchasers are "qualified investors" and then to have DSGI issue new stock certificates and adjust its ledger to reflect the changed ownership — were simply ministerial steps that really did not matter".  In support, the intervenors cited both Sections 8204 and  418(b).  Judge William H. Orrick, however,  disagreed, noting that both of these statutes were intended to protect the ignorant (i.e., those without actual knowledge).  Because the intervenors knew of the restrictions, they were out of luck.

However, the ruling in my opinion goes too far.  The fact that the restrictions may have been enforceable does not ineluctably lead to the conclusion that transfers in violation of those restrictions did not occur. 

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XII, Number 256
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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