Relationship of Issuer to Owner and Transferee The subject of this chapter is the relationship between the issuer of a security and the rest of the

Transcription

1 Chapter Two Relationship of Issuer to Owner and Transferee The subject of this chapter is the relationship between the issuer of a security and the rest of the world. This relationship is far simpler than it may sound, because so far as Article 8 is concerned, the issuer is entitled to ignore virtually everyone except the registered owner (or holder, in the case of bearer securities) and, in the case of a certificated security in registered form, those who may seek from time to time to assert themselves as a registered owner s transferee. Thus, the issuer s potential conflicts with the world reduce to two: on one hand, assertions of rights by the owner (with converse assertions of defenses by the issuer), and on the other hand, the process by which one party can replace a prior party as the registered owner of a given security. Parts A through C of this chapter address the first of these potential conflicts, and bring out Article 8 s general approach of precluding issuers from asserting most defenses against a purchaser for value without notice of the defense. The remainder of this chapter addresses the second kind of potential conflict, and brings out Article 8 s general approach of minimizing burdens on issuers while striking a balance between current and prospective registered owners. Broadly speaking, an issuer, defined in 8-201, is the person responsible for the performance of the obligations represented by a security--usually, the enterprise that places its name on the security certificate as an indication that the security certificate represents debt or equity of that enterprise. (Uncertificated securities involve no tangible instruments on which the issuer s name might appear, so the issuer thereof is defined as the person who creates an equity interest or undertakes an obligation that is an uncertificated security.) As an extension of this notion of responsibility for performance, two additional types of person may fall within the definition of issuer as applied in most contexts. First, any successor to the obligations of an issuer is itself an issuer, and

2 second, any guarantor of the obligations of an issuer is itself an issuer. However, when the subject is the specialized one of registration of transfer (a subject discussed in Chapter 2.C, D, and E), as opposed to obligations on or defenses to securities, the definition of issuer is narrower, referring only to the person on whose behalf transfer books are maintained. A. Overview of Issuer s Responsibility and Defenses An issuer is ordinarily responsible for performance of the terms of its securities, and this principle raises the threshold question of precisely what those terms are. Article 8 provides that the terms include the statements made in the body of the security certificate and, in addition, any statements made in other documents or laws that are incorporated by reference into the security certificate. (Since no statement can be made in the body of a certificate of an uncertificated security, the terms of an uncertificated security include only those stated in the documents or laws pursuant to which it is issued.) In the case of a conflict, statements made in the body of the security certificate control over statements incorporated by reference. The terms of the security (as opposed to certain issuer defenses to those terms) are binding on all purchasers, whether or not they have notice of the terms (a). An issuer may have any of several defenses to the performance of the terms of a security. Many of these are discussed in Chapter 2.B. Article 8 s approach is, as a general rule, to preclude the issuer from asserting defenses against a purchaser of the security for value and without notice of the particular defense (d). This rule, which is derived from the law of negotiable instruments, is designed to promote the readiness and certainty of transactions that are an important component of a security s value. (The uniform version of Article 8 states the preclusion of defenses rule as if it applied only to certificated securities, but New York has explicitly broadened the rule with a nonuniform amendment covering any security. In other jurisdictions, the uniform version of the rule should be treated as a drafting oversight, so that uncertificated securities are covered, too, as they were under the 1978 version of Article 8.) Value is broadly defined in to include, among other things, pre-existing claims and any consideration sufficient to support a simple contract.

3 Purchaser, as used in the UCC, is far broader than its everyday meaning, encompassing any person acquiring an interest in the security by means of any consensual transaction (including takers by original issue, later buyers, secured parties, and others) (29) and (30). Thus, the term purchaser for value includes virtually every recipient of a property interest other than a donee, a thief, or a creditor attaching through judicial process. To fit within the general rule precluding issuer defenses, however, the purchaser for value must also be without notice of the defense, a concept that is narrower and more fact-intensive, usually requiring examination of all the facts and circumstances known to the purchaser In addition to having notice of defenses based on particular circumstances, purchasers also have notice as a matter of law of all defects and defenses under the specialized circumstances known as staleness. People do not ordinarily leave their securities claims uncollected for very long after the maturity (whether scheduled or accelerated) or call of the security, and after the passage of a substantial length of time, it is justifiable to put the security s transferees on notice that there is probably some good substantive reason for the failure to collect. For this reason, and to accommodate the issuer s interest in definitely determining its liabilities, Article 8 charges purchasers who take their interest more than one year (or, in some cases, two years) after the maturity or call with notice of all defects in the security s issuance and of all defenses of the issuer. This rule applies only to certificated securities, because matured or called uncertificated securities will simply be paid to the registered owner and canceled on the books of the issuer, and do not continue to be transferred as certificated securities might In the indirect holding system, Article 8 takes the same general approach to issuer defenses as it does in the direct holding system: the issuer is precluded from asserting a defense against an entitlement holder who gives value and is without notice of the defense. Section 8-202(f) expresses this concept by adapting the direct holding system s rules to the indirect holding system: issuers are precluded from asserting any defenses against an entitlement holder that would have been precluded

4 if the entitlement holder held the security directly. (Conversely, the fact that a clearing corporation or other securities intermediary has notice of a defense should not ordinarily affect entitlement holders.) B. Particular Defects and Defenses In some cases an issuer s defense will be that the securities have a defect going to their validity, i.e., that certain requirements imposed in connection with the issuance by state corporation law, state constitution, or the issuer s own charter or bylaws were not complied with. (The term validity thus has a narrower meaning in Article 8 than in some other aspects of modern legal practice; see Chapter 6.) In such cases Article 8 s general approach to issuer defenses usually applies: the issuer is precluded from asserting the invalidity against a purchaser for value and without notice of the defect, so that in effect the invalidity is simply ignored as against such purchasers and the issuer is obligated accordingly (d). (Because validity-related formalities, or the provisions imposing them, are often incorporated by reference into the terms of a security, the question arises whether such reference can put a purchaser on notice of the issuer s failure to adhere to them (a) provides that it cannot, removing what would otherwise be a heavy burden from purchasers shoulders.) Special rules apply, however, in a few situations. The first of these involves the defense of overissue. Overissue is a special case of invalidity that arises from an issuer s purporting to issue more shares (or, less frequently, more debt) than it has corporate power to issue within the bounds of state corporation statutes and the organic documents of the issuer that derive their legitimacy from those statutes. Overissue can result from simple inadvertence, or from events relating to wrongfully reregistered securities, or from certificates being lost and replaced and then recovered. When it happens, the issuer can cure the problem by simply amending its organic documents to validate the larger issuance. But if the issuer cannot or does not choose to do so, the purchaser of the overissued shares has no power to force it to do so, and a rule that simply disregarded the invalidity (even if only as against purchasers for value and without notice) would be inconsistent with the limited nature of issuers state-bestowed powers. Accordingly, Article 8 provides another remedy to the purchaser of overissued securities. The purchaser is entitled to compel the issuer to purchase an identical security

5 not constituting an overissue, if one is reasonably available, and to deliver it to him or her; if no such security is reasonably available, the purchaser is entitled to monetary compensation (c), (d). A more specialized case of defects going to validity arises where the issuance violates not state statutes or the issuer s organic documents, but instead the state constitution. In these cases, the rights of purchasers who take on original issue are left to non-article 8 law, while the rights of subsequent purchasers are governed by the ordinary for value and without notice rule. (If the issuer is a governmental entity, additional safeguards are imposed before the securities are validated.) 8-202(b). Another exception to the general rule of issuer defense preclusion is lack of genuineness of the security. Even Article 8 s goals of facilitating and promoting certainty of transactions do not justify holding an issuer to the terms of forged or counterfeit securities. Accordingly, lack of genuineness is a complete defense, even against a purchaser for value and without notice thereof (c). An important exception to this exception concerns unauthorized signatures placed on a security by certain persons close to the issuance process (such as transfer agents, authenticating trustees, or certain employees of the issuer), against whom it is justifiable to require the issuer to protect itself. An unauthorized signature placed on a security by one of these persons -who are, in practice, responsible for most unauthorized signatures -is effective in favor of a purchaser for value and without notice of the lack of authorization A signed but otherwise incomplete security certificate (e.g., a certificate neglecting to specify the number of shares represented or the name of a registered holder) presents a problem similar to that of the certificate bearing an unauthorized signature: the issuer is in a better position to protect itself than is an innocent purchaser. Article 8 provides that any person is entitled to complete a security certificate by filling in the blanks (other than those intended for signatures) as authorized and, in accordance with the general rule, a purchaser for value and without notice that a certificate has been incorrectly completed is entitled to enforce it as completed. By contrast, if a security certificate is fully completed before it leaves the issuer s hands but then is later altered, the issuer is

6 no longer the best cost-avoider, and is responsible only for the original terms of the certificate, even against a purchaser for value and without notice of the alteration All other defenses of an issuer are governed by the general rule: the issuer is precluded from asserting them against a purchaser for value and without notice of that defense (d). Example: Taxicab Corporation issues a security certificate to its president on the condition that she pay for it within ten days or return it. After ten days, she fails to satisfy the condition, and sells the certificate to Purchaser, who has no notice of the payment condition. If Purchaser asserts his rights represented by the security certificate, Taxicab Corporation is precluded from raising the defense that it had against the president. C. Issuer s Lien and Issuer s Restriction on Transfer Issuers occasionally impose liens on the securities that they issue, for the purpose of securing payments owed to the issuer by the holder. Issuers also more frequently impose restrictions on the transfer of securities, for any of a variety of reasons (e.g., to ensure compliance with certain provisions of the federal securities laws, to protect the issuer s right of first refusal in respect of shares in a closely held corporation, or even to bolster rights under an issuer s lien). Article 8 restricts the circumstances under which both of these types of provision are binding in ways that it does not restrict the effectiveness of other terms of securities. An issuer s lien is not valid against a purchaser unless the lien is noted conspicuously on the security certificate It is irrelevant whether the purchaser gives value or has knowledge or notice of the lien acquired in some way other than through notation on the certificate. The statute s use of the word noted means that the text of the lien provisions need not appear in full on the certificate as a condition of validity, but the word conspicuously requires the reference to the lien that does appear to be prominent enough in size, typeface, color, or the like so that a person ought to notice it (10). Article 8 makes no express provision for issuer s liens on uncertificated securities.

7 A restriction on transfer imposed by the issuer (as opposed, for example, to one imposed by contract among shareholders) is also ineffective against a purchaser unless it meets similar requirements. The restriction will be effective with respect to a certificated security if noted conspicuously on the certificate (terms carrying the same meaning as in the context of issuer s liens) or, in the case of an uncertificated security, if the registered owner has been notified of the restriction. Unlike an issuer s lien, a restriction on transfer will also be effective against a party with actual knowledge of it, even if the restriction is not noted conspicuously Article 8 leaves to other law the question of whether any given restriction on transfer is invalid as an unlawful restraint on alienation. D. Issuer s Right to Disregard Unregistered Owner and Duty to Register Transfer Except for the fairly unusual case of securities that are in bearer form, the careful owner of securities in the direct holding system will not be content simply to hold the security free of defects and issuer defenses: the owner will also usually want to be registered as such on the issuer s records. Unless the owner is so registered, the issuer may for some purposes disregard the fact that the security has been transferred to that owner, even if the transfer is effective between the parties and vis-à-vis other third parties; that is, for purposes of voting, notice, most distributions, or otherwise, the issuer may (but is not required to) continue to treat the transferor as the owner Permitting the issuer to rely solely on its own books, rather than inquiring into an endlessly changing state of affairs between third parties, furthers Article 8 s goal of efficiency in transfers of securities. Transferors and transferees remain free to contract around this rule between themselves (agreeing that the transferee will, for example, be entitled to dividends or voting rights), but such an agreement is not, of course, binding on the issuer who is not a party to it. The transferee of a certificated security in registered form becomes registered as its owner by presenting it to the issuer (or the issuer s transfer agent) for registration of transfer, and by satisfying any related requirements imposed by the issuer as described below. Once the transferee

8 takes these steps, the issuer has a duty to register the transfer, and is liable for losses resulting from failure or unreasonable delay to do so. The issuer s duty is, however, subject to a number of conditions. The duty arises only if, among other things, the indorsement is made by the appropriate person or its agent, applicable securities transfer tax laws have been complied with, the transfer does not violate a restriction on transfer imposed by the issuer, the registration dispute process described in Chapter 2.E below has not operated to halt the registration, and if the transfer is in fact rightful or to a protected purchaser (discussed in Chapter 3.B) The fact that the issuer s duty to register the transfer is subject to these conditions does not impose on the issuer any duty to insist on fulfillment of the conditions or to investigate whether they have been fulfilled. But the issuer cannot treat the conditions lightly, either, for just as the issuer faces a Scylla of liability to the transferee for failure to register, it also faces a Charybdis of liability to the former registered owner for wrongful registration of transfer. See Chapter 2.E immediately below. In order to let issuers steer their way between these dangers without plaguing security holders with technicalities, Article 8 authorizes issuers to minimize risks by requiring certain assurances that all necessary indorsements are authorized, including signature guarantees. In addition to the assurances specifically authorized by Article 8, an issuer may also require other assurances that are reasonable under the circumstances, subject to the disciplines of the marketplace and of threats of legal action for improper refusal to register E. Liability for Wrongful Registration Article 8 holds issuers liable for wrongful registration of transfer only under four circumstances that are narrowly drawn in order to minimize possible disruptions to securities transactions (a). The first circumstance is when the issuer registers the transfer pursuant to an ineffective indorsement (or, one certainly presumes, pursuant to no indorsement at all). An indorsement is simply a signature placed on a security certificate in registered form, or on an accompanying document such as a stock power, for the purpose of transferring or redeeming the security (a)(11). (In addition to the signature, indorsements often include other words limiting the indorsement s purpose

9 or the identity of the transferee. Distinctions among indorsements are discussed in Chapter 3.A.) Indorsements are effective if made by certain appropriate persons or by others who have power to act under agency or other law In order to minimize the risk of an indorsement being forged or otherwise ineffective, issuers often require signature guaranties or other documentation referred to in Chapter 2.D above. A second circumstance giving rise to issuer liability for wrongful registration of transfer is when the issuer is served with legal process enjoining the registration, and has a reasonable opportunity to act on that process, but does not. Those who assert that a registration of transfer was or would be wrongful must ordinarily proceed through the courts; otherwise the issuer is entitled to ignore them. (This contrasts sharply with prior versions of Article 8, under which an issuer was liable for wrongful registration if it failed to investigate adverse claims of which it was on notice and thereby harmed the claimant. That rule, which was a holdover from even stricter doctrines, imposed a substantial burden on the efficiency of securities transfers.) A third circumstance accommodates Article 8 s stop-registration procedure, under which a registered owner can require the issuer to give it an opportunity to seek injunctive legal process. The procedure, set forth in 8-403, works as follows. If a registered owner believes that its security certificate has been stolen, or otherwise fears a future presentation by an unauthorized party for registration of transfer, it may communicate to the issuer a demand that transfer not be registered. An issuer who receives such a demand, and who later receives a request to register transfer of the securities referred to in the demand, is required to notify both the demanding party and the transferrequesting party that it will withhold registration of the transfer for a specified period not to exceed thirty days. This period is designed to afford the demanding party an opportunity to obtain legal process enjoining the registration of transfer or a bond indemnifying the issuer and its transfer or other agents against losses stemming from refusal to register the transfer. This procedure can have decisive consequences for the issuer. If the issuer fails to issue the notice and stand still as required, and if the transfer-requesting party is not entitled to registration, then the issuer is liable under 8-

10 404(a) for wrongfully registering the transfer. If, however, the issuer does properly respond to the stop-registration demand and the demanding party fails to obtain legal process or an indemnity bond within the time specified, then the issuer is not liable for registering the transfer (d). (This rule does not, however, insulate the issuer from liability for registering transfer pursuant to an ineffective indorsement as described above. For this reason, some registered owners could rationally choose to seek neither legal process nor a bond during the standstill period, and simply rely on their rights to sue the issuer later.) The fourth and final circumstance is when the issuer acts in collusion with the wrongdoer. This collusion standard, which also appears in other contexts in and 8-503(e), is intended in each case to resemble the standard for aiding and abetting liability in tort law, reaching only persons who are affirmatively and knowingly engaged in wrongful conduct. See 8-115, Official Comment 5. All four of these circumstances are subject to an exception designed to keep costs, where possible, on the party best situated to avoid them: if a security certificate has been lost, wrongfully taken or apparently destroyed, and if subsequently the issuer registers its transfer, then the former registered owner has a remedy for wrongful registration only if it notified the issuer of the certificate s loss within a reasonable time after having notice of it Owners are in a far better position to police their property than issuers are. A former registered owner to whom the issuer is liable for wrongful registration is entitled to a like replacement security, although if overissue would result from a new issuance, the remedy is as described in connection with overissue in Chapter 2.B above. The former registered owner is also entitled to any payments or distributions missed by reason of the registration.