Chapter 12 - § 12.7 • DUTY TO PERMIT THE TRANSFER OF SHARES

• Jurisdiction: Colorado

§ 12.7 • DUTY TO PERMIT THE TRANSFER OF SHARES

While the issuer has the duty to police its market to ensure that unregistered shares are not traded in violation of the 1933 Act, the issuer also has a duty to allow the transfer of shares when legal. When an issuer wrongfully denies the right to a person to transfer an interest in the issuer's securities, the issuer may find itself liable for lost profits and other costs in the transaction.⁸⁴ The issuer must, however, weigh this risk of liability against the requirement that all transfers be made in accordance with applicable securities requirements and can, therefore, impose reasonable restrictions on transfers. When an issuer appoints a transfer agent, UCC § 8-407 provides that the transfer agent has the same duties and potential liability as the issuer itself.

In Catizone v. Memry Corp.,⁸⁵ Catizone held a certificate for restricted shares issued in the name of a third party, and requested transfer. The court reviewed Delaware law regarding the duty to register a transfer, including § 8-401 (relating to the issuer's duty) and § 8-406 (relating to transfer agents) of the Uniform Commercial Code. In acting, the court noted that the initial purchaser (an affiliate) acquired shares represented by a certificate from the issuer and a year and a half later transferred them to another party who transferred them to a third party, all without complying with an exemption. In agreeing not to require the transfer, the court held, "Since the transfer violated the 1933 act, it cannot be considered rightful, and defendants [issuer and transfer agent] were under no duty to register the transfer."⁸⁶

Similarly, in American Securities Transfer, Inc. v. Pantheon Indus., Inc.,⁸⁷ the district court held that a request to remove a restrictive legend was a request to transfer shares as defined in UCC § 8-401. The court further held that, since both the transfer agent and issuer are responsible for ensuring that no unregistered or restricted shares are improperly transferred, each has an independent responsibility to investigate a seemingly improper transfer. The UCC § 8-401 provides that an issuer only has a duty to register a transfer when, among other things, the transfer is rightful and legal. A refusal to permit a transfer or to remove the restrictive legend is not wrongful if the issuer can point to reasonable grounds for its refusal.⁸⁸ In Travis Investment Co. v. Harwyn Publishing Corp.,⁸⁹ the court found that the issuer...