We are often called upon to give legal opinions to stock transfer agents for our public company clients that restrictive legends can be removed from stock certificates held by holders of the client’s stock. The removal of the legend will facilitate the transfer of the stock when the stockholder is ready to do so, which could be contemporaneous with the giving of the opinion or later. Our opinion generally will rest upon our conclusions as to whether the conditions in SEC Rule 144 are satisfied in the particular case.
In the case of stockholders who are “affiliates” of the company which has issued the stock (the “issuer”) Rule 144 imposes certain conditions and limitations that are in addition to those imposed on stockholders who are not affiliates. These include limitations on the amount of stock that can be sold by an affiliate within a three month period (no matter how long the affiliate has already held the stock) whereas non-affiliates can sell an unlimited amount of stock provided that they satisfy the other conditions of Rule 144. It is therefore often critical to determine whether a stockholder is or is not an affiliate.
Rule 144 defines the word affiliate of an issuer as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the issuer. This definition begs the question as to what is meant by the word “control” and is not particularly useful in devising an objective standard for determining affiliate status.
For example, it has often been a rule of thumb that all directors of an issuer are automatically treated as affiliates, whether or not they own any significant amount of voting stock or are officers or employees of the issuer. Does that make sense if an issuer has a 15 member Board (and a one in 15 vote regarding policy decisions for the issuer) and the person holds only a few shares and is not an employee, agent, consultant to the issuer or any entity doing business with the issuer? Can it be said that the person actually or even potentially has any real power to control the issuer?
Another rule of thumb is that any person who owns more than ten percent of the voting stock of the issuer, either directly or beneficially (as determined based on SEC rules) is an affiliate. But should that apply in all circumstances? For example, if a public company has 1,000 stockholders who collectively own 15% of its stock, as well as one stockholder who individually owns 75% of the stock and another who owns the remaining 10%, in the absence of any contractual or other arrangements between the 10% stockholder and the issuer or the 75% stockholder, should the 10% stockholder always be presumed to be a “controlling person”?
Our observation has been that most practitioners who give legal opinions involving a determination of affiliate status take the least common denominator approach. In other words, they determine to err on the side of an expansive definition of the term, even if the facts belie their position.
The results of an ongoing survey by The Corporate Counsel.net bear this out. Almost two thirds of the respondents stated that their companies define an affiliate to include a person who is any one of more of the following: an officer (as defined in SEC Rule 16a-1 to include the issuer’s president, principal financial officer, principal accounting officer or controller, vice-president in charge of a principal business unit, division or function of the issuer); a director or a 10% beneficial stockholder.
Written by Jay H. Weil | Download v-card
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View LinkedIn Profile for Jay: With more than 25 years of experience, Jay Weil represents public and private companies and individuals in a wide range of business transactions and securities laws compliance matters. In a practice that touches on virtually every aspect of corporate and securities law, Jay drafts contracts and SEC filings for clients, advises them on the law, helps develop negotiating strategies regarding the business terms of deals, and negotiates legal issues. Jay also handles all phases of both public offerings and private placements of securities. Much of the other transactional work in Jay’s practice involves reverse mergers that enable private companies to go public in an efficient and cost-effective manner, as well as mergers and acquisitions and secured and unsecured debt financings. Jay also advises a number of SEC reporting companies regarding their filing and disclosure obligations. Jay has practiced in New York City for his entire career. Prior to joining Guzov Ofsink in 2003, Jay was a securities and corporate partner with Wolf, Block, Schorr and Solis-Cohen, a regional law firm with more than 200 attorneys, and prior to that a partner in a 30-attorney firm. Jay began his career as an associate in the corporate securities practice of Shea & Gould. “With such a long and successful track record in securities law, we get up to speed quickly on client matters. What you see is what you get: senior, experienced attorneys who know their area and how to service clients.” Education New York University School of Law, J.D. Binghamton University, B.A. Distinctions Valedictorian, Deer Park High School, Deer Park, New York Admissions State of New York Please contact Jay directly at JWeil@golawintl.com |
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