Expenses of demand registration: Overview, definition, and example
What are expenses of demand registration?
Expenses of demand registration refer to the costs incurred by a company when it is required to register securities for sale with a regulatory authority, typically in response to a demand by shareholders or investors. This registration process allows the company to offer its securities (such as stocks or bonds) to the public or specific investors. Demand registration is often a provision in shareholder agreements that gives certain investors or shareholders the right to require the company to register their securities, so they can sell them in public markets.
The expenses of demand registration generally include fees for legal services, regulatory filings, accounting, printing, and other costs associated with preparing and submitting the registration documents to the relevant authorities, such as the Securities and Exchange Commission (SEC) in the U.S.
Why are expenses of demand registration important?
The expenses of demand registration are important because they clarify the financial responsibilities and obligations when shareholders invoke their right to demand a public offering of the company's securities. These costs are typically borne by the company unless otherwise specified in the agreement.
Understanding and managing the expenses of demand registration is essential for the company, as it can be a significant financial burden. For investors, knowing who is responsible for these costs ensures transparency and helps prevent any unexpected expenses when seeking to sell their securities.
Understanding expenses of demand registration through an example
Imagine a startup company with several early investors who hold shares in the company. The shareholders' agreement includes a provision that allows these investors to demand a registration of their shares to sell them on the open market. When one of the investors exercises this right, the company must register the shares, which involves filing the necessary documents with regulatory authorities.
The expenses of demand registration in this case could include legal fees for preparing the registration statement, filing fees to the SEC, and accounting costs for auditing the company’s financials. These costs are typically incurred by the company, though they may be negotiated to be shared or covered by the investors in some cases.
In another example, a public company may receive a demand from a large shareholder to register additional shares for sale. The company would be responsible for the expenses of the registration, including preparation of the registration document, legal fees, and other related costs, to ensure that the shares can be publicly traded.
Example of an expenses of demand registration clause
Here’s what an expenses of demand registration clause might look like in a shareholder agreement:
“In the event that Shareholders exercise their right to demand registration of securities, the Company shall bear all reasonable expenses associated with the registration process, including but not limited to legal fees, accounting fees, filing fees with regulatory authorities, and printing costs. The Company shall not be responsible for the shareholders' individual selling costs, such as commissions or brokerage fees.”
Conclusion
Expenses of demand registration are an important consideration in shareholder agreements and securities transactions. They outline who is responsible for covering the costs of registering securities when shareholders demand such a registration. For companies, understanding these expenses is essential for budgeting and financial planning, while for investors, knowing who will bear these costs helps clarify their obligations and rights under the agreement.
By clearly defining how registration expenses will be handled, companies and investors can avoid confusion and ensure that the registration process proceeds smoothly and efficiently.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.