Removal of restrictive legends: Overview, definition, and example
What is the removal of restrictive legends?
The removal of restrictive legends refers to the process of eliminating or altering certain notations or restrictions that are placed on securities, documents, or contracts, typically to limit the transferability or sale of those securities. A restrictive legend is often a statement on a stock certificate, bond, or other investment documents that restricts the holder’s ability to sell, transfer, or assign the securities under certain conditions.
For example, a restrictive legend may indicate that the securities can only be sold after a specified period or only to certain qualified buyers. The removal of this legend typically occurs after certain conditions are met, such as the expiration of a holding period or the completion of legal or regulatory requirements.
Why is the removal of restrictive legends important?
The removal of restrictive legends is important because it enables the holder of the securities or documents to freely transfer or sell them in the market. These legends are often placed to comply with securities laws or private agreements, ensuring that the transfer of ownership does not violate regulations. Once the restrictions are lifted, the asset becomes more liquid, and the holder gains greater flexibility in managing their investment or property.
For businesses, the ability to remove restrictive legends can increase the liquidity of their securities, making it easier to raise capital by allowing shares to be traded. For investors, removing these legends can improve the potential for selling or transferring securities in the future.
Understanding the removal of restrictive legends through an example
Imagine an investor who purchases shares in a private company during a fundraising round. The shares come with a restrictive legend stating that they cannot be sold or transferred for one year after the purchase. After the one-year period expires, the investor submits a request to the company to remove the restrictive legend, allowing them to sell the shares on the open market. Once the legend is removed, the investor can freely sell the shares to other parties.
In another example, a startup issues stock to an early investor, and the stock certificate includes a restrictive legend stating that the shares cannot be transferred without the company's approval. The investor can request the removal of this legend once the company meets certain milestones, such as obtaining a public listing or meeting regulatory conditions, allowing the investor to transfer or sell the shares more easily.
An example of a removal of restrictive legends clause
Here’s how a clause regarding the removal of restrictive legends might appear in a contract:
“The Company agrees to remove the restrictive legend from the Securities upon the expiration of the holding period required by applicable securities laws or upon the fulfillment of any other conditions specified in this Agreement. The holder of the Securities shall notify the Company when such conditions are met, and the Company shall take all necessary actions to facilitate the removal of the restrictive legend.”
Conclusion
The removal of restrictive legends is an important step in ensuring the liquidity and transferability of securities, allowing investors or holders of assets to freely sell or transfer their holdings once certain conditions are met. For businesses, this process can increase the marketability of their securities, while for investors, it provides greater flexibility and potential financial return. By understanding and addressing restrictive legends in contracts, both parties can ensure that the terms of the transfer or sale are clear and legally enforceable.
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.