Representation by the holder: Overview, definition, and example
What is representation by the holder?
Representation by the holder refers to statements, warranties, or commitments made by a person or entity that owns a financial instrument, such as a stock, bond, or other security. These representations confirm that the holder has the legal right to own, transfer, or exercise rights over the instrument and that their actions comply with relevant laws and agreements.
For example, when a shareholder sells shares in a private company, they may be required to represent that they legally own the shares, have the authority to transfer them, and that no legal disputes or encumbrances exist.
Why is representation by the holder important?
Representation by the holder is important because it ensures transparency and legal compliance in financial transactions. It protects both parties in a transaction by confirming that the holder has the necessary rights and authority to act. This reduces risks such as fraud, misrepresentation, or disputes over ownership.
For businesses, requiring representations from security holders helps maintain the integrity of transactions, ensuring that shares, bonds, or other financial instruments are legally transferred and free from hidden claims or obligations. In contractual agreements, these representations are often included to safeguard against liability and ensure smooth financial dealings.
Understanding representation by the holder through an example
Imagine an investor decides to sell their shares in a privately held corporation. Before completing the transaction, the investor is required to represent and warrant that they are the legal owner of the shares, that the shares are not pledged as collateral, and that no third party has any claim to them. This ensures that the buyer receives clear and undisputed ownership.
In another example, a bondholder redeems corporate bonds for payment. The bond issuer requires the holder to represent that they are the rightful owner of the bonds and that no legal restrictions prevent them from redeeming the securities. This protects the issuer from potential disputes over bond ownership.
An example of a representation by the holder clause
Here’s how a representation by the holder clause might appear in a financial agreement:
“The Holder represents and warrants that they are the lawful owner of the Securities, have the full right and authority to transfer or exercise rights under this Agreement, and that the Securities are free from any liens, encumbrances, or claims by third parties.”
Conclusion
Representation by the holder is a key contractual provision that ensures the rightful ownership and transferability of financial instruments. It provides legal certainty, reduces risks of disputes, and helps maintain trust in financial transactions. Including clear representation clauses in agreements protects both holders and counterparties, ensuring smooth and legally compliant dealings.
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.