Restrictive legend: Overview, definition and example
What is a restrictive legend?
A restrictive legend is a statement placed on a document, typically securities or contracts, that limits the transfer or use of that document or its contents. It is used to warn parties about restrictions on the document's use or conveyance. For example, a stock certificate may have a restrictive legend stating that the stock cannot be transferred unless certain conditions are met, such as regulatory approval.
Why is a restrictive legend important?
A restrictive legend is important because it serves as a clear notice of legal limitations or conditions attached to the document or asset. It helps prevent unauthorized transfers or actions that might violate contractual obligations, securities regulations, or other legal restrictions.
For businesses, it provides a way to ensure compliance with laws, agreements, or other regulations that govern the use or transfer of assets or information.
Understanding restrictive legend through an example
Imagine a company issues restricted stock to an employee under certain conditions, such as a holding period or performance targets. The stock certificate includes a restrictive legend that states the shares cannot be sold or transferred until the conditions are met. This protects the company by ensuring the employee doesn't sell the shares before fulfilling the conditions.
Another example could be a confidential agreement that includes a restrictive legend specifying that certain documents cannot be shared with third parties without prior approval.
An example of a restrictive legend
Here’s how a restrictive legend might appear in a securities agreement:
“The transfer of these securities is restricted under applicable law and may not be sold, assigned, or otherwise transferred without the prior written consent of the Company.”
Conclusion
A restrictive legend is an important tool for businesses to control the transfer or use of documents or assets, ensuring that legal or contractual restrictions are clearly communicated. It helps protect against unauthorized actions and ensures compliance with relevant regulations. By understanding restrictive legends, businesses can manage their assets and agreements more effectively and securely.
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.