Stop transfer orders: Overview, definition, and example
What are stop transfer orders?
A stop transfer order is an instruction given by a shareholder or account holder to their broker or financial institution to restrict or block the transfer of ownership of certain securities or assets under specific conditions. This type of order is typically used to prevent unauthorized transfers, protect against fraud, or freeze transactions on securities until a legal or regulatory issue is resolved, such as in the case of a dispute or to ensure compliance with regulations.
For example, if a shareholder believes that their shares have been fraudulently transferred or is in the midst of a legal dispute over the ownership of those shares, they may place a stop transfer order to prevent the securities from being transferred to another party.
Why are stop transfer orders important?
Stop transfer orders are important because they provide an added layer of protection against unauthorized transactions and fraudulent activities. In some cases, these orders are necessary to freeze or halt the transfer of securities in response to potential legal disputes or regulatory investigations. They help safeguard the interests of the rightful owner by ensuring that securities cannot be transferred without proper authorization or due process.
For businesses and investors, using a stop transfer order ensures that their assets are protected during situations that require a pause on transactions or further investigation, preventing financial harm or unauthorized transfers.
Understanding stop transfer orders through an example
A shareholder of a publicly traded company believes that their shares have been sold without their consent due to fraudulent activity. To prevent further transfers of the shares while the issue is investigated, the shareholder places a stop transfer order with the company's transfer agent. This order effectively halts any future transfer of the shares until the matter is resolved, providing a safeguard against unauthorized sales or movements of ownership.
In another case, a business involved in an acquisition may request a stop transfer order on its shares to ensure that any transactions involving the shares are halted while due diligence and regulatory approvals are completed, preventing shares from changing hands without the appropriate checks in place.
An example of a stop transfer orders clause
Here’s how this type of clause might appear in a shareholder agreement or securities transfer policy:
“The Shareholder agrees that upon the Company’s receipt of a valid stop transfer order from the Shareholder or any authorized party, no transfer of the shares specified in the order shall be processed or recorded by the Company or its transfer agent. The stop transfer order shall remain in effect until it is lifted in writing by the Shareholder or upon the resolution of the issue prompting the stop.”
Conclusion
Stop transfer orders are essential tools for preventing the unauthorized transfer of securities and ensuring the protection of assets in situations involving legal disputes, fraud prevention, or regulatory compliance. By placing a stop transfer order, shareholders and businesses can effectively secure their assets while ensuring that transactions are only processed when the appropriate conditions are met. Understanding and utilizing stop transfer orders can help mitigate risks and provide a safeguard for financial and legal interests.
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.