Stop transfer: Overview, definition, and example
What is a stop transfer?
A stop transfer is a request made to prevent the transfer or sale of certain assets, usually stocks or securities, from one party to another. This can be initiated by the party who holds the asset (e.g., a shareholder), a legal authority, or a financial institution if there is a dispute, legal restriction, or violation that requires halting the transfer of ownership. The stop transfer is typically used to maintain control over the asset or prevent unauthorized transactions while the issue is being resolved.
For example, if your business owns shares in another company, and there’s a dispute regarding ownership or the transfer of shares, you may issue a stop transfer order to prevent those shares from being sold or transferred until the issue is resolved.
Why is a stop transfer important?
A stop transfer is important because it allows businesses, shareholders, or legal authorities to control and protect assets from being transferred under circumstances that could be detrimental, such as fraud, unauthorized transactions, or legal disputes. It ensures that ownership changes only occur under the correct conditions, protecting the rights of the rightful owners and maintaining the integrity of asset management.
For SMBs, understanding when and how to use a stop transfer can help safeguard assets and avoid financial loss or complications in situations involving disputes, bankruptcies, or other issues affecting asset ownership.
Understanding stop transfer through an example
Imagine your small business owns shares in a company, and there is a pending legal case where one of your partners is attempting to transfer their shares without your consent. In this case, your business could place a stop transfer order with the company’s registrar to prevent the shares from being transferred until the dispute is settled.
In another example, if your business is involved in a merger or acquisition and certain stock transfers are prohibited until the deal is finalized, a stop transfer can be used to prevent the shares from being sold or transferred during that period.
An example of stop transfer in action
Here’s how a stop transfer might be referenced in a shareholder agreement or business contract:
“The company may issue a stop transfer order for any shares subject to a dispute, legal action, or violation of the terms outlined in this agreement. During the period of the stop transfer, no shares will be transferred or sold until the matter is resolved.”
Conclusion
A stop transfer is a mechanism used to prevent the unauthorized or disputed transfer of assets, typically stocks or securities. For SMBs, using stop transfer orders can help protect assets from being improperly transferred, ensure compliance with legal agreements, and resolve disputes in an orderly manner. It’s an essential tool for businesses looking to maintain control and prevent financial or legal issues related to ownership transfers.
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.