Termination of registration rights: Overview, definition, and example
What is termination of registration rights?
Termination of registration rights refers to the process or condition under which an agreement or contract that grants a party the right to register securities for public sale, usually in the context of a securities offering, is ended or no longer applicable. In securities law, registration rights give investors or certain parties the ability to require a company to register their securities with the appropriate regulatory authorities, typically the SEC (Securities and Exchange Commission), so they can be publicly traded.
The termination of registration rights typically occurs under certain conditions specified in the agreement, such as after a certain period, after the securities have been sold, or when specific legal requirements or objectives have been met. It can also happen if the company or the investor no longer wishes to exercise the right or if a mutual agreement is reached to discontinue it.
Why is termination of registration rights important?
Termination of registration rights is important because it clarifies the end of an investor’s ability to demand the registration of securities. This is critical in managing the legal and financial obligations of both the company and the investors. For the company, it ensures that they are no longer bound by the responsibility to facilitate the registration of securities for certain investors, which can be a costly and time-consuming process.
For investors, understanding the termination of these rights helps them know when they can no longer rely on the company to assist in registering their securities, which could limit their ability to sell those securities in public markets.
Understanding termination of registration rights through an example
Imagine a private company, Company A, enters into a contract with a group of investors. The agreement grants these investors registration rights, allowing them to demand that the company file a registration statement with the SEC to allow them to sell their shares publicly. After a period of time, the contract includes a clause stating that the registration rights will terminate five years after the company’s IPO (initial public offering), regardless of whether the investors have exercised them.
In another example, a company has provided registration rights to certain investors as part of a private equity investment. However, after these investors have sold their shares through a public offering, the company and the investors mutually agree to terminate the registration rights, ending the company’s obligation to assist with any further registration.
An example of termination of registration rights clause
Here’s how a termination of registration rights clause might appear in an agreement:
“The Registration Rights granted under this Agreement shall terminate upon the earlier of (i) the completion of a public offering of securities by the Company, or (ii) the date that is five (5) years from the date of this Agreement, whichever occurs first. After the termination of the Registration Rights, the Company shall have no further obligation to register the securities for the benefit of the Investors.”
Conclusion
Termination of registration rights is an important provision in agreements related to securities offerings, ensuring that the company and investors understand when the obligation to facilitate the registration of securities ceases. By clearly outlining when and how these rights end, both parties can manage their expectations and responsibilities effectively. This termination helps companies limit ongoing obligations while providing investors with clarity about their ability to sell shares publicly.
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.