|
|
|
Return to index Return to July-August 1988 contents |
The Corporate Counsel, Vol. XIII, No. 4
|
| Selling Pledged Securities-Rule 144(k) (CC July-Aug 88)
As our readers know, since late 1981 the Staff has taken the position that pledgees (banks, brokers, etc.) may rely on Rule 144(k) and sell without restriction restricted securities as well as non-restricted securities pledged by affiliates as long as the three-year Rule 144(k) holding period (with tacking) has been satisfied. (See our January-February 1985 issue at pg 6.) If, the three-year holding period has not been satisfied, however, such as where an affiliate pledges shares recently purchased in the open market or acquired through a company stock plan, Rule 144(k) would not be available and the pledgee would essentially stand in the shoes of the pledgor. Last October, however, the Staff issued a troublesome letter to a bank pledgee taking the position that neither the bank nor the pledgor could be an affiliate during the three months preceding the sale by the bank. (See MBank, avail. December 24, 1987, not reported in CCH.) Fortunately, the Staff's error was brought to its attention and the letter was subsequently "clarified" to make it clear that pledgees of affiliates may nevertheless sell under Rule 144(k) even where the pledgor is still an affiliate at the time of the sale. (See MBank, (Recon.) avail. February 1, 1988.) Recent Court Case Helps Banks and Brokers Deal With Uncooperative Pledgors Those of our readers who have represented banks or brokers liquidating shares pledged by affiliates know that the pledgors (and the issuers they control) are often uncooperative when it comes time to foreclose. As a result, the Staff has long held that, where Rule 144 applies to the sale, pledgees may sign the Form 144 in lieu of the pledgor. [In the clear-cut case, however, where the shares have satisfied the Rule 144(k) three-year holding period, there is no need to comply with Rule 144.] Recently the U.S. District Court for the Southern District of New York was presented with a request for a preliminary injunction to allow a broker to sell without restriction legended securities held over three years pledged by the chief executive officer of an issuer. Because of the legend, the broker, wisely, wanted assurance that the issuer would instruct the transfer agent to transfer the securities. The issuer, apparently attempting to keep the broker's sales from further depressing the price of the stock, took the position that there was material negative inside information in the possession of the issuer and the CEO that would prevent the pledgee's sale. The Court held that, even assuming the alleged facts, the issuer could not prevent the sale by the broker. (See Shearson Lehman Hutton Holdings vs. Coated Sales, Inc., 88 Civ. 4073 (PML), June 15, 1988, CCH ¶93,793.) [A practical suggestion to those of our readers counselling brokers who are asked by lenders to sell legended shares pledged by affiliates: It is wise either to get the certificates transferred into street name prior to the sale or to insist on an indemnification letter from your client (the bank) or to obtain a written representation from the issuer or its counsel that the transfer agent will, in fact, transfer the shares. This writer has seen too many situations where CEO's have been able to prevent or delay transfers, to be so naive as to assume that the existence of a decided case will eliminate future problems.] ©1998 Executive Press, Inc. |
| For more information about this site, contact broc.romanek@ElectronicTheCorporateCounsel.net.
© , Executive Press, Inc. Terms & Conditions, Disclaimer, Contact Us |