A long time ago in what seems like a different universe, I was working on an IPO for a company that will have to remain unidentified in a country that never experienced Enlightenment thinking. The company’s CEO and majority owner decided to challenge the local dictator’s political leadership. Dictator X didn’t take kindly to that and decided that a change of ownership of the company was in order. One of the ways he did that was to simply change the share register. “All your shares are belong to me”, he goes. And the keeper of the register does not challenge that because at least one person has already shown up dead in a quarry at that point.
I’m not suggesting that anything like that is happening here yet. But I am worrying about the sanctity of the share register for a couple of reasons.
First, the political environment suggests that many places might be moving towards a more dirigiste system with more political interference into the conduct of companies, with companies being penalized for behavior or policies the political leadership disapproves of.
Second, in our own industry, I’ve seen instances where issuers and gatekeepers (including lawyers) are looking for easy solutions to the existence of inconvenient shareholders. For example, trying to “reverse” the sale of shares that has already taken place by returning the money because of some compliance failure in an offering. Or trying to “cash out” non-accredited shareholders in an acquisition transaction that runs into the “Rule 145 problem” where registering or finding an available exemption is impossible or inconvenient.
Here's the thing. A share is a bundle of economic and governance rights. Some of those rights are specified by the corporate laws of the state in which a company is incorporated. Some of those rights are set out in the bylaws. State law dictates how rights granted to shareholders may be modified. If a company (or a potential acquiror of the company) finds that having a large number of shareholders, or having non-accredited shareholders, is not part of its plan, then it can only remove them through prescribed means in accordance with corporate law. Neither they nor their agents can just wipe out a shareholder’s rights by throwing money at them if the ability to do so is not specified in law.
Transfer agents, please guard the share registers you are entrusted with. You may be the first line of defense against oligarchs. You are certainly the defender of retail investors. You should be making sure that transfer of (or cancellation of) ownership is made pursuant to the law. If someone wants to remove a shareholder on your register, make sure you have legal advice that says you can do that.
Also, does anyone have an opinion on whether a blockchain-only register would make this issue better or worse?