S*927 Session 109 (1991-1992)
S*0927(Rat #0238, Act #0161 of 1991) General Bill, By Senate Judiciary
A Bill to amend Chapter 8, Title 36, Code of Laws of South Carolina, 1976,
relating to investment securities under the Uniform Commercial Code, so as to
further provide for the issuance of these securities, for the rights, duties,
and obligations of the holders and issues of these securities, for the
purchase, transfer and registration of these securities, and for the
negotiability of these securities and other related provisions, and to amend
Sections 36-1-201, 36-5-114, 36-9-103, 36-9-105, 36-9-203, 36-9-302, 36-9-304,
36-9-305, 36-9-309, and 36-9-312, relating to other provisions of the Uniform
Commercial Code, so as to revise these provisions in order to conform them to
the above provisions of Chapter 8.
04/24/91 Senate Introduced, read first time, placed on calendar
without reference SJ-9
04/25/91 Senate Read second time SJ-55
04/25/91 Senate Unanimous consent for third reading on next
legislative day SJ-55
04/26/91 Senate Read third time and sent to House SJ-6
04/30/91 House Introduced and read first time HJ-19
04/30/91 House Referred to Committee on Judiciary HJ-20
05/09/91 House Committee report: Favorable Judiciary HJ-7
05/22/91 House Debate interrupted HJ-139
05/22/91 House Amended HJ-142
05/22/91 House Read second time HJ-143
05/23/91 House Read third time and returned to Senate with
amendments HJ-17
06/05/91 Senate House amendment amended SJ-63
06/05/91 Senate Returned to House with amendments SJ-64
06/05/91 House Concurred in Senate amendment and enrolled HJ-42
06/06/91 Ratified R 238
06/12/91 Signed By Governor
06/12/91 Effective date 06/12/91
06/12/91 Act No. 161
07/09/91 Copies available
(A161, R238, S927)
AN ACT TO AMEND CHAPTER 8, TITLE 36, CODE OF LAWS OF
SOUTH CAROLINA, 1976, RELATING TO INVESTMENT
SECURITIES UNDER THE UNIFORM COMMERCIAL CODE, SO AS
TO FURTHER PROVIDE FOR THE ISSUANCE OF THESE
SECURITIES, FOR THE RIGHTS, DUTIES, AND OBLIGATIONS OF
THE HOLDERS AND ISSUES OF THESE SECURITIES, FOR THE
PURCHASE, TRANSFER AND REGISTRATION OF THESE
SECURITIES, AND FOR THE NEGOTIABILITY OF THESE
SECURITIES AND OTHER RELATED PROVISIONS, AND TO
AMEND SECTIONS 36-1-201, 36-5-114, 36-9-103, 36-9-105, 36-9-203,
36-9-302, 36-9-304, 36-9-305, 36-9-309, AND 36-9-312, RELATING TO
OTHER PROVISIONS OF THE UNIFORM COMMERCIAL CODE, SO
AS TO REVISE THESE PROVISIONS IN ORDER TO CONFORM
THEM TO THE ABOVE PROVISIONS OF CHAPTER 8.
Be it enacted by the General Assembly of the State of South Carolina:
Uniform Commercial Code - Investment Securities Division
SECTION 1. Chapter 8, Title 36 of the 1976 Code is amended to
read:
"CHAPTER 8
Commercial Code -- Investment Securities
Part 1
Short Title and General Matters
Section 36-8-101. Short title.
1. This chapter shall be known and may be cited as Uniform
Commercial Code--Investment Securities.
2. If in any respect there is any inconsistency between this Article and
the Uniform Act for Simplification of Fiduciary Security Transfers, Title
35, Chapter 7, the provisions of Title 35, Chapter 7 shall control.
Amended Official Comment
Purposes:
This Article sets forth certain rights and duties of the issuers of and the
parties that deal with investment securities, both certificated and
uncertificated. Unlike a corporation code, it does not set forth general rules
defining property rights that accrue to holders of securities. And unlike a
Blue Sky statute it does not set forth specific requirements for disclosing to
the public the nature of the property interest that is the security. Rather it
sets forth rules relative to the transfer of the rights that constitute securities
and to the establishment of those rights against the issuer and other
parties.
As is true with respect to all other Articles of the Code, parties may by
agreement create rights and duties between themselves that vary from those
set forth in this Article. Section 1-102(3). But prejudice to the rights of
those not party to the agreement is limited by Code provisions (e.g.,
Sections 8-313 and 8-321) as well as by general legal principles that
supplement the Code. See Section 1-103 and Comment 2 to Section
1-102.
This Article does not purport to determine whether a particular issue of
securities should be represented by certificates, in whole or in part. That
determination is left to the parties involved, subject to federal and state
law.
South Carolina Reporter's Comments to the 1991 Amendment
The South Carolina version of the Uniform Act for Simplification of
Fiduciary Security Transfers, Section 35-7-10 et seq., is intended to provide
certainty to parties dealing with fiduciaries. Section 36-8-101(2) has been
added to preserve this intended certainty where issuers of securities have
dealings with fiduciaries.
Section 36-8-102. Definitions and index of definitions.
(1) In this chapter, unless the context otherwise requires:
(a) A `certificated security' is a share, participation, or other
interest in property of or an enterprise of the issuer or an obligation of the
issuer which is
(i) represented by an instrument issued in bearer or registered
form;
(ii) of a type commonly dealt in on securities exchanges or
markets or commonly recognized in any area in which it is issued or dealt
in as a medium for investment; and
(iii) either one of a class or series or by its terms divisible into a
class or series of shares, participations, interests, or obligations.
(b) An `uncertificated security' is a share, participation, or other
interest in property or an enterprise of the issuer or an obligation of the
issuer which is
(i) not represented by an instrument and the transfer of which is
registered upon books maintained for that purpose by or on behalf of the
issuer;
(ii) of a type commonly dealt in on securities exchanges or
markets; and
(iii) either one of a class or series or by its terms divisible into a
class or series of shares, participations, interests, or obligations.
(c) A `security' is either a certificated or an uncertificated
security. If a security is certificated, the terms `security' and `certificated
security' may mean either the intangible interest, the instrument
representing that interest, or both, as the context requires. A writing that is
a certificated security is governed by this chapter and not by Chapter 7 of
this title, even though it also meets the requirements of that chapter. This
chapter does not apply to money. If a certificated security has been
retained by or surrendered to the issuer or its transfer agent for reasons
other than registration of transfer, other temporary purpose, payment,
exchange, or acquisition by the issuer, that security must be treated as an
uncertificated security for purposes of this chapter.
(d) A certificated security is in `registered form' if
(i) it specifies a person entitled to the security or to the rights it
represents; and
(ii) its transfer may be registered upon books maintained for that
purpose by or on behalf of the issuer or the security so states.
(e) A certificated security is in `bearer form' if it runs to bearer
according to its terms and not by reason of any indorsement.
(2) A `subsequent purchaser' is a person who takes other than by
original issue.
(3) A `clearing corporation' is a corporation registered as a `clearing
agency' under the federal securities laws or a corporation:
(a) at least ninety percent of whose capital stock is held by or for
one or more organizations, none of which, other than a national securities
exchange or association, holds in excess of twenty percent of the capital
stock of the corporation, and each of which is
(i) subject to supervision or regulation pursuant to the provisions
of federal or state banking laws or state insurance laws,
(ii) a broker or dealer or investment company registered under the
federal securities laws,
(iii) is a national securities exchange or association registered
under the federal securities laws; and
(b) any remaining capital stock of which is held by individuals
who have purchased it at or prior to the time of their taking office as
directors of the corporation and who have purchased only so much of the
capital stock as is necessary to permit them to qualify as directors.
(4) A `custodian bank' is a bank or trust company that is supervised
and examined by state or federal authority having supervision over banks
and is acting as custodian for a clearing corporation.
(5) Other definitions applying to this chapter or to specified parts
thereof and the sections in which they appear are:
`Adverse claim.' Section 36-8-302.
`Bona fide purchaser.' Section 36-8-302.
`Broker.' Section 36-8-303.
`Debtor.' Section 36-9-105.
`Financial intermediary.' Section 36-8-313.
`Guarantee of the signature.' Section 36-8-402.
`Initial transaction statement.' Section 36-8-408.
`Instruction.' Section 36-8-308.
`Intermediary bank.' Section 36-4-105.
`Issuer.' Section 36-8-201.
`Overissue.' Section 36-8-104.
`Secured Party.' Section 36-9-105.
`Security Agreement.' Section 36-9-105.
(6) In addition, Chapter 1 contains general definitions and principles
of construction and interpretation applicable throughout this chapter.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. This is Article 8's definitional Section. It is supplemented generally
by the definitions in Article 1 and in particular matters is supplemented by
definitions in other Articles. Subsection (5) enumerates several important
supplementary definitions and their locations in the Code.
2. Subsection (1) defines `security,' the basic term of this section.
Paragraphs (a) and (b) respectively define `certificated security' and
`uncertificated security,' and paragraph (c) states that the term `security'
comprises both. These definitions are functional rather than formal. At the
core is the notion that a security is a share or participation in an enterprise
or an obligation that is of a type commonly traded in organized markets for
such interests or is commonly recognized as a medium for investment. The
ambit of the definition will change as `securities' trading practices evolve to
include or exclude new property interests. It is believed that the definition
will cover anything which securities markets, including not only the
organized exchanges but as well the `over-the-counter' markets, are likely
to regard as suitable for trading. For example, transferable warrants
evidencing rights to subscribe fore shares in a corporation will normally be
`certificated securities' within the definition, since they (a) are issued in
bearer or registered form, (b) are of a type commonly dealt in on securities
markets, (c) constitute a class or series of instruments, and (d) evidence an
obligation of the issuer, namely the obligation to honor the warrant upon its
due exercise and issue shares accordingly.
Notice that the definition of uncertificated security does not include the
phrase `or commonly recognized in any area in which it is issued or dealt in
as a medium for investment.' Since there is no requirement of
representation by an instrument, a great many interests that might be
regarded as media for investment would be classified as securities under the
umbrella of the omitted phrase. For example, interests such as bank
checking and savings accounts are intended to be excluded from the
definition because they are not commonly traded; but since those accounts
are commonly recognized as media for investment, the omitted language
might bring them within the scope of the definition.
Interests such as the stock of closely-held corporations, although they
are not actually traded on securities exchanges, are intended to be included
within the definitions of both certificated and uncertificated securities by
the inclusion of interests `of a type' commonly traded in those markets. See
paragraphs (1)(a)(ii) and (1)(b)(ii).
The second sentence of (1)(c) is intended to eliminate confusion arising
from the fact that certificated securities are alternatively viewed as the
actual pieces of paper and the interests they represent. The final sentence
of (1)(c) is to recognize that an issuer that nominally issues certificated
securities but does not normally send the certificates to the owners is
functionally identical to the issuer of uncertificated securities and should be
guided by the same rules.
3. The consequence of determining that an interest is a `security' is that
this Article will provide the relative rights of issuers, owners, purchasers
and creditors as to transfer of rights, notice of claims, registration of
interests, etc. This definition has no bearing upon whether an interest is a
`security' for purposes of federal securities laws. By the same token the
definitions of `securities' for purposes of those laws has no bearing upon
whether an interest is a security within the definition of this Article.
4. A certificated security is a negotiable instrument (Section 8-105) but
is nonetheless governed by this Article rather than by Article 3. A critical
distinction between certificated securities and other negotiable instruments
is that one indorsing a security does not undertake the issuer's obligation or
make any warranty that the issuer will honor the underlying obligation.
One indorsing other negotiable instruments becomes secondarily liable on
the underlying obligation.
5. The definition of `clearing corporation' in subsection (3) reflects the
fact that a 1975 amendment to the Securities Exchange Act provides for
registration of `clearing agencies' with the Securities and Exchange
Commission.
South Carolina Reporter's Comment to the 1991 Amendment
`Security' -- The definition of security is intended to be flexible, to
permit courts to construe the term in a manner commensurate with the
purposes of the statute.
As was the case before amendment, the definition of security is not
necessarily intended to coincide with the definition employed in securities
regulation. Were the definitions to coincide, the definition of security
would be far broader than required by Article 8 and, in addition, there
could be gathered into Article 8 a vast amount of securities-regulation juris-
prudence not necessarily related to the functions of Article 8.
The definition of security is intended to include shares of stock in
closely-held corporations, but to exclude deposit obligations of any
financial institution whose deposits are insured by a United States
governmental entity. Concerning CDs see Article 9. Limited partnership
interests are also meant to be excluded, except when represented by an
instrument.
The definition of certificated security is intended to have exactly the
same meaning as that intended for the pre-amendment definition of
security. The changes in form and wording were not intended to change
the substance of the definition except to introduce the distinguishing
concept of the certificate.
The definition of uncertificated security is intended to be narrower in
scope than the definition of certificated security. To this end, the phrase `or
commonly recognized . . . as a medium for investment' has been omitted
from the definition of uncertificated security. The purpose is to limit the
application of the Article, in the case of uncertificated interests, to those
cases in which the issuer intended to issue a traditional sort of security.
`Clearing corporation' -- These changes are not related to uncertificated
securities. They are intended to facilitate the formation of the securities
depository system.
Section 36-8-103. Issuer's lien.
A lien upon a security in favor of an issuer thereof is valid against a
purchaser only if:
(a) the security is certificated and the right of the issuer to the
lien is noted conspicuously thereon; or
(b) the security is uncertificated and a notation of the right of the
issuer to the lien is contained in the initial transaction statement sent to the
purchaser or, if his interest is transferred to him other than by registration
of transfer, pledge, or release, the initial transaction statement sent to the
registered owner or the registered pledgee.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 15, Uniform Stock Transfer Act.
Purposes:
1. The rule of Section 15 of the Uniform Stock Transfer Act is made
applicable to all securities covered by the Article. An analogous rule as to
restrictions on transfer imposed by the issuer appears at Section 8-204.
Compare also Section 8-202. This section differs from those two sections
in that the purchaser's knowledge of the issuer's claim is irrelevant.
`Noted' makes clear that the text of the lien provisions need not be set
forth in full. However, this would not override a provision of an applicable
corporation code requiring statement in haec verba.
2. The purchaser of an uncertificated security is charged with notice of
all provisions in the initial transaction statement, whether or not it is sent to
him personally. Similarly, one who takes a certificated security is charged
with notice of all provisions noted on the certificate whether or not he
actually receives the certificate. When a purchaser takes a security under
circumstances in which no initial transaction statement is sent to him by the
issuer and no certificated security is delivered to him, he must look to the
person to whom a transfer or pledge of the uncertificated security has been
registered or the person in possession of the certificated security for the
appropriate notice or absence thereof. If the purchaser is not notified of a
lien he may have a right of action for breach of transfer warranties. See
Section 8-306. Compare Section 8-202 and its Comment 1.
South Carolina Reporter's Comment to the 1991 Amendment
As to certificated securities, no change is made in South Carolina law.
As to uncertificated securities, transferees desiring certainty concerning
issuer's liens must demand delivery of the original transaction
statement.
Section 36-8-104. Effect of overissue; `overissue'.
(1) The provisions of this chapter which validate a security or compel
its issue or reissue do not apply to the extent that validation, issue or reissue
would result in overissue; but if:
(a) an identical security which does not constitute an overissue is
reasonably available for purchase, the person entitled to issue or validation
may compel the issuer to purchase the security for him and either to deliver
a certificated security or to register the transfer of an uncertificated security
to him, against surrender of any certificated security he holds;
or
(b) a security is not so available for purchase, the person entitled
to issue or validation may recover from the issuer the price he or the last
purchaser for value paid for it with interest from the date of his
demand.
(2) `Overissue' means the issue of securities in excess of the amount
the issuer has corporate power to issue.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. Deeply embedded in corporation law is the conception that
`corporate power' to issue securities stems from the statute, either general or
special, under which the corporation is organized. Corporation codes
universally require that the charter or articles of incorporation state, at least
as to capital shares, maximum limits in terms of number of shares or total
dollar capital. Historically, special incorporation statutes are similarly
drawn and sometimes similarly limit the face amount of authorized debt
securities. The theory is that issue of securities in excess of the authorized
amounts is prohibited. See, for example, McWilliams v. Geddes &
Moss Undertaking Co., 169 So. 894 (1936), La.; Crawford v. Twin City Oil
Co., 216 Ala. 216, 113 So. 61 (1927); New York and New Haven R.R. Co.
v. Schuyler, 34 N.Y. 30 (1865). This conception persists despite modern
corporation codes under which, by action of directors and stockholders,
additional shares can be authorized by charter amendment and thereafter
issued. This section does not give a person entitled to validation, issue or
reissue of a security, the right to compel amendment of the charter to
authorize additional shares. Therefore, in a case where issue of an
additional security would require charter amendment, the plaintiff is limited
to the two alternate remedies set forth in paragraphs (a) and (b) of
subsection (1).
2. Where an identical security is reasonably available for purchase,
whether because traded on an organized market, or because one or more
security owners may be willing to sell at a not unreasonable price, the
issuer, although unable to issue additional shares, will be able to purchase
them and may be compelled to follow that procedure. West v. Tintic
Standard Mining Co., 71 Utah 158, 263 P. 490 (1928).
Paragraph (1)(a) gives the issuer the choice to transfer either a
certificated or an uncertificated security. As a practical matter the issuer
will have the choice only when the securities of the issue involved are
partly certificated and partly uncertificated; and in those circumstances
section 8-407 gives the owner (or registered pledgee) the right to choose
the form of the security. Thus the issuer likely will transfer a security of
the form requested by the person entitled to the security.
3. The right to recover damages from an issuer who has permitted an
overissue for occur is well settled. New York and New Haven R. R. Co. v.
Schuyler, 34 N.Y. 30 (1865). The measure of such damages, however, has
been open to question, some courts basing them upon the value of stock at
the time registration is refused; some upon the value at the time of trial; and
some upon the highest value between the time of refusal and the time of
trial. Allen v. South Boston Railroad, 150 Mass. 200, 22 N.E. 917, 5
L.R.A. 716, 15 Am. St. Rep. 185 (1889); Commercial Bank v. Kortright, 22
Wend. (N.Y.) 348 (1839). The purchase price of the security to the last
purchaser who gave value for it is here adopted as being the fairest means
of reducing the possibility of speculation by the purchaser. Interest may be
recovered as the best available measure of compensation for delay.
4. This section modifies and controls the rules otherwise laid down in
this Article as to the validation and issue of securities. The particular
sections so modified are listed in the cross-references.
South Carolina Reporter's Comments to the 1991 Amendment
South Carolina law would be changed by this amendment to the extent
that an issuer of a mixed issue of certificated and uncertificated securities,
could use either to satisfy the holder in an overissue situation. As the
Official Comment points out, the holder could thereupon, under Section
36-8-407, exchange one for the other, if dissatisfied. As a matter of
corporate governance, of course, individual corporations could choose to
issue only certificated or only uncertificated securities. In the case of a
corporation choosing to authorize and issue only certificated securities, the
amendment would make no change.
Section 36-8-105. Certificated securities negotiable; statements and
instructions not negotiable; presumptions.
(1) Certificated securities governed by this chapter are negotiable
instruments.
(2) Statements (Section 36-8-408), notices, or the like, sent by the
issuer of uncertificated securities and instructions (Section 36-8-308) are
neither negotiable instruments nor certificated securities.
(3) In any action on a security:
(a) unless specifically denied in the pleadings, each signature on a
certificated security, in a necessary indorsement, on an initial transaction
statement, or on an instruction, is admitted;
(b) if the effectiveness of a signature is put in issue, the burden of
establishing it is on the party claiming under the signature, but the signature
is presumed to be genuine or authorized;
(c) if signatures on a certificated security are admitted or established,
production of the security entitles a holder to recover on it unless the
defendant establishes a defense or a defect going to the validity of the
security;
(d) if signatures on an initial transaction statement are admitted
or established, the facts stated in the statement are presumed to be true as of
the time of its issuance; and
(e) after it is shown that a defense or defect exists, the plaintiff has the
burden of establishing that he or some person under whom he claims is a
person against whom the defense or defect is ineffective (Section
36-8-202).
Amended Official Comment
Prior Uniform Statutory Provisions:
None.
Purposes:
1. Although certificated securities are negotiable instruments, this
Article and not Article 3 provides the rights and duties relative to such
instruments. See Sections 8-102(1)(c) and 3-103(1). But in subsection (3)
of this section the particular rules stated in Section 3-307 for the negotiable
instruments governed by Article 3 are adapted to certificated securities.
Further those rules are adopted with respect to signatures on initial
transaction statements, although subsection (2) makes clear that such
statements are not negotiable instruments.
2. Paragraph (3)(d) makes clear that the effect of establishing the
validity of signatures on an initial transaction statement is to create a
presumption that the facts stated therein were true as of the time it was
issued. The issuer is free to show that later events -- e.g., a subsequent
transfer -- changed the stated facts.
3. `Any action on a security' includes any action or proceeding brought
against the issuer to enforce a right or interest that is part of the security --
e.g., to collect principal or interest or a dividend, or to establish a right to
vote or to receive a new security under an exchange offer or plan of
reorganization.
South Carolina Reporter's Comments to the 1991 Amendment
The amendment makes no changes with respect to certificated
securities. With respect to uncertificated securities, writings relating to the
security are treated similarly to certificates for purposes of the section.
Section 36-8-106. Applicability.
The law (including the conflict of laws rules) of the jurisdiction of
organization of the issuer governs the validity of a security, the
effectiveness of registration by the issuer, and the rights and duties of the
issuer with respect to:
(a) registration of transfer of a certificated security;
(b) registration of transfer, pledge, or release of an uncertificated
security; and
(c) sending of statements of uncertificated securities.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. This section states a special rule for conflicts of laws relating to
certain matters covered by this Article. Except as provided in this section,
the generally applicable conflicts rules stated in Section 1-105 apply to
Article 8.
2. Generally speaking, this section makes the law, including the
conflict of laws rules, of the jurisdiction in which the issuer is organized
applicable to determine the right and obligations of the issuer with respect
to security. Further, the effectiveness of registration by the issuer is to be
governed by the law of the jurisdiction in which the issuer is organized.
Thus whenever an uncertificated security is transferred through registration
on the issuer's records, Section 8-313(1)(b), this section provides the choice
of law rule as to the effectiveness of the registration to effect the transfer.
Similarly, the effectiveness of a registration on the issuer's records to create
and perfect a security interest in uncertificated securities (see Section
8-321) is within the ambit of this section.
It is significant that this section makes applicable the conflict of laws
rules as well as the substantive law of the jurisdiction in which the issuer is
organized. Because of this provision many matters related to the
registration of transfer--for example, the appointment of a guardian for an
incompetent person and the existence of agency relations--may be governed
by the substantive law of a jurisdiction other than that in which the issuer is
organized.
Any transfer of securities that is not effected through registration on the
issuer's records is subject to the law provided by general choice of law
rules. Transfers (including pledges) of certificated securities are not
effected by registration on the issuer's records, and thus are subject to
general choice of law rules. Similarly, some transfers of uncertificated
securities are not covered by this section. See Section 8-313(1)(d) and
(f)-(j).
South Carolina Reporter's Comments to the 1991 Amendment
As to certificated securities, no change in South Carolina law is made
by the amendment. Because transfers of uncertificated securities would
normally be effected on the issuer's books, such transfers are brought
within the laws of the issuer's jurisdiction of organization. Similarly,
pledge and release of uncertificated securities, to the extent they are
accomplished by registration on the issuer's books, are to be governed by
the laws of the issuer's jurisdiction of organization.
Section 36-8-107. Securities transferable; action for price.
(1) Unless otherwise agreed and subject to any applicable law or
regulation respecting short sales, a person obligated to transfer securities
may transfer any certificated security of the specified issue in bearer form
or registered in the name of the transferee, or indorsed to him or in blank,
or he may transfer an equivalent uncertificated security to the transferee or
a person designated by the transferee.
(2) If the buyer fails to pay the price as it comes due under a contract
of sale, the seller may recover the price of:
(a) certificated securities accepted by the buyer;
(b) uncertificated securities that have been transferred to the
buyer or a person designated by the buyer; and
(c) other securities if efforts at their resale would be unduly
burdensome or if there is no readily available market for their resale.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. The rights and interests that constitute securities of the same issue
are `fungible'. Section 1-201(17). This is true of both certificated and
uncertificated securities. Subsection (1) states the generally accepted legal
consequences of such fungibility. `Unless otherwise agreed,' the seller,
bailee, broker or other `person obligated to transfer securities' need not
transfer any specific instrument, but may select (e.g., from `a fungible bulk'
(Section 8-13(2) any security of the proper issue, in bearer form or
appropriately registered or indorsed or may transfer an uncertificated
security of the same issue.
Rules of the organized markets limiting the forms in which securities
are transferable in transactions on such markets are matters `otherwise
agreed'. Cases such as Parsons v. Martin, 77 Mass. (11 Gray) 111 (1858)
and Rumery v. Brooks, 205 App. Div. 283, 199 N.Y. Supp. 517 (1st Dept.
1923), holding a broker liable for conversion if he registers transfer of a
customer's securities held in `cash account' out of the customer's name or
tenders on demand for delivery a different though equivalent security, are
rejected. However, this act does not enlarge the rights of a broker as to
such securities so as to permit him without the customer's consent to pledge
them for his own indebtedness, and he may properly do with securities held
in a `margin account' to the extent he has acquired a lien for advances. The
distinction is carefully preserved in statute (e.g., N.Y. Penal Law Section
956) and case law. In re Mills, 125 App. Div. 730, 113 N.Y. Supp. 314 (1st
Dept. 1908).
2. Subsection (2) is designed to follow the dictum in Agar v. Orda, 265
N.Y. 248, 190 N.E. 479 (1934) in this context. Paragraph (c) is applicable
where for example (i) the securities are those of a `closely-held' corporation
not dealt in on any organized market; or (ii) because of the necessity for
compliance with the registration requirements of the Securities Act of 1933
or other regulatory provisions or procedures prior to offering the particular
securities on the market substantial delay and expense would be involved.
The approval of these particular remedies does not constitute disapproval of
other remedies that may exist under other rules of law. Section 1-103.
South Carolina Reporter's Comments to the 1991 Amendment
The amendment adds to existing law the concept of transfer of uncertifi-
cated securities.
Section 36-8-108. Registration of pledge and release of uncertificated
securities.
A security interest in an uncertificated security may be evidenced by the
registration of pledge to the secured party or a person designated by him.
There can be no more than one registered pledge of an uncertificated
security at any time. The registered owner of an uncertificated security is
the person in whose name the security is registered, even if the security is
subject to a registered pledge. The rights of a registered pledgee of an
uncertificated security under this chapter are terminated by the registration
of release.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
This section introduces the concept of the registered pledge of
uncertificated securities. The term "pledge" is used,
notwithstanding the absence of physical delivery, because it reflects
common terminology employed in connection with security interests in
investment securities. Note that the same term has been used in Section
8-320 to describe the security interest created by book entry made by a
securities depository. The rights of a registered pledgee, set forth in other
sections (particularly Section 8-207), are intended to resemble, as closely as
possible, the rights of the pledgee of a certificated security who retains
possession of the pledged security without registration. Although the
registration of pledge requires communication to the issuer, no details of
the security agreement between the debtor and the secured party need be
disclosed.
There is no provision for the registration of more than one pledge at a
time. This limits the burden on issuers and insulates them from problems
of conflicting priorities and the like. The registration of pledge is only one
among several methods of crating security interests under Section 8-313(1),
and other methods can be effectively employed to create security interests
junior to that of the registered pledgee or even first security interests if, for
some reason, the use of the registered pledge mechanism is inadvisable.
See Section 8-321, which deals comprehensively with security interests and
incorporates the transfer rules of Section 8-313(1) by reference.
The third sentence makes it clear that the registered owner, and not the
registered pledgee is the person in whose name an uncertificated security is
registered as, for example, to determine how an unsecured creditor may
reach his debtor's interest under Section 8-317(2). The registration of
release, in effect, nullifies the registration of pledge, and is functionally
equivalent to the redelivery of a pledged certificated security to the
pledgor.
South Carolina Reporter's Comment to the 1991 Amendment
Section 36-8-108 is a new concept in South Carolina law, making
provision for pledges of uncertificated securities. Uncertificated securities
may be pledged by transfer on the books of the issuer or, under this new
section, by registration of the pledge on the issuer's books. The mechanics
of registering a pledge of uncertificated securities are set out in part 3 of
Article 8.
Part 2
Issue -- Issuer
Section 36-8-201. `Issuer'.
(1) With respect to obligations on or defenses to a security, `issuer'
includes a person who:
(a) places or authorizes the placing of his name on a certificated
security (otherwise than as authenticating trustee, registrar, transfer agent,
or the like) to evidence that it represents a share, participation, or other
interest in his property or in an enterprise, or to evidence his duty to
perform an obligation represented by the certificated security;
(b) creates shares, participations, or other interests in his property
or in an enterprise or undertakes obligations, which shares, participations,
interests, or obligations are uncertificated securities;
(c) directly or indirectly creates fractional interests in his rights or
property, which fractional interests are represented by certificated
securities; or
(d) becomes responsible for or in place of any other person
described as an issuer in this section.
(2) With respect to obligations on or defenses to a security, a
guarantor is an issuer to the extent of his guaranty, whether or not his
obligation is noted on a certificated security or on statements of
uncertificated securities sent pursuant to Section 36-8-408.
(3) With respect to registration of transfer, pledge, or release (Part 4 of
this chapter), `issuer' means a person on whose behalf transfer books are
maintained.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 29, 60, 61, and 62, Uniform Negotiable Instruments law.
Purposes:
1. Part 2 of Article 8 describes the rights and duties of an
"issuer" of a security. It is generally understood that an
"issuer" is the one who creates the property interest that is a
"security" and who thereby incurs obligations to purchasers of
that interest. This section provides the criteria for determining whether a
person has incurred the obligations--and gained the rights--given to an
issuer in this Article. Numerous rights and obligations arise from sources
other than Article 8. This section does not determine whether a person is
an "issuer" for purposes of those sources of law.
2. Paragraph (1)(a) makes a person an "issuer" for purposes
of this Article if he authorizes the placing of his name on a certificate
intending that it should be a certificated security (Section 8-102(1)(a)).
This paragraph bears a close relationship to Section 8-102(1)(a), which
describes the property interests that may constitute a "certificated
security." The latter section describes those interests in terms of
rights against "the issuer," while this section defines issuer in
terms of authorizing the placing of a name on a "certificated
security." The effect is to add to the definition of "certificated
security" the requirement that it bear the authorized name of the
person creating the property interests. Thus, if a certificate bears the
unauthorized name of the purported issuer is not an "issuer"
within this Article; and the certificate is not a "certificated
security." See Section 8-202(3) and its Comment 4. Section 8-205
describes the circumstances in which the purported issuer will be treated as
if he were a true "issuer" despite the absence of his authorized
signature.
3. Read in conjunction with the definition of "uncertificated
security" in Section 8-102(1)(b), paragraph (1)(b) makes a person an
"issuer" if he creates, and maintains books for the registration
of ownership of, property interests that fit within the definition of an
uncertificated security.
4. Subsection (2) distinguishes the obligations of a guarantor as issuer
from those of the principal obligor. However, it does not exempt the
guarantor from the impact of subsection (4) of Section 8-202. Whether or
not the obligation of the guarantor is noted on the security or initial
transaction statement (Section 8-408(4) is immaterial. Typically,
guarantors are parent corporations, or stand in some similar relationship to
the principal obligor. If that relationship existed at the time the security
originally was issued, the guaranty probably would be noted on the security
or initial transaction statement. However, if the relationship arose
afterward -- e.g., through a purchase of stock or properties, or through
merger or consolidation -- probably the notation would not be made.
Nonetheless, the owner of the security is entitled to the benefit of the
obligation of the guarantor.
5. Subsection (3) narrows the definition of "issuer" for
purposes of Part 4 of this Article (registration of transfer). It is
supplemented by Section 8-406.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed revision broadens the definition to include those who
create uncertificated securities. See Section 36-8-201 comment 3. The
revision also adds the requirement that certificated securities must bear the
authorized name of the creator of the property interest in order to qualify as
an "issuer" for statutory purposes. On the other hand, a bona
fide purchaser without notice of a defect would have rights against the
issuer, regardless of the correctness of the name. See Section 36-8-201
(1)(a), comment 2. This requirement is not new in South Carolina law.
See, e.g., Code Section 33-6-250 requiring an issuer's proper name to
appear on share certificates.
Section 36-8-202. Issuer's responsibility and defenses; notice of defect
or defense.
(1) Even against a purchaser for value and without notice, the terms of
a security include:
(a) if the security is certificated, those stated on the security;
(b) if the security is uncertificated, those contained in the initial
transaction statement sent to such purchaser or, if his interest is transferred
to him other than by registration of transfer, pledge, or release, the initial
transaction statement sent to the registered owner or registered pledgee;
and
(c) those made part of the security by reference, on the certificated
security or in the initial transaction statement, to another instrument,
indenture, or document or to a constitution, statute, ordinance, rule,
regulation, order or the like, to the extent that the terms referred to do not
conflict with the terms stated on the certificated security or contained in the
statement. A reference under this paragraph does not of itself charge a
purchaser for value with notice of a defect going to the validity of the
security, even though the certificated security or statement expressly states
that a person accepting it admits notice.
(2) A certificated security in the hands of a purchaser for value or an
uncertificated security as to which an initial transaction statement has been
sent to a purchaser for value, other than a security issued by a government
or governmental agency or unit, even though issued with a defect going to
its validity, is valid with respect to the purchaser if he is without notice of
the particular defect unless the defect involves a violation of constitutional
provisions, in which case the security is valid with respect to a subsequent
purchaser for value and without notice of the defect. This subsection
applies to an issuer that is a government or governmental agency or unit
only if either there has been substantial compliance with the legal
requirements governing the issue or the issuer has received a substantial
consideration for the issue as a whole or for the particular security and a
stated purpose of the issue is one for which the issuer has power to borrow
money or issue the security.
(3) Except as otherwise provided in the case of certain unauthorized
signatures (Section 36-8-205), lack of genuineness of a certificated security
or an initial transaction statement is a complete defense, even against a
purchaser for value and without notice.
(4) All other defenses of the issuer of a certificated or uncertificated
security, including nondelivery and conditional delivery of a certificated
security, are ineffective against a purchaser for value who has taken
without notice of the particular defense.
(5) Nothing in this section shall be construed to affect the right of a
party to a `when, as and if issued' or a `when distributed' contract to cancel
the contract in the event of a material change in the character of the security
that is the subject of the contract or in the plan or arrangement pursuant to
which the security is to be issued or distributed.
Amended Official Comment
Prior Uniform Statutory Provisions:
Sections 16, 23, 28, 56, 57, 60, 61, 62, Uniform Negotiable Instruments
Law.
Purposes:
1. A purchaser must have some method of learning the terms of the
security he is purchasing. The printing on the certificate or on the initial
transaction statement ("ITS") is designed to notify the
purchaser of those terms. If he purchases without examining the certificate
or ITS, he does so at his peril, since he is charged with notice of terms
stated thereon.
Some methods of transferring a security do not involve the actual
delivery of a certificate or the sending of an ITS to the actual purchaser.
See Section 8-313(1)(c)-(j). The situations in which these methods of
transfer will be used can be divided into two categories--those in which an
intermediary takes a transfer for his principal and those in which a bailee
"holding" a security effects a transfer by receiving notice of, or
sending acknowledgement of, the purchase. In either type of situation the
purchaser will be charged with notice of all terms stated on the certificate if
the security is certificated or, if the security is uncertificated, with notice of
all terms stated in the ITS sent to the registered owner or registered
pledgee. For example, suppose that Customer purchases an uncertificated
security that is already registered in the name of his broker. Customer is
content to allow the security to remain registered in Broker's name, so that
Customer never receives an ITS. Customer is charged with notice of the
terms stated on the ITS sent to Broker when Broker became the registered
owner. Or suppose that Purchaser buys a certificated security and the
transfer is effected not by delivering the certificate but by having Bailee,
who holds the security, acknowledge that he holds for Purchaser.
Purchaser is charged with notice of the terms written on the certificate.
It is apparent that in these situations a purchaser must rely upon the
intermediary or bailee who "holds" the security for him.
2. Subsection (1)(c) states, in accordance with the prevailing case law,
the right of the issuer (who prepares the text of the security or statement) to
include terms incorporated by adequate reference to an extrinsic source, so
long as the terms so incorporated do not conflict with the stated terms.
Thus the standard practice of referring in a bond or debenture to the trust
indenture under which it is issued without spelling out its necessarily
complex and lengthy provisions is approved. Every stock certificate or ITS
will refer in some manner to the charter or articles of incorporation of the
issuer. At least where there is more than one class of stock authorized,
applicable corporation codes specifically require a statement or summary as
to preferences, voting powers and the like. References to constitutions,
statutes, ordinances, rules, regulations or orders are not so common except
in the obligations of governments or governmental agencies or units; but
where appropriate they fit into the rule here stated.
Following the basic principles of the Negotiable Instruments Law the
cases have generally held that an issuer is estopped from denying
representations made in the text of a security. Delaware-New Jersey Ferry
Co. v. Leeds, 21 Del. Ch. 279, 186 A. 913 (1936). Nor is a defect in form
or the invalidity of a security normally available to the issuer as a defense.
Bojnini v. Family Theatre Corporation, 327 Pa. 273, 194 a. 498 (1937);
First National Bank of Fairbanks v. Alaska Airmotive, 119 F.2d 267
(C.C.A. Alaska 1941).
This general rule of estoppel is here adopted in favor of purchasers, with
the exception noted above.
3. The last sentence of subsection (1) and all of subsection (2) embody
the concept that it is the duty of the issuer, not of the purchaser, to make
sure that the security complies with the law governing its issue. The last
sentence of subsection (1) makes clear that the issuer cannot, by
incorporating a reference to a statute or other document, charge the
purchaser with notice of the security's invalidity. Subsection (2) gives to a
purchaser for value without notice of the defect the right to enforce the
security against the issuer despite the presence of a defect that otherwise
would render the security invalid. This right accrues to a purchaser
regardless of whether the security has been transferred to him through
physical delivery of a certificate (Section 8-313(1)(a)), through registration
of transfer or pledge of an uncertificated security (Section 8-313(1)(b)), or
through some other method in which he receives no certificate or initial
transaction statement. (Section 8-313(1)(c)-(j)). There are three
circumstances in which a purchaser does not gain such rights: first, if the
defect involves a violation of constitutional provisions, these rights accrue
only to a subsequent purchaser (Section 8-102(2)). This Article leaves to
the law of each particular state the rights of a purchaser on original issue of
a security with a constitutional defect. No negative implication is intended
by the explicit grant of rights to a subsequent purchaser.
Second, governmental issuers are distinguished in subsection (2) from
other issuers as a matter of public policy, and additional safeguards are
imposed before governmental issues are validated. Governmental issuers
are estopped from asserting defenses only if there has been substantial
compliance with the legal requirements governing the issue or if substantial
consideration has been received and a stated purpose of the issue is one for
which the issuer has power to borrow money or issue the security. The
purpose of the substantial compliance requirement is to make certain that a
mere technicality as, e.g., in the manner of publishing election notices, shall
not be a ground for depriving an innocent purchaser of his rights in the
security. The policy is here adopted of such cases as Tommie v. City of
Gadsden, 229 Ala. 521, 158 So. 763 (1935), in which minor discrepancies
in the form of the election ballot used were overlooked and the bonds were
declared valid since there had been substantial compliance with the
statute.
A long and well established line of Federal cases recognizes the
principle of estoppel in favor of bona fide purchasers where municipalities
issue bonds containing recitals of compliance with governing constitutional
and statutory provisions, made by the municipal authorities entrusted with
determining such compliance. Chaffee County v. Potter, 142 U.S. 355, 12
S. Ct. 216, 35 L. Ed. 1040 (1892); Oregon v. Jennings, 119 U.S. 74, 7 S.
Ct. 124, 30 L. Ed. 323 (1886); Gunnison County Commissioners v. Rollins,
173 U.S. 255, 19 S. Ct. 390, 43 L. Ed. 689 (1898). This rule has been
qualified, however, by requiring that the municipality have power to issue
the security. Anthony v. County of Jasper, 101 U.S. 693, 25 L. Ed. 1005
(1879); Town of South Ottawa v. Perkins, 94 U.S. 260, 24 L. Ed. 154
(1876). This section follows the case law trend, simplifying the rule by
setting up two conditions for an estoppel against a governmental issuer: (1)
substantial consideration given, and (2) power in the issuer to borrow
money or issue the security for the stated purpose. As a practical matter the
problem of policing governmental issuers has been alleviated by the present
practice of requiring legal opinions as to the validity of the issue. The bulk
of the case law on this point is more than 50 years old and it may be
assumed that the question now seldom arises.
Section 8-104 regarding over-issue, provides the third exception to the
rule that an innocent purchase for value takes a valid security despite the
presence of a defect that would otherwise give rise to invalidity. See that
section and its comment for further explanation.
4. Subsection (3) is in effect a definitional provision. The person
purported to have issued a certificated security is not an
"issuer" and the certificate is not a "certificated
security," unless that person actually took the actions that constitute
issue. See Sections 8-102(1)(a) and 8-201(1). Similarly, a statement
purportedly sent by an issuer is not an "initial transaction
statement" if it was not actually sent by the issuer (Section 8-408(4),
(1), (2) and (3)). Section 8-205 is a caveat to both of these general
rules.
5. Subsection (4) gives the general rule that defenses of the issuer are
ineffective against a purchaser for value without notice of the defense.
Notice to the purchaser may come from sources other than a notation on a
certificate or an initial transaction statement. Compare Section 8-103 with
respect to an issuer's lien.
6. Subsection (5) is included to make clear that this section does not
affect the presently recognized right of either party to a "when, as and
if" or "when distributed" contract to cancel the contract
on substantial change.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed revision extends the general rule of estoppel in favor of
purchasers to purchasers of uncertificated securities. Purchasers are
charged with notice of terms printed on the certificate or included in the
Initial Transaction Statement. Terms may also be incorporated by
reference. When a security is transferred without delivery or the sending of
an Initial Transaction Statement to the actual purchaser, the purchaser is
charged with notice of all terms on the certificate, even if it is being held by
a bailee. The purchaser is also charged with notice of terms listed in an
Initial Transaction Statement sent to a registered pledgee or registered
owner. See Section 36-8-202 comment 1. If the notice is defective, or if
the security itself is defective or in some way illegal, the issuer is estopped
from asserting the security's terms or invalidity. Lack of genuineness,
however, is a complete defense.
With respect to certificated securities, South Carolina law would not be
changed. With respect to uncertificated securities, the Initial Transaction
Statement would be treated as the analogue of a certificate for purposes of
the statute. Although delivery of the Initial Transaction Statement is not
required to transfer ownership of the underlying security, its delivery is
vital to the purchaser's understanding of his rights.
Section 36-8-203. Staleness as notice of defects or defenses.
(1) After an act or event creating a right to immediate performance of
the principal obligation represented by a certificated security or that sets a
date on or after which the security is to be presented or surrendered for
redemption or exchange, a purchaser is charged with notice of any defect in
its issue or defense of the issuer if:
(a) the act or event is one requiring the payment of money, the
delivery of certificated securities, the registration of transfer of
uncertificated securities, or any of these on presentation or surrender of the
certificated security, the funds or securities are available on the date set for
payment or exchange and he takes the security more than one year after the
date; and
(b) the act or event is not covered by paragraph (a) and he takes
the security more than two years after the date set for surrender or
presentation or the date on which performance became due.
(2) A call that has been revoked is not within subsection (1).
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 52(2), 53, Uniform Negotiable Instruments Law.
Purposes:
1. The problem of matured or called securities is here dealt with in
terms of the effect of such events in giving notice of the issuer's defenses
and not in terms of "negotiability". The substance of this
section applies only to certificated securities because such securities may
be transferred to a purchaser by delivery after they have matured, been
called or become redeemable or exchangeable. It is contemplated that
uncertificated securities which have matured or been called will merely be
canceled on the books of the issuer and the proceeds sent to the registered
owner or registered pledgee, as the case may be. Uncertificated securities
which have become redeemable or exchangeable, at the option of the
owner, may be transferred to a purchaser, but the transfer is effectuated
only by registration of transfer, thus necessitating communication with the
issuer. If defects or defenses in such securities exist, the issuer will
necessarily have the opportunity to bring them to the attention of the
purchaser in the initial transaction statement sent to him.
2. The fact that a certificated security is in circulation long after it has
been called for redemption or exchange must vie rise to the question in a
purchaser's mind as to why it has not been surrendered. After the lapse of a
reasonable period of time he can no longer claim that he had "no
reason to know" of any defects or irregularities in its issue. Where
funds are available for the redemption of the security it is normally turned
in more promptly and a shorter time is set as the "reasonable
period", subsection 91 (a), than is set where funds are not
available.
It is true that defaulted certificated securities are frequently traded on
financial markets in the same manner as unmatured and undefaulted
instruments and a purchaser might not be placed upon notice of irregularity
by the mere fact of default. An issuer, however, should at some point be
placed in a position to determine definitely its liability on an invalid or
improper issue, and for this purpose a security under this section becomes
"stale" two years after the default. But notice that a different
rule applies when the question is notice not of issuer's defenses but of
claims of ownership. Section 8-305 and comment.
3. Nothing in this section is designed to extend the life of preferred
stocks called for redemption as "shares of stock" beyond the
redemption date. After such a call, the security represents only a right to
the funds set aside for redemption.
South Carolina Reporter's Comments to the 1991 Amendment
This section limits an issuer's liability for invalid or improper issues by
limiting the time period in which a purchaser can claim lack of notice that a
security has matured or been called. After the period fixed by this section,
a purchaser is charged with notice.
As the drafters of the proposed revision noted, this section normally
applies only to certificated shares. The issuers of uncertificated securities
may simply cancel the shares on their books and send the proceeds to the
registered owner or pledgee. When new shares are issued, the issuer gives
the registered owner or pledgee notice of the terms of the new shares by
sending an Initial Transaction Statement for the new shares.
As to certificated securities, no change would be made in South
Carolina law. Uncertificated securities by their nature require more
frequent contact between issuer and holder, so that a holder is far less likely
to buy a security which had matured or to be unaware of maturity or
call.
Section 36-8-204. Effect of issuer's restrictions on transfer.
A restriction on transfer of a security imposed by the issuer, even if
otherwise lawful, is ineffective against any person without actual
knowledge of it unless:
(a) the security is certificated and the restriction is noted
conspicuously thereon; or
(b) the security is uncertificated and a notation of the restriction
is contained in the initial transaction statement sent to such person or, if his
interest is transferred to him other than by the registration of transfer,
pledge, or release, the initial transaction statement sent to the registered
owner or the registered pledgee.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 15, Uniform Stock Transfer Act.
Purposes:
1. Use of the words "noted" and "notation" is
intended to make clear that the restriction need not be set forth in full text.
See Allen v. Biltmore Tissue Corporation, 2 N.Y.2d 5 34, 141 N.E.2d 812
(1957).
2. Securities traded on financial markets are generally assumed to be
free of adverse claims (Section 8-302). That assumption should not be
lightly negated. Therefore, a strict rule as to notice of a restriction on
transfer is here imposed. The issuer can protect itself by noting the
restriction on the D or initial transaction statement. Refusal by an issuer to
register a transfer on the basis of an unnoted restriction constitutes a
conversation and the issuer can be compelled to register the transfer under
the policy of Part 4 of this Article. Hulse v. Consolidated Quicksilver
Mining Corporation, 675 Idaho 768, 154 P.2d 149 (1944); Mancini v.
Patrizi, 110 Cal. App. 42, 293 P. 828 (1930). Conversely, the issuer to
whom a certificated security with proper notation of a restriction is
presented thereby receives timely notification of an adverse claim and is
under a duty to inquire (Section 8-403).
A purchaser with actual knowledge of an unnoted restriction certainly
has notice of an adverse claim (Section 8-304 and Comment). In that
situation this section adopts the reasoning of Baumohl v. Goldstein, 95 N.J.
Eq. 597, 124 A. 118 (1924), and Tomoser v. Kamphausen, 307 N.Y. 797,
121 N.E.2d 622 (1954), rejecting the contrary holding of such cases as
Costello v. Farrell, 234 Minn. 453, 48 N.W.2d 557 (1951).
3. A transferee who purchases securities in organized financial markets
often may neither take physical delivery of a certificated security nor have
an uncertificated security registered in his name. See Section 8-313(1)(c)
through (j). Under those circumstances the transferee may have no
occasion to examine the writing on the certificate or the initial transaction
statement. Nonetheless the transferee is charged with notice of restrictions
noted on the certificate or on the initial transaction statement sent to the
registered owner or registered pledgee. See Section 8-202(1) and Comment
1 thereto.
4. Most jurisdictions recognize the right of issuers to impose
restrictions giving either the issuer itself or other stockholders the option to
purchase the security at an ascertained price before it is offered to third
parties. Vanucci v. Peduni, 217 Cal. 138, 17 P.2d 706 (1932); People ex
rel. Rudaitis v. Galskis, 233 Ill. App. 414 (1924); Bloomingdale v.
Bloomingdale, 107 Misc. 646, 177 N.Y.S. 873 (1919). This is the type of
restriction contemplated by the present section. Mere notation on the
certificate or initial transaction statement cannot, of course, validate an
otherwise unlawful restriction. The present section in no way alters the
prevailing case law which recognizes free alienability as an inherent
attribute of securities and holds invalid unreasonable restraints on
alienation such as those requiring consents of directors without establishing
criteria for the granting or withholding of such consents and those giving
the directors an option of purchase at a price to be fixed in their sole
discretion. Howe v. Roberts, 209 Ala. 80, 95 So. 344 (1923); People ex rel.
Malcom v. Lake San Corporation, 251 Ill. App. 499 (1929); Morris v.
Hussong Dyeing Machine Co., 81 N.J. Eq. 256, 86 A. 1026 (1913); New
England Trust Co. v. Abbott, 162 Mass. 148, 378 N.E. 432, 27 L:.R.A. 271
(1894).
No interference is intended with the common practice of closing books
for proper corporate purposes.
5. Cooperative associations and ventures, as well as private clubs are
generally considered an exception to the rules against restrictions on
transfer as unreasonable restraints on alienation and are permitted for
example to require the consents of governing bodies such as a board of
directors. Penthouse Properties, Inc. v. 1158 Fifth Avenue, Inc., 256 App.
Div. 685, 11 N.Y.S.2d 417 (1939).
Historically restrictions on transfer were most commonly imposed by
so-called "closely-held" issuers (including cooperatives and the
like) in an attempt to restrict control if not total membership to a
homogeneous security holder group. They have been increasingly resorted
to by issuers with publicly held securities seeking to police enforcement of
the registration requirements of the Securities Act of 1933 against persons
purchasing their securities in a transaction exempt from those requirements
(e.g., one "not involving any public offering" [Securities Act of
1933, Section 492]) or against persons in a "control"
relationship to the issuer. [See Securities Act of 1933, Section 2(11) and
Rule 405 of the Rules and Regulations of the Securities and Exchange
Commission under that Act.] Particularly in the latter context in which
notation of the restriction on all affected certificates or initial transaction
statements may not be practical, the issuer enforces it by notifying the
holders of such certificates and refusing requests to register transfer out of
the name of the "controlling person" either for purposes of sale
or for delivery after sale, relying on the stated exception as to a person
"with actual knowledge" of the restriction.
6. This section deals only with restrictions imposed by the issuer and
restrictions imposed by statute are not affected. See Quiner v. Marblehead
Social Co., 10 Mass. 476 (18132); Madison Bank v. Price, 79 Kan. 289,
100 P. 280 (1909); Healey v. Steele Center Creamery Ass'n, 115 Minn.
451, 133 N.W. 69 (1911). Nor does it deal with private agreements
between stockholders containing restrictive covenants as to the sale of the
security as in In re Consolidated Factors Corporation, 46 F.2d 561
(S.D.N.Y. 1931).
7. An analogous provision concerning issuer's liens appears at Section
8-103.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed revision extends the concept of constructive notice of
restrictions on transfer to the purchasers of uncertificated securities.
Purchasers of uncertificated securities are charged with constructive
knowledge of all restrictions noted on the Initial Transaction Statement sent
to the purchaser or to the registered pledgee or registered owner.
As to certificated securities, no change would be made in South
Carolina law. As to uncertificated securities, the Initial Transaction
Statement is treated as the analogue of the certificate for purposes of the
statute.
Section 36-8-205. Effect of unauthorized signature on certificated
security or initial transaction statement.
An unauthorized signature placed on a certificated security prior to or in
the course of issue or placed on an initial transaction statement is
ineffective, but the signature is effective in favor of a purchaser for value of
the certificated security or a purchaser for value of an uncertificated
security to whom the initial transaction statement has been sent, if the
purchaser is without notice of the lack of authority and the signing has been
done by:
(a) an authenticating trustee, registrar, transfer agent, or other person
entrusted by the issuer with the signing of the security, of similar securities,
or of initial transaction statements or the immediate preparation for signing
of any of them; or
(b) an employee of the issuer, or of any of the foregoing,
entrusted with responsible handling of the security or initial transaction
statement.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 23, Uniform Negotiable Instruments Law.
Purposes:
1. In current practice the problem of forged or unauthorized signatures
arises most frequently where an employee of the issuer, transfer agent or
registrar has access to securities which he is required to prepare for issue by
affixing the corporate seal or by adding a signature necessary for issue.
This section is based upon the issuer's duty to avoid the negligent
entrusting of securities to such persons. Issuers have long been held
responsible for signatures placed upon securities by parties whom they
have held out to the public as authorized to prepare such securities. See
Fifth Avenue Bank of New York v. The Forty-Second Street & Grand
Street Ferry Railroad Co., 137 N.Y. 231, 33 N.E. 378, 19 L.R.A. 331, 33
Am. St. Rep. 712 (1893); Jarvis v. Manhattan Beach Co., 148 N.Y. 652, 43
N.E. 68, 31 L.R.A. 776, 51 Am. St. Rep. 727 (1896). The "apparent
authority" concept of some of the caselaw, however, is here extended
and this section expressly rejects the technical distinction, made by courts
reluctant to recognize forged signatures, between cases where the forger
signs a signature he is authorized to sign under proper circumstances and
those in which he signs a signature he is never authorized to sign. Citizens'
& Southern National Bank v. Trust Co. of Georgia, 50 Ga. App. 681,
179 S.E. 278 (1935). Normally the purchaser is not in a position to
determine which signature a forger, entrusted with the preparation of
securities, has "apparent authority" to sign and which he has
not. The issuer, on the other hand, can protect itself against such fraud by
the careful selection and bonding of agents and employees, or by action
over against transfer agents and registrars who in turn may bond their
personnel.
2. It is contemplated that purchasers of uncertificated securities will
rely on initial transaction statements (ITS's) sent to them, much as
purchasers of certificated securities rely on certificates. The issuer's
signature is thus required to ensure genuineness of the ITS. Section
8-408(4). In this regard the principal difference between certificates and
ITS's is that only the one to whom the ITS is sent can safely rely on it,
whereas a certificated security is a negotiable instrument and may be relied
upon by transferees other than the original purchaser. The issuer's
responsibility for unauthorized signatures otherwise is the same in both
instances.
A transferee of an uncertificated security may be protected indirectly by
this section despite the fact that he has not received the ITS. If his
transferor received an ITS and was protected by this section, Section
8-301(1) gives those rights to the transferee.
3. The issuer cannot be held liable for the honesty of employees not
entrusted, directly or indirectly, with the signing, preparation, or
responsible handling of similar securities or similar ITS's and whose
possible commission of forgery it has no reason to anticipate. The result in
such cases as Hudson Trust Co. v. American Linseed Co., 232 N.Y. 350,
134 NJ.E. 178 (1922), and Dollar Savings Fund & Trust Co. v.
Pittsburgh Plate Glass Co., 213 Pa. 307, 62 A. 916, 5 Ann. Cas. 248 (1906)
is here adopted.
4. This section is not concerned with forged or unauthorized
indorsements (Section 8-311), but only with unauthorized signatures of
issuers, transfer agents, etc., placed upon certificated securities or initial
transaction statements during the course of their issue. The protection here
stated is available to all purchasers for value without notice and not merely
to subsequent purchasers.
South Carolina Reporter's Comments to the 1991 Amendment
The revision extends to Initial Transaction Statements the current rule in
favor of purchasers for value without notice of the lack of authority of the
required signature on a certificate. If the original purchaser of an
uncertificated security had knowledge that the signature on his or her Initial
Transaction Statement was unauthorized, however, all subsequent
purchasers are charged with the original purchaser's knowledge and may
not invoke this section to avoid the complete bar of Section 8-202(3).
The amendment would not change South Carolina law relating to
certificated securities. With respect to uncertificated securities, the
amendment treats the Initial Transaction Statement as the analogue of the
certificate.
Section 36-8-206. Completion or alteration of certificated security or
initial transaction statement.
(1) If a certificated security contains the signatures necessary to its
issue or transfer but is incomplete in any other respect:
(a) any person may complete it by filling in the blanks as authorized;
and
(b) even though the blanks are incorrectly filled in, the security as
completed is enforceable by a purchaser who took it for value and without
notice of the incorrectness.
(2) A complete certificated security that has been improperly altered,
even though fraudulently, remains enforceable, but only according to its
original terms.
(3) If an initial transaction statement contains the signatures necessary
to its validity, but is incomplete in any other respect:
(a) any person may complete it by filling in the blanks as authorized;
and
(b) even though the blanks are incorrectly filled in, the statement
as completed is effective in favor of the person to whom it is sent if he
purchased the security referred to therein for value and without notice of
the incorrectness.
(4) A complete initial transaction statement that has been improperly
altered, even though fraudulently, is effective in favor of a purchaser to
whom it has been sent, but only according to its original terms.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 14, 15 and 124, Uniform Negotiable Instruments Law; Section
16, Uniform Stock Transfer Act.
Purposes:
1. The problem of forged or unauthorized signatures necessary for the
issue or transfer of a security or for the authentication of an initial
transaction statement is not involved here, and a person in possession of a
blank certificate or of a writing that would be an initial transaction
statement if it were properly signed is not, by this section, given authority
to fill in blanks with such signatures.
2. Completion of blanks left in a transfer instruction is dealt with
elsewhere (Section 8-308(5)). Blanks left upon authentication of an initial
transaction statement or upon issue of a certificated security are the only
ones dealt with here, and a purchaser for value without notice is protected.
A purchaser is not in a good position to determine whether blanks were
completed by the issuer or by some person not authorized to complete
them. On the other hand the issuer can protect itself by not placing its
signature on the writing until the blanks are completed or, if it does sign
before all blanks are completed, by carefully selecting the agents and
employees to whom it entrusts the writing after authentication. With
respect to a certificated security or an initial transaction statement that is
completed by the issuer but later is altered, the issuer has done everything it
can to protect the purchaser and thus is not charged with the terms as
altered. However, it is charged according to the original terms, since it is
not thereby prejudiced.
If the completion or alteration is obviously irregular, the purchaser may
be charged with notice. See Section 1-201(25).
3. Only the purchaser who physically takes the certificate or receives
the initial transaction statement is directly protected. However, a transferee
may receive protection indirectly through Section 8-301(1).
4. The protection granted a purchaser for value without notice under
this section is modified to the extent that an overissue may result where an
incorrect amount is inserted into a blank (Section 8-104).
South Carolina Reporter's Comment to the 1991 Amendment
The revision extends the current provision for an incomplete or altered
certificate to an incomplete or altered Initial Transaction Statement. With
respect to alteration, an original purchaser without notice may enforce the
altered terms of the certificate or Initial Transaction Statement against the
issuer. Subsequent purchasers, in every case, are bound by the original
terms.
The amendment would not change South Carolina law relating to
certificated securities, and, in the case of uncertificated securities, treats the
Initial Transaction Statement as the analogue of the certificate.
Section 36-8-207. Rights and duties of issuer with respect to registered
owners and registered pledgees.
(1) Prior to due presentment for registration of transfer of a certificated
security in registered form, the issuer or indenture trustee may treat the
registered owner as the person exclusively entitled to vote, to receive
notifications, and otherwise to exercise all the rights and powers of an
owner.
(2) Subject to the provisions of subsections (3), (4), and (6), the issuer
or indenture trustee may treat the registered owner of an uncertificated
security as the person exclusively entitled to vote, to receive notifications,
and otherwise to exercise all the rights and powers of an owner.
(3) The registered owner of an uncertificated security that is subject to
a registered pledge is not entitled to registration of transfer prior to the due
presentment to the issuer of a release instruction. The exercise of
conversion rights with respect to a convertible uncertificated security is a
transfer within the meaning of this section.
(4) Upon due presentment of a transfer instruction from the registered
pledgee of an uncertificated security, the issuer shall:
(a) register the transfer of the security to the new owner free of pledge,
if the instruction specifies a new owner (who may be the registered
pledgee) and does not specify a pledgee;
(b) register the transfer of the security to the new owner subject
to the interest of the existing pledgee, if the instruction specifies a new
owner and the existing pledgee; or
(c) register the release of the security from the existing pledge and
register the pledge of the security to the other pledgee, if the instruction
specifies the existing owner and another pledgee.
(5) Continuity of perfection of a security interest is not broken by
registration of transfer under subsection (4)(b) or by registration of release
and pledge under subsection (4)(c), if the security interest is assigned.
(6) If an uncertificated security is subject to a registered pledge:
(a) any uncertificated securities issued in exchange for or distributed
with respect to the pledged security must be registered subject to the
pledge;
(b) any certificated securities issued in exchange for or
distributed with respect to the pledged security must be delivered to the
registered pledgee; and
(c) any money paid in exchange for or in redemption of part or all of
the security must be paid to the registered pledgee.
(7) Nothing in this chapter shall be construed to affect the liability of
the registered owner of a security for calls, assessments, or the like.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 3, Uniform Stock Transfer Act.
Purposes:
1. Subsection (1) states the issuer's right to treat the registered owner of
a certificated security as the person entitled to exercise all the rights of an
owner. This right of the issuer is limited by the provisions of Part 4 of this
article -- once there has been due presentation for registration of transfer,
the issuer has a duty to register ownership in the name of the transferee.
Section 8-401. Thus its right to treat the old registered owner as
exclusively entitled to the rights of ownership must cease.
Subsection (2) states a parallel rule for uncertificated securities, with the
important exception that the rights of the registered owner are curtailed
when the uncertificated security is subject to a registered pledge. See
Section 8-108. Thus, subsection (3) denies the registered owner the power
to order transfer of an uncertificated security subject to a registered pledge
until the pledge has been released by order of the pledgee. See Section
8-308(4) and (7)(b).
Subsection (4) establishes the right of the registered pledgee to control
the transfer of an uncertificated security subject to his pledge. The three
paragraphs of subsection (4) illustrate the mechanics for three common
transactions: (a) the outright transfer of the security, free of the pledge; (b)
the transfer of registered ownership, subject to the pledge; and (c) the
transfer of the pledgee's interest without disturbing the registered
ownership. These transactions are not intended to be exclusive. For
example, the transfer of a pledged uncertificated security to a new owner
subject to the interest of a new pledgee might be accomplished in several
ways. There could be a release of his interest by the old pledgee followed
by a transfer of registered ownership from the old owner to the new owner
and a pledge from the new owner to the new pledgee. Or, if the respective
pledgees wished to maintain complete control over the security, the old
pledgee could order a transfer of his interest to the new pledgee under
paragraph (c) and the new pledgee could then order the transfer of
registered ownership from the old owner to the new owner under paragraph
(b). Still other combinations are possible, depending on the positions of the
parties.
Subsection (6) insures that stock dividends or splits issued with respect
to a pledged uncertificated security and securities or money distributed or
paid in exchange for a pledged uncertificated security will remain within
the control of the registered pledgee. This result cannot be extended to
pledges of certificated securities because the issuer will normally be
unaware of the pledgee's rights unless the pledgee has caused a transfer to
be registered.
The issuer may, under this section, make distributions of money and/or
securities to the registered owners of certificated securities without
requiring further proof of ownership, provided that such distributions are
distributable to the owners of all securities of the same issue and the terms
of the security do not require its surrender as a condition of payment or
exchange. Any such distribution shall constitute a defense against a claim
for the same distribution by a person in possession of the security.
2. The rule of such cases as Turnbull v. Longacre Bank, 249 N.Y. 159,
163 N.E. 135 (1928), which held the issuer liable for paying out dividends
to the record holder after the transferee had given notice of the transfer and
demanded that a new certificate be issued to him, is left unchanged.
However, such cases as Morrison v. Gulf Oil Corporation, 189 Miss. 212,
196 So. 247 (1940), holding that Section 3 of the Uniform Stock Transfer
Act did not change the common law as to the issuer's liability for dealing
with the record holder after mere notice of a pledge, are expressly rejected.
Mere notice is not enough under this section to impose upon the issuer the
duty of dealing with the pledgee although it may constitute notice to the
issuer of a claim of ownership under Part 4.
Subsections (1) and (2) are permissive and do not require that the issuer
deal exclusively with the registered owner. It is free to require proof of
ownership before paying out dividends or the like if it chooses to. Barbato
v. Breeze Corporation, 128 N.J.L. 309, 26 A.2d 53 (1942).
3. This section does not operate to determine who is finally entitled to
exercise voting and other rights or to receive payments and distributions.
The parties are still free to incorporate their own arrangements as to these
matters in seller-purchaser agreements which will be definitive as between
them.
4. No change in existing state laws as to the liability of registered
owners for calls and assessments is here intended; nor is anything in this
section designed to estop a record holder from denying ownership when
assessments are levied if he is otherwise entitled to do so under state law.
See State ex rel. Squire v. Murfey, Blosson & Co., 131 Ohio St. 289, 2
N.E.2d 866 (1936); Willing v. Delaplaine, 23 F. Supp. 579 (1937).
5. No interference is intended with the common practice of closing the
transfer books or taking a record date for dividend, voting and other
purposes, as provided for in by-laws, characters and statutes.
South Carolina Reporter's Comments to the 1991 Amendment
The amendments are structured to provide secured parties with the same
rights without regard to whether the pledged collateral is a certificated or
uncertificated security. The revisions actually provide issuers and secured
parties with more clearly defined rights when dealing with uncertificated
securities. When a pledge of an uncertificated security is registered only
the registered pledgee can order the registration of a transfer, unless a
release of the pledge has been registered. The pledgee can exercise his or
her right to transfer in 3 ways: outright transfer, transfer subject to the
pledge, or transfer of the security interest to another secured party. These
proposed provisions put a party with a security interest in an uncertificated
security in roughly the same position as a secured party who has accepted a
pledge of a certificated security and retains possession of the
certificate.
The disparity between the registered pledgee of an uncertificated
security and the pledgee of a certificated share arises when the issuer issues
additional securities. The issuer delivers the certificate to the registered
owner of a certificated security, but either delivers certificates to the
registered pledgee of an uncertificated security (if the new securities are
certificated) or registers the new securities subject to the pledge (if the new
securities are uncertificated). This reaches a desirable result because the
secured party's interest is not diminished by stock splits and similar
events.
No change would be made in South Carolina law as to certificated
securities. With respect to uncertificated securities, the Initial Transaction
Statement does not work well as an analogue to the certificate. This
requires creation of liens by registration and leads to the result that a
pledged security simply cannot be transferred prior to release. This appears
to give protection to pledgees at least as good as that ensured by possession
of a certificate.
The uniform comments to the proposed revision emphasize that the
parties' agreement may specify who is entitled to vote, receive dividends,
and receive payments. The parties may make appropriate arrangements
between themselves to implement the agreement. An issuer will not be
affected by this type of agreement because it will be effective only between
the parties.
Because both issuers and pledgees are given significant protection by
the revisions proposed for uncertificated securities, the issuer can be fairly
confident that it will not be subject to liability for wrongful dealings with
the owner of an uncertificated security. The new revisions provide that the
registered pledgee receives all dividend payments, certificated shares issued
as a replacement for the uncertificated shares, and the like. An owner may
not obtain a registration of transfer from the issuer unless the owner has
first obtained a release from the registered pledgee.
Issuers may be subject to liability, however, when a pledgee does not
obtain possession of a certificated share or register the pledge with the
issuer. Although it would be impractical to implement the same type of
system for certificated shares as that proposed for uncertificated shares, the
Permanent Editorial Board has attempted to address the disparity by
suggesting the following guidelines for interpreting Section 8-207:
(1) A distribution to the registered owner of a security is
protected under Section 8-207(1) only if it is distributable to the
owners of all securities of the same issue.
(2) If the terms of a security require its surrender as a
condition of payment or exchange, a distribution to the registered
owner in payment or exchange is not protected under Section
8-207(1) unless the security is surrendered.
(3) Distributions to all the registered owners of a security,
the terms of which do not require the surrender thereof, are
protected under Section 8-207(a), regardless of the regularity,
amount, or nature of such distributions.
(4) A distribution to the registered owner that is protected
under Section 8-207(a) constitutes a defense against a claim to
such distribution by a person in possession of the security, even
if such person is a bona fide purchaser.
Section 36-8-208. Effect of signature of authenticating trustee, registrar,
or transfer agent.
(1) A person placing his signature upon a certificated security or an
initial transaction statement as authenticating trustee, registrar, transfer
agent, or the like, warrants to a purchaser for value of the certificated
security or a purchaser for value of an uncertificated security to whom the
initial transaction statement has been sent, if the purchaser is without notice
of the particular defect, that:
(a) the certificated security or initial transaction statement is genuine;
(b) his own participation in the issue or registration of the
transfer, pledge, or release of the security is within his capacity and within
the scope of the authority received by him from the issuer; and
(c) he has reasonable grounds to believe the security is in the form and
within the amount the issuer is authorized to issue.
(2) Unless otherwise agreed, a person by so placing his signature does
not assume responsibility for the validity of the security in other
respects.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. The warranties here stated express the current understanding and
prevailing case law as to the effect of the signatures of authenticating
trustees, transfer agents, and registrars. See Jarvis v. Manhattan Beach Co.,
148 N.Y. 652, 43 N.E. 68, 31 L.Ra. 776, 51 Am. St. Rep. 727 (1896).
Although it has generally been regarded as the particular obligation of the
transfer agent to determine whether securities are in proper forms as
provided by the by-laws and Articles of Incorporation, neither a registrar
nor an authenticating trustee should properly place a signature upon a
certificate or transaction statement without determining whether it is at
least regular on its face. The obligations of these parties in this respect
have therefore been made explicit in terms of due care. See Feldmeier v.
Mortgage Securities, Inc., 34 Cal. app. 2d 201, 93 P.2d 593 (1939).
2. Those cases which hold that an authenticating trustee is not liable for
any defect in the mortgage or property which secures the bond or for any
fraudulent misrepresentations made by the issuer are not here affected since
these matters do not involve the genuineness or proper form of the security.
Ainsa v. Mercantile Trust Co., 174 Cal. 504, 163 P. 898 (1917);
Tschetinian v. City Trust Co., 186 N.Y. 432, 79 N.E. 401 (1906); Davidge
v. Guardian Trust Co. of New York, 203 N.Y. 331, 96 N.E. 751 (1911).
3. The charter or an applicable statute may affect the capacity of a bank
or other corporation undertaking to act as an authenticating trustee,
registrar or transfer agent. See, for example, the Federal Reserve Act
(U.S.C.A., Title 12, Banks and Banking, Section 248) under which the
Board of Governors of the Federal Reserve Bank is authorized to grant
special permits to National Banks permitting them to act as trustees. Such
corporations are therefore held to certify as to their legal capacity to act as
well as to their authority.
4. Authenticating trustees, registrars and transfer agents have normally
been held liable for an issue in excess of the authorized amount. Jarvis v.
Manhattan Beach Co., supra; Mullen v. Eastern Trust & Banking Co.,
108 Me. 498, 81 A. 948 (1911). In imposing upon these parties a duty of
due care with respect to the amount they are authorized to help issue, this
section does not necessarily validate the security, but merely holds persons
responsible for the excess issue liable in damages for any loss suffered by
the purchaser.
5. Aside from questions of genuineness and excess issued these parties
are not held to certify as to the validity of the security unless they
specifically undertake to do so. The case law which has recognized a
unique responsibility on the transfer agent's part to testify as to the validity
of any security which it countersigns is rejected.
6. This provision does not prevent a transfer agent or issuer from
agreeing with a registrar of stock to protect the registrar in respect of the
genuineness and proper form of a certificated security or initial transaction
statement signed by the issuer or the transfer agent or both. Nor does it
interfere with proper indemnity arrangements between the issuer and
trustees, transfer agents, registrars and the like.
7. An unauthorized signature is a signature for purposes of this section
if and only if it is made effective by Section 8-205.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed revision extends the warranties of certain third party
signatories to the addressee of an Initial Transaction Statement. This would
make no change in South Carolina law relating to certificated securities,
and, as to uncertificated securities, treats the Initial Transaction Statement
as the analogue of the certificate for purposes of this statute.
Part 3
Purchase
Section 36-8-301. Rights acquired by purchaser.
(1) Upon transfer of a security to a purchaser (Section 36-8-313), the
purchaser acquires the rights in the security which his transferor had or had
actual authority to convey unless the purchaser's rights are limited by
subsection (4) of Section 36-8-302.
(2) A transferee of a limited interest acquires rights only to the extent
of the interest transferred. The creation or release of a security interest in a
security is the transfer of a limited interest in that security.
Amended Official Comment
Prior Uniform Statute Provision:
Section 58, Uniform Negotiable Instruments Law.
Purposes:
1. The concept of transfer is defined only by example (Section 8-313),
but it clearly involves the passing of rights in the security from one party to
another. Subsection (1) states the "shelter" provision of the
Negotiable Instruments Law--upon transfer of the security a purchaser
acquires the rights his transferor had. There are at least three exceptions to
this basic rule, two of which limit the purchaser's rights and one of which
expands them. First, subsection (1) explicitly makes its rule subject to
Section 8-302(4), which prevents certain transferees from being freed of the
taint of earlier fraud or notice. The second exception, stated in subsection
(2), is that there may be a transfer explicitly limited to an interest less than
the transferor's entire interest. Finally Section 8-302 provides that a bona
fide purchaser takes certain rights of his own account, regardless of the
rights his transferor had.
2. Transfers by operation of law are not intended to be covered by this
Article. For example, transfers from decedent to administrator, from ward
to guardian, and from bankrupt to trustee in bankruptcy are governed by
other law as to both the time they occur and the substance of the transfer.
Subsequent delivery and registration on the issuer's record merely confirm
what has already happened.
South Carolina Reporter's Comments to the 1991 Amendment
Section 36-8-301 states the "shelter principle", that a
transferror can transfer no greater rights than those the transferror held in
the security, subject to the provisions of Section 36-8-302 concerning bona
fide purchasers. No change is made in current law with respect to
certificated securities, and the same principles are applied to uncertificated
securities.
The word "delivery" in the pre-amendment statute has been
changed to "transfer", to accommodate methods for transferring
uncertificated securities.
The new last sentence clarifies the existing law, that the creation or
release of a security interest is a transfer, although of a limited interest, and
comes within the statute's coverage.
Section 36-8-302. `Bona fide purchaser'; `adverse claim'; title acquired
by bona fide purchaser.
(1) A `bona fide purchaser' is a purchaser for value in good faith and
without notice of any adverse claim:
(a) who takes delivery of a certificated security in bearer form or in
registered form, issued or indorsed to him or in blank;
(b) to whom the transfer, pledge, or release of an uncertificated
security is registered on the books of the issuer; or
(c) to whom a security is transferred under the provisions of paragraph
(c), (d)(i), or (g) of subsection (1) of Section 36-8-313.
(2) `Adverse claim' includes a claim that a transfer was or would be
wrongful or that a particular adverse person is the owner of or has an
interest in the security.
(3) A bona fide purchaser in addition to acquiring the rights of a
purchaser (Section 36-8-301) also acquires his interest in the security free
of any adverse claim.
(4) Notwithstanding subsection (1) of Section 36-8-301, the transferee
of a particular certificated security who has been a party to any fraud or
illegality affecting the security, or who as a prior holder of that certificated
security had notice of an adverse claim, cannot improve his position by
taking from a bona fide purchaser.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 52, 57, 58 and 59, Uniform Negotiable Instruments Law;
Section 7, Uniform Stock Transfer Act.
Purposes:
1. Any purchaser for value of a security without notice of a particular
defect may take free of the issuer's defense based on that defect, but only a
purchaser taking by a formally perfect transfer, for value and without notice
of any adverse claim, may take free of adverse claims. The "bona
fide purchaser" here dealt with is the person taking free of adverse
claims. His rights against the issuer are determined by Part 2 of this Article
and his rights to registration are determined by Part 4.
2. Not every form of transfer can confer upon the purchaser the status
of bona fide purchaser. In particular, transfers effected through the
acknowledgement of a bailee who is not a financial intermediary or through
the acknowledgement of a financial intermediary who holds for the
transferee a proportionate interest in a fungible bulk do not confer bona fide
purchaser status. However, the transferee can acquire all the rights of a
bona fide purchaser status. However, the transferee can acquire all the
rights of a bona fide purchaser through the "shelter" provisions
of Section 8-301(1) if the transferor had those rights.
3. Protection is extended to bona fide purchasers of all investment
securities, whether such securities were considered negotiable or
non-negotiable under the prior law. This is the result sought by many cases
which have resolved doubts in favor of negotiability despite terms in bonds
which militated against their negotiability under the provisions of the
Negotiable Instruments Law. See Paxton v. Miller, 102 Ind. Ap. 511, 200
N.E. 87 (1936); Scott v. Platt, 171 Or. 379, 135 P.2d 769 (1943). Such
cases as U.S. Gypsum v. Faroll, 296 Ill. App. 47, 15 N.E.2d 888 (1938),
protecting bona fide purchasers of stock certificates under the provisions of
the Stock Transfer Act are adopted and approved.
4. An adverse claim may be either legal or equitable, e.g., that the
claimant is the beneficial owner of a security, though not the legal owner of
it, or that it has been or is proposed to be transferred in breach of trust or a
valid restriction on transfer (See Section 8-204 and Comment). Note that
there may be claims of ownership that are not "adverse" -- e.g.,
the claim of a principal against his agent including that of a customer
against his broker (Section 8-303). The agent's knowledge of his principal's
claim thus cannot defeat the agent's right to be a bona fide purchaser under
this section.
5. Subsection (4) provides an exception to the "shelter"
provisions of Section 8-301(1), but applies only to a transferee of a
certificated security transferee of a certificated security who as a prior
holder of the particular security had notice of adverse claims or who has
been a party to fraud or illegality affecting the particular security.
South Carolina Reporter's Comments to the 1991 Amendment
This section defines "bona fide purchaser" and
"adverse claim", making no change in existing law as to
certificated securities. It applies the definition of "adverse
claim" to uncertificated securities, and, as to uncertificated securities,
makes the time of registration the time for testing knowledge of adverse
claims. For these purposes, transferees of uncertificated securities are
charged with information contained in the initial transaction statement sent
to them upon registration of transfer; see Section 36-8-303. For purposes
of certainty they may wish to use such devices as escrow arrangements.
Transferees of uncertificated securities may also request that their
transferor request a written Statement from the issuer (see subsections (6)
and (7) of Section 36-4-408) before completing the transaction. This
discrepancy between transferees of certificated and uncertificated securities
in obtaining Bona Fide Purchaser requirements has been described as being
"of limited practical significance." PEBC Comments, 2 U.L.A.
at 291 (Supp. 1989).
New subsection (1)(c) clarifies that certain transferees, who are defined
by referenced provisions of 8-313, are "holders" and therefore
can be bona fide purchasers under this section.
Section 36-8-303. `Broker'.
`Broker' means a person engaged for all or part of his time in the
business of buying and selling securities, who in the transaction concerned
acts for, buys a security from, or sells a security to a customer. Nothing in
this chapter determines the capacity in which a person acts for purposes of
any other statute or rule to which the person is subject.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
This section defines "broker" for purposes of this Article in
terms of function in this particular transaction. The term is applicable to
the person performing the function. The differentiation under the Securities
Exchange Act of 1934 between "broker" and
"dealer" is of no significance under this Article. This and
similar distinctions are preserved for other purposes by the last sentence of
the section.
South Carolina Reporter's Comments to the 1991 Amendment
Only minor grammatical changes have been proposed for this
section.
Section 36-8-304. Notice to purchaser of adverse claims.
(1) A purchaser (including a broker for the seller or buyer, but
excluding an intermediary bank) of a certificated security is charged with
notice of adverse claims if:
(a) the security, whether in bearer or registered form, has been
indorsed `for collection' or `for surrender' or for some other purpose not
involving transfer; or
(b) the security is in bearer form and has on it an unambiguous
statement that it is the property of a person other than the transferor. The
mere writing of a name on a security is not such a statement.
(2) A purchaser (including a broker for the seller or buyer, but
excluding an intermediary bank) to whom the transfer, pledge, or release of
an uncertificated security is registered, is charged with notice of adverse
claims as to which the issuer has a duty under subsection (4) of Section
36-8-403 at the time of registration and which are noted in the initial
transaction statement sent to the purchaser or, if his interest is transferred to
him other than by registration of transfer, pledge, or release, the initial
transaction statement sent to the registered owner or the registered pledgee.
(3) The fact that the purchaser (including a broker for the seller or
buyer) of a certificated or uncertificated security has notice that the security
is held for a third person or is registered in the name of or indorsed by a
fiduciary does not create a duty of inquiry into the rightfulness of the
transfer or constitute constructive notice of adverse claims. If, however,
the purchaser (excluding an intermediary bank) has knowledge that the
proceeds are being used or that the transaction is for the individual benefit
of the fiduciary or otherwise in breach of duty, the purchaser is charged
with notice of adverse claims.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 37, 56, Uniform Negotiable Instruments Law.
Purposes:
1. Section 8-302 defines "bona fide purchaser" in terms of
three distinct elements, "value," "good faith", and
lack of "notice of any adverse claim". This section deals only
with notice and presents specific situations in which a purchaser is charged
with notice of adverse claims as a matter of law. The listing is not
exhaustive and does not exclude other situations in which the trier of the
facts may determine that similar notice has been given. For example,
receipt of notification that the particular security has been lost or stolen
raises the question of notice "forgotten" in good faith.
Kentucky Rock Asphalt v. Mazza's Admr., 264 Ky. 158, 94 S.W.2d 316
(1936); Graham v. White-Phillips Co., 296 U.S. 27, 56 S. Ct. 21, 80 L. Ed.
20, 102 A.L.R. 24 (1935) but cf., First National Bank of Odessa v. Fazzari,
10 N.Y.2d 394, 179 N.E.2d 493 (1961). Also suspicious characteristics of
the transaction may give a purchaser (particularly a commercially
sophisticated purchaser such as a broker) "reason to know."
U.S. Fidelity & Guaranty Co. v. Goetz, 285 N.Y. 74, 32 N.E.2d 798
(1941); Morris v. Muir, 111 Misc. 739, 180 N.Y.S. 913 (1920).
2. Subsection (1)(a) refers to situations in which a certificated security
indorsed "for collection" or "for surrender" is being
offered for transfer and follows in effect Section 37 of the Negotiable
Instruments Law, which provides that subsequent indorsees acquire only
the title of the first indorsee under a restrictive indorsement.
3. A purchaser of an uncertificated security is charged with notice of
adverse claims noted in the initial transaction statement. If the security is
transferred to him other than by registration on the issuer's records, he is
charged with notice of claims noted in the statement sent to the registered
owner (or to the registered pledgee if his rights were transferred by notice
to or acknowledgement from a registered pledgee).
Situations may arise in which the lissauer receives notice of an adverse
claim after registration of transfer, pledge or release but before the initial
transaction statement is prepared and sent. The issuer ought not to note
those claims on the statement. See Section 8-408(1)(d), (2)(d) and (3)(d).
If the issuer should mistakenly note such a claim, subsection (2) does not
charge the purchaser with notice.
4. In subsection (3) some situations involving purchaser from one
described or identifiable as a fiduciary are explicitly provided for, again
imposing an objective standard, while leaving the door open to other
circumstances which may constitute notice of adverse claims. Mere notice
of the existence of the fiduciary relation is not enough in itself to prevent
bona fide purchase, and the purchaser is free to take the security on the
assumption that the fiduciary is acting properly. The fact that the security
may be transferred to the individual account of the fiduciary or that the
proceeds of the transaction are paid into that account in cash would not be
sufficient to charge the purchaser with notice of potential breach of
fiduciary obligation but as in State Bank of Binghamton v. Bache, 162
Misc. 128, 293 N.Y.S. 667 (1937) knowledge that the proceeds are being
applied to the personal indebtedness of the fiduciary will charge the
purchase with such notice.
5. The notice here involved is to purchasers. A broker acting as such
(Section 8-303) is treated in this section as a purchaser though he may not
be a purchaser under the definitions of that term (Section 1-201(33)). On
the other hand, a bank, stockbroker or other intermediary who, in the
particular transaction acts purely in that capacity, is not a purchaser. Cf.
subsections (3) and (4) of Section 8-306 and Comments 3 and 4 to that
Section. Subsection (3) follows the policy of Section 4 of the Uniform
Fiduciaries Act and of Section 3-304(2) with respect to commercial paper.
Compare Section 7(a) of the Uniform Act for Simplification of Fiduciary
Security Transfers.
The fact that the broker is expressly mentioned in this section carries no
negative implication in other sections in which merely the word
"purchaser" is used.
An issuer is not a purchaser. Its duty of inquiry is set forth in Part
4.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed section makes no change in the current law with respect
to certificated securities. A new subsection has been added to provide an
analogous method of notice of adverse claims for uncertificated securities.
The purchaser of an uncertificated security is charged with notice of an
adverse claim if the claim appears or is referred to in the Initial Transaction
Statement (see Section 36-8-403(4)). The rules of subsection (3), which
states that a purchaser's knowledge that the seller holds for a third party
does not constitute notice of an adverse claim, has been extended to apply
equally to certificated and uncertificated securities.
Section 36-8-305. Staleness as notice of adverse claims.
An act or event that creates a right to immediate performance of the
principal obligation represented by a certificated security or sets a date on
or after which the certificated security is to be presented or surrendered for
redemption or exchange does not itself constitute any notice of adverse
claims except in the case of a transfer:
(a) after one year from any date set for presentment or surrender for
redemption or exchange; or
(b) after six months from any date set for payment of money
against presentation or surrender of the security if funds are available for
payment on that date.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 52(2), 53, Uniform Negotiable Instruments Law.
Purposes:
1. The fact of "staleness" is viewed as notice of certain
defects after the lapse of stated periods, but the maturity of the security
does not operate automatically to affect holders' rights. The periods of time
here stated are shorter than those appearing in the provisions of this Article
on staleness as notice of defects or defenses (Section 8-203) since a
purchaser who takes a security after funds or other securities are available
for its redemption has more reason to suspect claims of ownership than
issuer's defenses. An owner will normally turn in his security rather than
transfer it at such a time.
Of itself, a default never constitutes notice of a possible adverse claim.
To provide otherwise would not tend to drive defaulted securities home and
would serve only to disrupt current financial markets where many defaulted
securities are actively traded.
2. The owner is provided with a means of protecting himself while his
security is being sent in for redemption or exchange. He may endorse it
"for collection" or "for surrender," and this
constitutes notice of his claims (Section 8-304). The present section does
not come into operation unless the time period here stated has elapsed.
3. Unpaid or overdue coupons attached to a bond do not bring it within
the operation of this section, although under some circumstances they may
give the purchaser "reason to know" of claims of ownership.
Georgia Granite R. Co. v. Miller, 144 Ga. 665, 87 S.E. 897 (1916).
4. This section has been made expressly applicable to certificated
securities only, since the transfer of an uncertificated security normally will
involve communication with the issuer and a consequent opportunity for
the issuer to give the transferee effective notice of adverse claims.
South Carolina Reporter's Comments to the 1991 Amendment
This section applies only to certificated securities and makes no change
in the current law. Because transfer of uncertificated securities requires
communication with the issuer or registrar, the transferee will receive
notice of any claims from the issuer or registrar. A collateral system of
notice is therefore not necessary for uncertificated securities.
Section 36-8-306. Warranties on presentment and transfer of
certificated securities; warranties of originators of instructions.
(1) A person who presents a certificated security for registration of
transfer or for payment or exchange warrants to the issuer that he is entitled
to the registration, payment or exchange. However, a purchaser for value
without notice of adverse claims who receives a new, reissued, or
reregistered certificated security on registration of transfer or receives an
initial transaction statement confirming the registration of transfer of an
equivalent uncertificated security to him warrants only that he has no
knowledge of any unauthorized signature (Section 36-8-311) in a necessary
indorsement.
(2) A person by transferring a certificated security to a purchaser for
value warrants only that:
(a) his transfer is effective and rightful;
(b) the security is genuine and has not been materially altered;
and
(c) he knows of no fact which might impair the validity of the
security.
(3) If a certificated security is delivered by an intermediary known to
be entrusted with delivery of the security on behalf of another or with
collection of a draft or other claim against delivery, the intermediary by
delivery warrants only his own good faith and authority, even though he
has purchased or made advances against the claim to be collected against
the delivery.
(4) A pledgee or other holder for security who redelivers a certificated
security received, or after payment and on order of the debtor delivers that
security to a third person, makes only the warranties of an intermediary
under subsection (3).
(5) A person who originates an instruction warrants to the issuer
that:
(a) he is an appropriate person to originate the instruction; and
(b) at the time the instruction is presented to the issuer he will be
entitled to the registration of transfer, pledge, or release.
(6) A person who originates an instruction warrants to any person
specially guaranteeing his signature (subsection (3) of Section 36-8-312)
that:
(a) he is an appropriate person to originate the instruction; and
(b) at the time the instruction is presented to the issuer
(i) he will be entitled to the registration of transfer, pledge, or
release; and
(ii) the transfer, pledge, or release requested in the instruction
will be registered by the issuer free from all liens, security interests,
restrictions, and claims other than those specified in the instruction.
(7) A person who originates an instruction warrants to a purchaser for
value and to any person guaranteeing the instruction (subsection (6) of
Section 36-8-312) that:
(a) he is an appropriate person to originate the instruction; and
(b) the uncertificated security referred to therein is valid; and
(c) at the time the instruction is presented to the issuer
(i) he will be entitled to the registration of transfer, pledge, or
release; and
(ii) the transfer, pledge, or release requested in the instruction
will be registered by the issuer free from all liens, security interests,
restrictions, and claims other than those specified in the instruction; and
(iii) the requested transfer, pledge, or release is rightful.
(8) If a secured party is the registered pledgee or the registered owner
of an uncertificated security, a person who originates an instruction of
release or transfer to the debtor or, after payment and on order of the
debtor, a transfer instruction to a third person, warrants to the debtor or the
third person only that he is an appropriate person to originate the
instruction and, at the time the instruction is presented to the issuer, the
transferor will be entitled to the registration of release or transfer. If a
transfer instruction to a third person who is a purchaser for value is
originated on order of the debtor, the debtor makes to the purchaser the
warranties of paragraphs (b), (c)(ii) and (c)(iii) of subsection (7).
(9) A person who transfers an uncertificated security to a purchaser for
value and does not originate an instruction in connection with the transfer
warrants only that:
(a) his transfer is effective and rightful; and
(b) the uncertificated security is valid.
(10) A broker gives to his customer and to the issuer and a purchaser
the applicable warranties provided in this section and has the rights and
privileges of a purchaser under this section. The warranties of and in favor
of the broker, acting as an agent, are in addition to applicable warranties
given by and in favor of his customer.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 65, 66, 67, 69, Uniform Negotiable Instruments Law; Sections
11, 12, Uniform Stock Transfer Act.
Purposes:
1. The warranties with respect to certificated securities have been
recognized by the prevailing case law as well as by the prior Acts cited.
See Boston Tow Boat Co. v. Medford Nat. Bank, 232 Mass. 38, 121 N.E.
491 (1919); Burtch v. Child, Hulswit & Co., 207 Mich. 205, 174 N.W.
170 (1919).
Usual estoppel principles apply with respect to transfers of both
certificated and uncertificated securities whenever the purchaser has
knowledge of the defect, and these warranties will not be effective in such a
case. In addition, under Section 1-102(3) these provisions apply only
"unless otherwise agreed" and the parties are free to enter into
any express agreement they desire where both are aware of possible
defects.
2. The second sentence of subsection (1) limits the warranties made by
a bona fide purchaser whose presentation of a certificated security is
defective in some way but who nonetheless is given a reissued certificated
security or an initial transaction statement confirming the transfer of an
uncertificated security to him. The effect is to deny the issuer a remedy
against such a person unless at the time of presentment the person had
knowledge of an unauthorized signature in a necessary indorsement. The
issuer can protect itself by refusing to make the transfer or, if it registers the
transfer before it discovers the defect, by pursuing its remedy against a
signature guarantor.
3. Subsections (3) and (4) are designed to eliminate all substantive
warranties in the case of deliveries of certificated securities by
intermediaries and pledgees. Such parties deal primarily with the draft or
other claim and, having no access to direct knowledge about the security,
they cannot be held to warrant its genuineness or validity. Subsection (8)
similarly limits the warranties given by a secured party (or its agent)
originating an instruction at the behest of the debtor.
4. The so-called "stock-broker" normally functions as a
broker (see definition of "Broker", Section 8-303) and on a few
occasions another institution such as a bank may function as a broker--e.g.,
for a standard broker's commission or similar compensation. In those
situations the warranties, rights and privileges of the broker are spelled out
in subsection (10). Nevertheless either the so-called
"stock-broker" or the bank can qualify for the protection given
by subsections (3) and (4) to an "intermediary" where in the
particular transaction it does not function as a broker -- e.g., when it
transfers securities on a customer's instructions, either without charge or for
a nominal handling charge.
5. Subsection (5) establishes the rights of the issuer against one who
originates an instruction (Section 8-308(4)) that is fraudulent or otherwise
improper. The issuer's loss -- which necessitates the remedy -- arises only
if the issuer registers the requested transfer, pledge or release and is
subjected to liability for improper registration. See Section 8-404(3).
6. Subsection (6) sets forth the warranties made by the instruction
originator to a person specially guaranteeing his signature. These
warranties mirror those made by the special signature guarantor.
7. Subsection (7) sets forth the warranties made to a purchaser for
value by one who originates an instruction. These warranties are quite
similar to those made by one transferring a certificated security, subsection
(2), the principal difference being the absolute warranty of validity. If upon
receipt of the instruction the issuer should dispute the validity of the
security, it seems proper to place the burden of proving validity upon the
transferor. Because the guarantor of an instruction makes an absolute
warranty of rightfulness, Section 8-312(6), he is given the benefit of a
similar warranty from the originator in subsection (7).
South Carolina Reporter's Comments to the 1991 Amendment
No change in the law relating to certificated securities is made by the
amendments to this section. With respect to uncertificated securities and in
their context of transfer, pledge and release, the amendments create a
system of warranties as closely analogous as possible to that relating to
certificated securities.
Uncertificated securities can be transferred and pledged, and pledges
released, only by instruction (Section 36-8-308(4)) to the issuer submitted
by an appropriate person (Section 36-8-308(7)). Accordingly, in
subsections (5)(a) and (b) the amendment creates new warranties, running
to the issuer from the person originating the instruction, that such person is
an appropriate person to originate the instruction and is entitled to the
action sought by the transfer. This permits issuers to rely on instructions
while placing the burden on the originator.
Those guaranteeing signatures on instructions will not have certificates
to inspect. Accordingly, the signing party is required, by new subsections
(6)(a) and (b), to warrant to the guaranteeing party that the signing party is
an appropriate person to execute the instruction and entitled to the action
requested in the instruction. New subsection (6)(c) requires the signing
party to warrant to the guaranteeing party that the security will be
registered free from claims not specified in the instruction. The warranties
running to guarantors are designed to protect guarantors in light of their
own warranties created by Section 36-8-312(3).
Warranties to purchasers and guarantors are found in subsection (7).
The person originating an instruction warrants to purchasers and guarantors
the appropriateness and entitlement found in subsections (5) and (6); that
all claims are specified in the instruction; and that the action requested in
the instruction is rightful and that the security is valid. The warranty of
validity of certificated securities is limited by the knowledge of the
warranting party. With respect to uncertificated securities, there is no such
limit on the transferror's warranty. Should the issuer dispute the validity of
a security upon receipt of an instruction, the transferror would bear the
burden of proving validity. This is appropriate in light of the transferror's
superior access to information concerning the status of an uncertificated
security, as opposed to a certificated one. Further, it is anticipated that
transferees, by means of escrow accounts or similar devices, will not part
with their money until after receiving an initial transfer statement from the
issuer.
Because the guarantor of an instruction warrants its rightfulness under
Section 36-8-312, guarantors are given the benefit of the warranties of
subsection (7).
New subsection (8) limits the warranties of the originators of
instructions relating to uncertificated securities when the originator is
acting for a pledgee of the security, who is either the registered owner or
registered pledgee. When such an instruction is for release of a pledge, for
transfer to the debtor or transfer after payment to a third person on the
debtor's order, the originator's warranties are limited in ways substantially
similar to those in which the warranties of the pledgee of a certificated
security are limited under subsection (4).
New subsection (9) addresses the transfer of an uncertificated security
by a transferror who does not originate an instruction in connection with
such transfer, such as (without limitation) a transferror who is neither the
registered owner nor the registered pledgee. Such a transferror's warranties
are limited as described in subsection (9).
Under both systems of warranties, a purchaser for value without notice
makes only limited warranties on presentation and is shielded from liability
against a former owner or pledgee. When secured parties deliver
certificated securities or originate transfer instructions, they also make only
limited warranties.
Section 36-8-307. Effect of delivery without indorsement; right to
compel indorsement.
If a certificated security in registered form has been delivered to a
purchaser without a necessary indorsement he may become a bona fide
purchaser only as of the time the indorsement is supplied; but against the
transferor, the transfer is complete upon delivery and the purchaser has a
specifically enforceable right to have any necessary indorsement
supplied.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 49, Uniform Negotiable Instruments Law; Section 9, Uniform
Stock Transfer Act.
Purposes:
1. As between the parties the transfer of a certificated security is made
complete upon delivery, but the transferee cannot become a bona fide
purchaser of the security until indorsement is made. The indorsement does
not operate retroactively, and notice may intervene between delivery and
indorsement so as to prevent the transferee from becoming a bona fide
purchaser. This Article rejects such cases as Bethea v. Floyd, 177 S.C. 521,
181 S.E. 721 (1935), certiorari denied, 296 U.S. 622, 56 S. Ct. 143, 80 L.
Ed. 442, holding that the indorsement of a note delivered prior to maturity
but indorsed thereafter took effect as of the date of delivery to permit the
purchaser to become a holder in due course. Although a purchaser taking
without a necessary indorsement may be subject to claims of ownership,
any issuer's defense of which he had no notice at the time of delivery will
be cut off, since the provisions of this Article protect all purchasers for
value without notice (Section 8-202).
2. The transferee's right to compel an indorsement where a certificated
security has been delivered with intent to transfer is recognized in the case
law and the Article of this Act on Documents of Title. See Coats v.
Guaranty Bank & Trust Co., 170 La. 871, 129 So. 513 (1930), and
Section 7-506 of this Act.
3. A proper indorsement is one of the requisites of transfer which a
purchaser of a certificated security has a right to obtain (Section 8-316). A
purchaser may not only compel an indorsement under that section but may
also recover for any reasonable expense incurred by the transferor's failure
to respond to the demand for an indorsement.
South Carolina Reporter's Comments to the 1991 Amendment
This section makes no change to a transferee's right to compel
indorsement or to the indorsement requirement for Bona Fide Purchaser
status. Language has been inserted to reflect that the section applies only to
certificated securities.
Section 36-8-308. Indorsements; instructions.
(1) An indorsement of a certificated security in registered form is
made when an appropriate person signs on it or on a separate document an
assignment or transfer of the security or a power to assign or transfer it or
his signature is written without more upon the back of the security.
(2) An indorsement may be in blank or special. An indorsement in
blank includes an indorsement to bearer. A special indorsement specifies
to whom the security is to be transferred, or who has power to transfer it. A
holder may convert a blank indorsement into a special indorsement.
(3) An indorsement purporting to be only part of a certificated security
representing units intended by the issuer to be separately transferable is
effective to the extent of the indorsement.
(4) An `instruction' is an order to the issuer of an uncertificated
security requesting that the transfer, pledge, or release from pledge of the
uncertificated security specified therein be registered.
(5) An instruction originated by an appropriate person is:
(a) a writing signed by an appropriate person; or
(b) a communication to the issuer in any form agreed upon in a
writing signed by the issuer and an appropriate person.
If an instruction has been originated by an appropriate person but is
incomplete in any other respect, any person may complete it as authorized
and the issuer may rely on it as completed even though it has been
completed incorrectly.
(6) `An appropriate person' in subsection (1) means the person
specified by the certificated security or by special indorsement to be
entitled to the security.
(7) `An appropriate person' in subsection (5) means:
(a) for an instruction to transfer or pledge an uncertificated security
which is then not subject to a registered pledge, the registered owner;
or
(b) for an instruction to transfer or release an uncertificated
security which is then subject to a registered pledge, the registered
pledgee.
(8) In addition to the persons designated in subsections (6) and (7), `an
appropriate person' in subsections (1) and (5) includes:
(a) if the person so designated is described as a fiduciary but is no
longer serving in the described capacity, either that person or his successor;
(b) if the persons designated are described as more than one
person as fiduciaries and one or more are no longer serving in the described
capacity, the remaining fiduciary or fiduciaries, whether or not a successor
has been appointed or qualified;
(c) if the person so designated is an individual and is without capacity
to act by virtue of death, incompetence, infancy, or otherwise, his executor,
administrator, guardian, or like fiduciary;
(d) if the persons designated are described as more than one
person as tenants by the entirety or with right of survivorship and by reason
of death all cannot sign, the survivor or survivors;
(e) a person having power to sign under applicable law or controlling
instrument; and
(f) to the extent that the person designated or any of the foregoing
persons may act through an agent, his authorized agent.
(9) Unless otherwise agreed, the indorser of a certificated security by
his indorsement or the originator of an instruction by his origination
assumes no obligation that the security will be honored by the issuer but
only the obligations provided in Section 36-8-306.
(10) Whether the person signing is appropriate is determined as of the
date of signing and an indorsement made by or an instruction originated by
him does not become unauthorized for the purposes of this chapter by
virtue of any subsequent change of circumstances.
(11) Failure of a fiduciary to comply with a controlling instrument or
with the law of the state having jurisdiction of the fiduciary relationship,
including any law requiring the fiduciary to obtain court approval of the
transfer, pledge, or release, does not render his indorsement or an
instruction originated by him unauthorized for the purposes of this
chapter.
Amended Official Comment
Prior Uniform Statutory Provision:
Sections 31 through 37, 64 through 69, Uniform Negotiable Instruments
Law; Section 20, Uniform Stock Transfer Act.
Purposes:
1. The simplified method of indorsing certificated securities set forth in
the Uniform Stock Transfer Act is continued in subsections (1) and (2).
Although more than one special indorsement on a given certificated
security is here made possible, the desire for dividends or interest, as the
case may be, should operate to bring the security home for registration of
transfer within a reasonable period of time. The usual form of assignment
which appears in the back of a stock certificate or in a separate
"power" may be filled up either in the form of an assignment, a
power of attorney to transfer, or both. If it is not filled up at all but merely
signed, the indorsement is in blank; if filled up either as an assignment or as
a power of attorney to transfer, the indorsement is special.
2. Subsection (3) recognizes, in contradistinction to the rule under the
Uniform Negotiable Instruments Law, the validity of a "partial"
indorsement of a certificated security -- e.g., as to fifty shares of the one
hundred represented by a single certificate. The rights of a transferee under
a partial indorsement to the status of a bona fide purchaser are left to the
case law.
3. Subsections (4) and (5) together indicate that an instruction is an
order from an "appropriate person" (subsection (7)) to the
issuer demanding registration of some form of transfer of an uncertificated
security. Functionally, presentation of an instruction is quite similar to the
presentation of an indorsed certificate of re-registration. The instruction
may be in the form of a writing signed by an appropriate person or in any
other form agreed upon in writing by the issuer and an appropriate person.
Allowing nonwritten forms of instructions will permit the development and
employment of means of transmitting instructions electronically.
When a person originates an instruction in which he leaves a blank and
the blank later is completed, subsection (5) gives the issuer the same rights
it would have had against the originating person had that person completed
the blank himself. This is true regardless of whether the person completing
the instruction had authority to complete it. Compare Section 8-206 and its
Comment, dealing with blanks left upon issue.
4. Subsections (6) and (7) give basic rules for determining who is an
appropriate person to indorse a certificated security or to originate a
transfer instruction for an uncertificated security. Subsection (8) defines
the various situations in which persons other than those designated in
subsections (6) and (7) will also be "appropriate persons." The
provisions are not mutually exclusive; for example, the same certificated
security may be effectively indorsed either by the registered owner under
subsection (6) or by his agent under (8)(f). Paragraph (8)(a) is made
explicitly alternative to make it clear that there is no conflict with
paragraph (3)(a) of Section 8-403, permitting the issuer to rely on the
continued power of a fiduciary to act where he is the registered owner and
the issuer has not received written notice to the contrary. Similar protection
is given to other persons dealing with the security. See also the comment to
Section 8-404.
Paragraphs (e) and (f) in particular are comprehensive. For example,
where a "small estate statute" permits a widow to transfer a
decedent's securities without administration proceedings, she would be
"a person having power to sign under applicable law."
Similarly, in the usual partnership case, the signature of a partner would be
that of "a person having power to sign under ... [a] ... controlling
instrument."
Indorsement or origination by "an appropriate person" is
included in the scope of the guarantee of signature (Section 8-312). It is
prerequisite to the issuer's duty to register a transfer (Section 8-401) and to
his exoneration from liability for improper registration (Section 8-404).
5. Subsection (9) makes clear that the indorser of a certificated security
and the originator of an instruction do not warrant that the issuer will honor
the underlying obligation. In view of the nature of investment securities
and the circumstances under which they are normally transferred, a
transferor cannot be held to warrant as to the issuer's actions. As a
transferor he, of course, remains liable for breach of the warranties set forth
in this Article (Section 8-306).
6. Subsection (10) of this section makes the indorsement or instruction
speak as of the date of signing. Section 8-312 on guaranty of signature and
Section 8-402 on assurance that indorsements and instructions are effective
apply the same reasoning. Thus, the signatures on a security indorsed by A
during his lifetime or on behalf of X corporation by Y as president during
his incumbency do not become "unauthorized" (Section 8-311)
because A dies or Y is replaced as president by Z. Authority to deliver a
certificated security and thus to complete the transfer is not covered by this
section. Subsection (11) supplements Section 8-403(3)(b) by making it
clear that certain matters go to rightfulness of the transfer rather than to the
validity of the indorsement or instruction. An example is the failure of a
duly appointed guardian to obtain a required court approval of the transfer.
Such a guardian is an "appropriate person" under paragraph
(8)(c) of this section, and his indorsement may be effective even though,
e.g., a required court order is not obtained.
South Carolina Reporter's Comments to the 1991 Amendment
This section is closely related to Section 36-8-306, which creates
systems for transfers of certificated and uncertificated securities. The
amendment to Section 36-8-308 is designed to permit, as far as possible,
reliance on the same documentation and evidence relating to registration
under both systems.
Essential to the system of transfer of certificated securities are the
concepts of "indorsement" and "appropriate
person". Section 36-8-308 makes no change in the concept of
"indorsement", and no change in the concept of
"appropriate person" as it applies to certificated securities.
Essential to the system of transfer of uncertificated securities are the
concepts of "instruction" and "appropriate person".
An "instruction" is the order for action which substitutes, in the
case of an uncertificated security, for the absence of an instrument.
Subsection (4) defines "instruction", and provides that
instructions may be used to order registrations of transfer, pledge and
release of pledge. Subsection (5) permits the parties to agree in a signed
writing that instructions may be given in any manner. Subsection (5) also
provides that blanks left in an instruction originated by an appropriate
person may be completed by any person to the effect authorized by the
issuer.
Subsection (7) defines "appropriate person" as applied to
uncertificated securities. As to uncertificated securities not subject to a
registered pledge, the appropriate person is the registered owner, who may
originate an instruction either to transfer or to pledge. When the
uncertificated security is subject to a registered pledge, only the registered
pledgee may originate an instruction to register either a transfer or a
release. (There can be only one registered pledgee. See Section
36-8-108.)
In addition to the persons designated in subsections (1) and (5) as
"appropriate" to initiate instructions, subsection (8) carries over
from prior law a list of alternative "appropriate persons",
unchanged except as necessary to make them applicable to both certificated
and uncertificated securities.
Subsections (9), (10) and (11) are changed only as necessary to add the
concept of uncertificated securities, with the exception of the final phrase
of subsection (9). This phrase was added to make clear that a transferror of
a certificated security and the originator of an instruction relating to an
uncertificated security do not, unless otherwise agreed, warrant that the
issuer will honor their orders to register the transaction, nor do they become
sureties, in effect, of the issuer's duties beyond the duty to register, such as
the duty to pay interest and principal.
Section 36-8-309. Effect of indorsement without delivery.
An indorsement of a certificated security, whether special or in blank,
does not constitute a transfer until delivery of the certificated security on
which it appears or, if the indorsement is on a separate document, until
delivery of both the document and the certificated security.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 30, Uniform Negotiable Instruments Law; Sections 1, 10,
Uniform Stock Transfer Act.
Purposes:
1. There must be a voluntary parting with control in order to effect a
valid transfer of a certificated security as between the parties. Levey v.
Nason, 279 Mass. 268, 181 N.E. 193 (1932), and National Surety Co. v.
Indemnity Insurance Co. of North America, 237 App. Div. 485, 261 N.Y.S.
605 (1933).
2. The provision in Section 10 of the Uniform Stock Transfer Act that
an attempted transfer without delivery amounts to a promise to transfer is
here omitted. Even under the prior Act the effect of such a promise was left
to the applicable law of contracts, and this Article by making no reference
to such situations intends to achieve a similar result.
With respect to delivery there is no counterpart to Section 8-307 on
right to compel indorsement, such as is envisaged in Johnson v. Johnson,
300 Mass. 24, 13 N.E.2d 788 (1938), where the transferee under a written
assignment was given the right to compel a transfer of the certificate.
South Carolina Reporter's Comments to the 1991 Amendment
This section makes no change to the current law, which provides that
indorsement alone does not constitute transfer. Language has been inserted
to reflect that the section applies only to certificated securities.
Section 36-8-310. Indorsement of certificated security in bearer
form.
An indorsement of a certificated security in bearer form may give notice
of adverse claims (Section 36-8-304) but does not otherwise affect any
right to registration the holder possesses.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 40, Uniform Negotiable Instruments Law.
Purposes:
1. The concept of indorsement applies only to registered certificated
securities, and a purported indorsement of bearer paper is normally of no
effect.
An indorsement "for collection," "for surrender"
or the like, charges a purchaser with notice of adverse claims (Section
8-304(1)(a)) but does not operate beyond this to interfere with any right the
holder may otherwise possess to have the security registered in his
name.
2. The provisions of Section 40 of the Negotiable Instruments Law as
to the liability of special indorsers of bearer instruments have no
applicability here since this Article negates the liability of indorsers as such
upon the issuer's obligation (Section 8-308(9)).
South Carolina Reporter's Comments to the 1991 Amendment
This section makes no change to the effect of an indorsement in bearer
form placed on a certificated security. Language has been inserted to
reflect that the section applies only to certificated securities.
Section 36-8-311. Effect of unauthorized indorsement or
instruction.
Unless the owner or pledgee has ratified an unauthorized indorsement or
instruction or is otherwise precluded from asserting its ineffectiveness:
(a) he may assert its ineffectiveness against the issuer or any
purchaser, other than a purchaser for value and without notice of adverse
claims, who has in good faith received a new, reissued, or reregistered
certificated security on registration of transfer or received an initial
transaction statement confirming the registration of transfer, pledge, or
release of an equivalent uncertificated security to him; and
(b) an issuer who registers the transfer of a certificated security
upon the unauthorized indorsement or who registers the transfer, pledge, or
release of an uncertificated security upon the unauthorized instruction is
subject to liability for improper registration (Section 36-8-404).
Amended Official Comment
Prior Uniform Statutory Provision:
Section 23, Uniform Negotiable Instruments Law.
Purposes:
1. Most present day security purchases are made through brokers. The
purchaser who normally receives and sees only a certificated security
registered in his own name or an initial transaction statement addressed to
him cannot realistically be held to have notice of or to have relied upon a
forged or unauthorized indorsement on the original security transferred or
upon the unauthorized instruction. A good faith purchaser who has
received an initial transaction statement or a new, reissued or re-registered
certificate is therefore protected. Compare Telegraph Co. v. Davenport, 97
U.S. 369, 24 L. Ed. 1047 (1878). That line of cases which has refused to
apply this rule where the new security is still in the hands of the party to
whom it was issued is expressly rejected. See Weniger v. Success Mining
Co., 227 F. 548 (C.C.A. Utah 1915); Hambleton v. Central Ohio R.R. Co.,
44 Md. 551 (1876).
2. The original owner of a security which has been transferred on the
basis of a forged indorsement or instruction is protected by the issuer's
liability for wrongful registration of transfer (Section 8-404). The issuer's
duty to issue a similar security to the owner unless an overissue would
result is made explicit in Part 4 of this Article, as is his obligation to
purchase available securities on the open market for transfer to the owner
where overissue is involved (see Section 8-104). Compare Prince v. Childs
Co., 23 F.2d 605 (1928); West v. Tintic Standard Mining Co., 71 Utah 158,
263 P. 490, 56 A.L.R. 1190 (1928). The issuer's recourse is against the
forger and the guarantor of the latter's signature, if any. But since the issuer
has a right to require a guarantee of signature, a bona fide purchaser
presenting the certificated security or instruction to the issuer should not be
held liable on any implied warranty of title theory unless he knew of the
forgery (Section 8-306).
3. A bond which has been registered as to principal and subsequently is
returned to bearer form is, at that point, a "new security" within
the meaning of this Section.
South Carolina Reporter's Comments to the 1991 Amendment
The proposed section makes no change to the effect of an unauthorized
indorsement of a certificated security. The proposal extends the rule to
unauthorized instructions ordering registration of pledge or transfer of an
uncertificated security. The bona fide purchaser who receives an initial
transaction statement receives the same protection as does the recipient of a
certificated security from the issuer. The proposed revision also extends
issuers' liability for improper registration to issuers who register a transfer,
pledge, or release after receiving unauthorized instructions.
Section 36-8-312. Effect of guaranteeing signature, indorsement, or
instruction.
(1) Any person guaranteeing a signature of an indorser of a certificated
security warrants that at the time of signing:
(a) the signature was genuine;
(b) the signer was an appropriate person to indorse (Section
36-8-308); and
(c) the signer had legal capacity to sign.
(2) Any person guaranteeing a signature of the originator of an
instruction warrants that at the time of signing:
(a) the signature was genuine;
(b) the signer was an appropriate person to originate the
instruction (Section 36-8-308) if the person specified in the instruction as
the registered owner or registered pledgee of the uncertificated security
was, in fact, the registered owner or registered pledgee of the security, as to
which fact the signature guarantor makes no warranty;
(c) the signer had legal capacity to sign; and
(d) the taxpayer identification number, if any, appearing on the
instruction as that of the registered owner or registered pledgee was the
taxpayer identification number of the signer or of the owner or pledgee for
whom the signer was acting.
(3) Any person specially guaranteeing the signature of the originator
of an instruction makes not only the warranties of a signature guarantor
(subsection (2)) but also warrants that at the time the instruction is
presented to the issuer:
(a) the person specified in the instruction as the registered owner or
registered pledgee of the uncertificated security will be the registered
owner or registered pledgee; and
(b) the transfer, pledge, or release of the uncertificated security
requested in the instruction will be registered by the issuer free from all
liens, security interests, restrictions, and claims other than those specified in
the instruction.
(4) The guarantor under subsections (1) and (2) or the special
guarantor under subsection (3) does not otherwise warrant the rightfulness
of the particular transfer, pledge, or release.
(5) Any person guaranteeing an indorsement of a certificated security
makes not only the warranties of a signature guarantor under subsection (1)
but also warrants the rightfulness of the particular transfer in all respects.
(6) Any person guaranteeing an instruction requesting the transfer,
pledge, or release of an uncertificated security makes not only the
warranties of a special signature guarantor under subsection (3) but also
warrants the rightfulness of the particular transfer, pledge, or release in all
respects.
(7) No issuer may require a special guarantee of signature (subsection
(3)), a guarantee of indorsement (subsection (5)) or a guarantee of
instruction (subsection (6)) as a condition to registration of transfer, pledge,
or release.
(8) The foregoing warranties are made to any person taking or dealing
with the security in reliance on the guarantee and the guarantor is liable to
the person for any loss resulting from breach of the warranties.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. In subsection (1) the commonly accepted liability of the guarantor of
the signature of the indorser of a certificated security, which includes a
warranty of the authority of the signer to sign for the holder as well as the
capacity of the signer to sign, is made express so that issuers and their
agents may have a clear understanding of the extent to which they may rely
upon such guarantees.
2. Consistent with the coordinate provisions of Section 8-308, 8-401
and 8-404, this Section provides that a signature guarantor warrants as to
facts "at the time of signing."
3. Subsection (2) sets forth the warranties that can reasonably be
expected from the guarantor of the signature of the originator of an
instruction, who, though familiar with the signer, does not have before him
any evidence that the purported owner or pledgee is, in fact, the owner or
pledgee of the subject uncertificated security. This is in contrast to the
position of the person guaranteeing a signature on a certificate who can see
a certificate in the signer's possession in the name of or indorsed to the
signer or in blank. Thus, the warranty of appropriateness in clause (b) is
expressly conditioned on the actual registration's conforming to that
represented by the originator. If the signer purports to be the owner or
pledgee, the guarantor under clause (b), warrants only his identity. If,
however, the signer is acting in a representative capacity, the guarantor
warrants both his identity and his authority to act for the purported owner
or pledgee. The additional warranty of clause (d) as to the taxpayer
identification number is intended to prevent error or fraud resulting from
identical or similar names. The warranties of subsection (2) are intended to
provide satisfactory assurance to the issuer who needs no warranty as to the
facts of registration because he can ascertain those facts from his own
records.
4. Subsection (3) sets forth a "special guarantee of
signature" under which the guarantor additionally warrants both
registered ownership or pledge and freedom from undisclosed defects of
record. The guarantor of the signature of an indorser of a certificated
security effectively makes these warranties to a purchaser for value on the
evidence of a clean certificate issued in the name of the indorser, indorsed
to the indorser or indorsed in blank. By specially guaranteeing under
subsection (3), the guarantor warrants that the instruction will, when
presented to the issuer, result in the requested registration free from defects
not specified. It is contemplated that the special guarantee of signature will
be used principally in brokerage transactions where the broker will be
specially guaranteeing the signature on an instruction originated by his own
customer. The broker's risk will be no greater than that of a broker who
executes the sale of a security for his customer without the absolute
assurance that his customer will deliver a clean certificate at settlement.
5. Subsection (4) makes clear that the warranties of a person
guaranteeing a signature are limited to those specified in this section and do
not include a general warranty of rightfulness. On the other hand
subsections (5) and (6) make clear that a person guaranteeing an
indorsement or an instruction does warrant that the transfer is rightful in all
respects.
6. Subsection (7) makes clear what can be inferred from the
combination of Sections 8-401 and 8-402, that the issuer may not require as
a condition to transfer a guarantee of the indorsement or instruction nor
may it require a special signature guarantee. But the voluntary furnishing
of such a guarantee and its acceptance by the issuer may save the time and
expense of an inquiry into possible adverse claims (cf. Section 8-403).
7. Subsection (8) is expressly designed to encourage issuers and their
agents to rely upon signature guarantees and to avoid needless waste of
time and duplication of effort in ascertaining the facts so guaranteed.
South Carolina Reporter's Comments to the 1991 Amendment
To this section, which delineates the warranties made by a signature
guarantor or guarantor of an indorsement, the 1991 amendments added
warranties made by a signature guarantor of an instruction, a special
guarantor of the signature of an originator of an instruction and a guarantor
of an instruction.
The amendments to subsection (1) do not make any changes in South
Carolina law with respect to the warranties made by a person who
guarantees the signature of an indorser of a certificated security. The
former language disclaiming any warranty of rightfulness by a signature
guarantor has been retained in subsection (4).
Subsection (2) establishes an analogous system of warranties made by a
person who guarantees the signature of an originator of an instruction
relating to an uncertificated security. Because the signature guarantor of an
instruction does not have a certificate that specifies the registered owner or
pledgee of the uncertificated security, there are some differences between
the warranties made by the signature guarantor of an indorsement and the
signature guarantor of an instruction. The signature guarantor conditions
his warranty of appropriateness (subsection (2)(b)) on registration
conforming to representations made by the originator. Without this
condition, the signature guarantor would be required to warrant facts of
which he has no evidence. If the signer purports to be the registered
pledgee or owner, the signature guarantor warrants only the signer's
identity. If the signer is a representative of the purported owner or pledgee,
the signature guarantor warrants the signer's identity and his authority to act
for the purported owner or pledgee. The additional warranty of subsection
(2)(d), which warrants that the taxpayer identification number that appears
on the instruction is that of the registered owner or pledgee, or his
representative, is designed to prevent fraud or error which results from
similar or identical names.
Subsection (3) describes the warranties made by a person who specially
guarantees the signature of an originator of an instruction. This concept is
new and does not apply to certificated securities. The guarantor warrants
that, upon receipt of the instruction, the issuer will register the transfer,
pledge, or release free from all defects not specified in the instruction. An
issuer may not require a special guarantee as a condition of registration
(subsection (7)). The special guarantee is contemplated for use in
brokerage transactions. A broker who specially guarantees an instruction
originated by his customer will be in a position analogous to that of a
broker who executes the sale of a certificated security without absolute
assurance that his customer will deliver a clean certificate.
Subsection (4) makes clear that a signature guarantor or a special
guarantor does not warrant the rightfulness of the transfer or registration.
Subsection (6), which is new, provides for a guarantee of instruction
analogous to the guarantee of indorsement of subsection (5). Such a
guarantee, in addition to warranting the signature on an instruction,
warrants the rightfulness of the transfer, pledge, or release in all respects.
Subsection (7) collects and extends the former rules that an issuer may
not require any guarantees other than a signature guarantee of an
indorsement or instruction. An issuer may not require a special guarantee
(subsection (3)).
Section 36-8-313. When transfer to the purchaser occurs; a financial
intermediary as bona fide purchaser; `financial intermediary'.
(1) Transfer of a security or a limited interest (including a security
interest) therein to a purchaser occurs only:
(a) at the time he or a person designated by him acquires possession of
a certificated security;
(b) at the time the transfer, pledge, or release of an uncertificated
security is registered to him or a person designated by him;
(c) at the time his financial intermediary acquires possession of a
certificated security specially indorsed to or issued in the name of the
purchaser;
(d) at the time a financial intermediary, not a clearing
corporation, sends him confirmation of the purchase and also by book entry
or otherwise identifies as belonging to the purchaser:
(i) a specific certificated security in the financial intermediary's
possession;
(ii) a quantity of securities that constitute or are part of a fungible
bulk of certificated securities in the financial intermediary's possession or
of uncertificated securities registered in the name of the financial
intermediary;
(iii) a quantity of securities that constitute or are part of a fungible
bulk of securities shown on the account of the financial intermediary on the
books of another financial intermediary;
(e) with respect to an identified certificated security to be delivered
while still in the possession of a third person, not a financial intermediary,
at the time that person acknowledges that he holds for the purchaser;
(f) with respect to a specific uncertificated security the pledge or
transfer of which has been registered to a third person, not a financial
intermediary, at the time that person acknowledges that he holds for the
purchaser;
(g) at the time appropriate entries to the account of the purchaser
or a person designated by him on the books of a clearing corporation are
made under Section 36-8-320; or
(h) with respect to the transfer of a security interest where the debtor
has signed a security agreement containing a description of the security, at
the time a written notification, which, in the case of the creation of the
security interest, is signed by the debtor (which may be a copy of the
security agreement) or which, in the case of the release or assignment of the
security interest created pursuant to this paragraph, is signed by the secured
party, is received by:
(i) a financial intermediary on whose books the interest of the
transferor in the security appears;
(ii) a third person, not a financial intermediary, in possession of
the security, if it is certificated;
(iii) a third person, not a financial intermediary, who is the
registered owner of the security, if it is uncertificated and not subject to a
registered pledge; or
(iv) a third person, not a financial intermediary, who is the
registered pledgee of the security, if it is uncertificated and subject to a
registered pledge;
(i) with respect to the transfer of a security interest where the
transferor has signed a security agreement containing a description of the
security, at the time new value is given by the secured party; or
(j) with respect to the transfer of a security interest where the secured
party is a financial intermediary and the security has already been
transferred to the financial intermediary under paragraphs (a), (b), (c), (d),
or (g), at the time the transferor has signed a security agreement containing
a description of the security and value is given by the secured party.
(2) The purchaser is the owner of a security held for him by a financial
intermediary, but cannot be a bona fide purchaser of a security so held
except in the circumstances specified in subparagraphs (c), (d)(i), and (g) of
subsection (1). If a security so held is part of a fungible bulk, as in the
circumstances specified in subparagraphs (d)(ii) and (d)(iii) of subsection
(1), the purchaser is the owner of a proportionate property interest in the
fungible bulk.
(3) Notice of an adverse claim received by the financial intermediary
or by the purchaser after the financial intermediary takes delivery of a
certificated security as a holder for value or after the transfer, pledge, or
release of an uncertificated security has been registered free of the claim to
a financial intermediary who has given value is not effective either as to the
financial intermediary or as to the purchaser. However, as between the
financial intermediary and the purchaser, the purchaser may demand
transfer of an equivalent security as to which no notice of an adverse claim
has been received.
(4) A `financial intermediary' is a bank, broker, clearing corporation,
or other person (or the nominee of any of them) which in the ordinary
course of its business maintains security accounts for its customers and is
acting in that capacity. A financial intermediary may have a security
interest in securities held in account for its customer.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 191, Uniform Negotiable Instruments Law; Section 22, Uniform
Stock Transfer Act.
Purposes:
1. Subsection (1) lists the various methods by which legal rights in a
security may be transferred from one person to another. Subsection (1) is
expressly made applicable to limited interests, including security interests,
as well as to entire interests. Compare Section 8-301(2). The word
"only" in the first sentence is intended to provide that the
methods of transfer listed are exclusive and that compliance with one of
them is essential to a valid transfer. Transfers by operation of law are
excepted because they are not transfers to a "purchaser".
2. This section is intended to bring the law of securities transfers into
line with modern security trading practices and to allow for future
development of those practices. It is recognized that most transfers are not
effected through physical delivery of a certificate from seller to buyer, but
rather through adjustments in balances of the parties' accounts with various
intermediaries. Whether each intermediary has physical possession of a
certificate to match every security it "holds" in its customer
accounts is of no importance. So long as the intermediary exercises
ultimate control, the securities may equally well take the form of an
account with a securities depository, with another intermediary or with a
transfer agent.
Thus a "financial intermediary," which as defined in
subsection (4) must be a person that as part of its ordinary business
"maintains security accounts" for its customers, must control
the disposition of securities pursuant to its customers' orders but may
exercise its control in any of a number of forms -- e.g., maintaining
possession of certificated securities, being registered owner or registered
pledgee of uncertificated securities, or having its own account with another
financial intermediary. The important factor is that the intermediary must
"hold" securities in an account of the customer. Notice that one
who is a professional agent for holding securities accounts is not a financial
intermediary with respect to any particular transaction in which it is not
holding securities in an account for its customer. For example, a bank may
as part of its business hold securities in accounts for its customers and
therefore hold a financial intermediary with respect to those accounts; but if
it takes a pledge of securities not held in account for the borrower to secure
a loan, it is not a financial intermediary with respect to the securities
pledged, since it holds the securities for its own account rather than for a
customer. On the other hand, a broker is a financial intermediary with
respect to a margin account, since even though it has a personal interest in
the securities, it holds securities in an account for a customer.
3. Paragraphs (a) and (b) of subsection (1) describe the most basic
forms of transfer for certificated and uncertificated securities respectively.
Paragraph (d) is the basic provision for transfers effected through entries in
the records of a financial intermediary. For a valid transfer to be effected
there must be both an entry made in the records and a confirmation sent to
the purchaser. Confirmation is required to ensure that evidence exists to
prove that the securities are held by the intermediary in a customer account
rather than for its own account. This provision is important principally
with regard to potential insolvency of an intermediary. So long as the
financial intermediary holds the securities in an account, the form in which
it "holds" the securities makes no difference to the effectuation
of a transfer. The form does, however, make a difference as to whether the
purchaser can become a bona fide purchaser. See subsection (2) and
Section 8-302(1)(c).
Paragraphs (e) and (f) of the subsection (1) provide for transfers of
certificated and uncertificated securities held by a "third
person" who is not a financial intermediary ... Acknowledgement by
that person that he holds for the purchaser is the only condition to the
transfer. Requiring acknowledgement forces the transferee to have the
arrangement made explicit.
Paragraph (g) sets forth the requirements for a transfer of a security held
by a clearing corporation. The transfer occurs when the appropriate entries
are made. No confirmation is required, since the fact that a clear
corporation holds no securities for its own account eliminates the
possibility that customers' securities might be intermingled with securities
owned by the clearing corporation.
Paragraphs (h), (i), and (j) relate only to transfers of security interests.
Paragraph (h) is analogous to Section 9-305, which provides the rule for
perfecting a security interest in property in the possession of a bailee.
Paragraph (h) makes explicit that if the transferor's interest is in an account
with a financial intermediary, that intermediary is the proper person to
receive notice of the transfer regardless of whether it has physical
possession or registration in its own name or whether it has securities in an
account with another intermediary. The notification to the
"bailee" must be written and must be signed by the debtor or by
the secured party, according to whether the security interest is being created
or released. The transfer is also conditioned upon the existence of a written
security agreement signed by the debtor and adequately identifying the
security. This requirement is included in paragraph (h) because Section
8-321, which sets forth the requirements for creation and perfection of
security interests, gives no formality requirements other than the existence
of a valid transfer.
Paragraph (i) is similar to Section 9-304(4). Read in conjunction with
Section 8-321, it provides for "automatic" perfection for 21
days after new value is given with respect to a security interest as to which
the debtor has signed a security agreement.
Paragraph (j) also deals only with the creation of security interests. In
conjunction with Section 8-321, it provides that a financial intermediary
that already controls disposition of a security may take a perfected security
interest by giving value and having the debtor sign a security
agreement.
4. Subsection (2) sets forth the principle that a purchaser is the owner
of any security "held for him" -- i.e., controlled pursuant to his
instructions -- by a financial intermediary. For example, a purchaser owns
the securities in his custody account with a bank or his margin account with
a broker. However, unless specific securities are separately identified as
belonging to the purchaser, he cannot become a bona fide purchaser. A
bona fide purchaser takes particular securities free of all claims and
defenses. If bona fide purchaser status were given to those whose securities
are held as part of a fungible bulk, there would be a possibility of
inconsistent claims between two or more bona fide purchasers, since if the
bulk should prove to be smaller than was expected, the claim of one or both
must be compromised. An exception is made with respect to securities held
by clearing corporations, since the fact that those entities hold only for
customer accounts makes the chance of inconsistent claims small.
Securities held by intermediaries pursuant to paragraphs (c) and (d)(i) of
subsection (1) are identifiable as belonging to a particular customer, and the
customer therefore can be a bona fide purchaser. Those customers that are
not bona fide purchasers own a proportionate property interest in the bulk
of securities of that nature held by the intermediary. Thus the group of
customers together own the entire bulk, and in the event of insolvency of
the intermediary they would as a group be secured to the extent the bulk
covered their ownership claims. If the bulk were insufficient to provide
each customer his full claim, each would share ratably.
5. Subsection (3) provides protection to both financial intermediary and
customer whenever notice of an adverse claim is received after the
intermediary takes delivery of a certificated security as a holder for value or
after the transfer, pledge or release of an uncertificated security has been
registered free of the claim to a financial intermediary. It also states the
principle that as between the intermediary and its customer, the latter is
entitled to a "clean" security, i.e., one as to which no notice of
adverse claim has been received. Isham v. Post, 141 N.Y. 100, 35 N.E.
1084, 23 A.L.R. 90 (1894), which permitted a broker acting as agent to
deliver to his customer a security as to which a claim of forgery was made
after its receipt by the broker, is rejected. An intermediary is in the
business of handling securities. It is better equipped to clear up any
questions of genuineness or adverse claim. And even though it acts in
whole or in part as agent for its customer, it is not permitted to pass such
problems on to its customer. However, if the problem arises because of the
customer's own act or omission to act, he is estopped to rely on it as a basis
for rejecting the security. Section 1-103.
South Carolina Reporter's Comments to the 1991 Amendment
This is one of three sections -- the others being 36-8-317 and 36-8-321
-- which has been substantively amended beyond the introduction of the
concept of uncertificated securities. Prior law has been changed by the
substitution of the term "financial intermediary" for
"broker". "Financial intermediary" is defined in
subsection (4) to include any entity which maintains security accounts for
its customers. Institutions, such as commercial banks, which serve
customers in multiple ways would be financial intermediaries in respect of
their customer accounts but not otherwise; not, for example, in respect of
securities held as pledgee.
Prior law has also been changed by the broadening of the application of
this section to include transfers of all interests in securities, including such
limited interests as security interests. The word "only" in
subsection (1) is intended to indicate that this section represents the only
means of a valid transfer of any interest in a security, including security
interests. Compliance with one of the methods of transfer described in this
section is essential to a valid transfer. Transfers by operation of law are
excepted, because they are not transfers to a "purchaser".
Finally, subparagraphs (d)(ii) and (d)(iii) introduce the concept of transfers
of parts of "fungible bulks" of securities and thereby make
clear a proposition implied in former law. Prior law relating to
certificated securities is otherwise unchanged by the 1991 amendments, and
is to be found in subsections (a), (c), (d)(i), (e) and (g). Substitution of the
concept of financial intermediary broadens the application of subsections
(c) and (d)(i), and financial intermediaries have been deleted from the
operation of subsection (e). The basic rule for timing of transfers of
uncertificated securities is found in subsection (b), which provides that
transfer occurs upon registration.
New subsection (f) is, for uncertificated securities, the analogue of
subsection (e), providing that when a security is held by a third person,
transfer to the transferee occurs upon acknowledgment by the third person
that he holds for the transferee.
Subsection (d) applies to all financial intermediaries except clearing
corporations. It requires, for a valid transfer, that there be both a book
entry and a confirmation to the customer. The requirement of a
confirmation is to provide protection, in the form of objective, physical
evidence, of the transfer. This protection is thought to be useful in case of
the insolvency of either the customer or the financial intermediary, to
distinguish customer's securities from those of the financial intermediary
held for their own account or as pledgee. By contrast, subparagraph (g),
which applies only to clearing corporations, requires only a book entry, on
the supposition that clearing corporations normally hold only customers'
securities. A similar distinction was made between subsections (c) and (e)
of prior law.
Under prior law, under subsection (2) a broker's customer could not be a
"holder" unless the broker were holding a specific certificated
security for the customer's account. Customers with interests in fungible
bulks of securities could not, under that rule, be bona fide purchasers. New
subsection (2) specifies the kinds of transfers in which a purchaser, whose
securities are held by a financial intermediary, can become a bona fide
purchaser. See also Section 36-8-302(1)(c).
Subsection (3) has been broadened to apply to all financial
intermediaries protection for the customer against adverse claims noticed to
a financial intermediary after the financial intermediary has achieved
bona-fide-purchaser status. Similarly, it gives customers the right to
demand a clean security from any financial intermediary who has received
no notice of adverse claims.
Security interests. Under prior law, this section did not expressly apply
to security interests and, in any event, was not made exclusive. Section
36-9-203(1) did permit the creation of an enforceable security interest upon
(i) the giving of value, (ii) the creation of rights of the secured party in the
collateral and (iii) either possession of the security by the secured party or
the execution by the debtor of a written security agreement. Chapter 9 of
this title also permitted an enforceable (but, normally, unperfected) security
interest in securities by a written and signed security agreement.
New Section 36-8-321 now requires a transfer under Section
36-8-313(1) to create an enforceable security interest. This means that an
enforceable security interest in securities can no longer be made by a
written agreement alone. Section 36-8-321 now provides that a security
interest transferred under Section 36-8-313 "pursuant to agreement
by a transferror who has rights in the security to a transferee who has given
value is a perfected security interest", except that interests transferred
pursuant to subsection (1)(i) become unperfected after 21 days unless the
requirements of some other provision of subsection (1) are satisfied
first.
Subsection (1)(h) permits security interests in either certificated or
uncertificated securities to be perfected by notice to a bailee, pursuant to a
written agreement. A similar provision was made by Section 36-9-305 of
prior law. Securities are now excluded from the coverage of Section
36-9-305.
Subsection (1)(h) requires receipt of the notice, which must be signed
by the transferror to minimize the possibility of fraud, and describes who
must receive the notice. Unlike subsections (1)(d), (e) or (f), no
confirmation or acknowledgement is required to be made by the controlling
party. The transfer is effective upon receipt of notice by the party required
by the subsection to be notified.
Subsection (1)(i) is also new. It deals with automatic 21-day perfection,
similar to that previously dealt with by Section 36-9-304(4). Subsection
(1)(i) provides, in essence, that a "transfer" occurs when new
value is given pursuant to written agreement, creating a security interest
which, under Section 36-8-321(2), is automatically perfected for 21 days.
Securities are now excluded from the coverage of Section 36-9-304(4).
Subsection (1)(j) applies to financial intermediaries who obtain security
interests in securities held in customers' accounts. Examples would be a
broker's margin account, or the pledging of securities held for a customer
by a lending bank. Subsection (1)(j) requires a written agreement as
protection for the customer.
Section 36-8-314. Duty to transfer, when completed.
(1) Unless otherwise agreed, if a sale of a security is made on an
exchange or otherwise through brokers:
(a) the selling customer fulfills his duty to transfer at the time he: (i) places a certificated security in the possession of the selling broker
or a person designated by the broker;
(ii) causes an uncertificated security to be registered in the name
of the selling broker or a person designated by the broker;
(iii) if requested causes an acknowledgment to be made to the
selling broker that a certificated or uncertificated security is held for the
broker;
(iv) he places in the possession of the selling broker or of a person
designated by the broker a transfer instruction for an uncertificated security,
provided that the issuer does not refuse to register the requested transfer if
the instruction is presented to the issuer for registration within thirty days
thereafter; and
(b) the selling broker, including a correspondent broker acting for
a selling customer, fulfills his duty to transfer at the time he:
(i) places a certificated security in the possession of the buying
broker or a person designated by the buying broker;
(ii) causes an uncertificated security to be registered in the name
of the buying broker or a person designated by the buying broker;
(iii) places in the possession of the buying broker or of a person
designated by the buying broker a transfer instruction for an uncertificated
security, provided that the issuer does not refuse to register the requested
transfer if the instruction is presented to the issuer for registration within
thirty days thereafter; or
(iv) effects clearance of the sale in accordance with the rules of
the exchange on which the transaction took place.
(2) Except as provided in this section or unless otherwise agreed, a
transferor's duty to transfer a security under a contract of purchase is not
fulfilled until he:
(a) places a certificated security in form to be negotiated by the
purchaser in the possession of the purchaser or of a person designated by
him or at the purchaser's request causes an acknowledgment to be made to
the purchaser that such a certificated security is held for him; or
(b) causes an uncertificated security to be registered in the name
of the purchaser or a person designated by the purchaser; or
(c) if the purchaser requests, causes an acknowledgment to be made to
the purchaser that a certificated or uncertificated security is held for the
purchaser.
(3) Unless made on an exchange, a sale to a broker purchasing for his
own account is within subsection (2) and not within subsection (1).
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. This section, together with the section on warranties to the purchaser
(Section 8-306) and the section on transfer to the purchaser (Section
8-313), states the rights and duties of the parties involved in the transfer of
a security from the original transferor to the ultimate purchaser. Particular
emphasis has been placed upon transactions on organized exchanges or
through brokers or dealers since they account for the great bulk of security
sales. Normally the sale of a security on such an exchange or through
brokers involves at least three intermediate transactions, and perhaps more,
depending upon the number of correspondent brokers concerned. Rarely is
the same security transferred through the entire transaction, and the duty of
each intermediate party in the chain of transfer must therefore be stated.
The increased use of clearing houses is also recognized - in subparagraph
(1)(b)(iv) a selling broker is specifically permitted to make delivery by
clearing the sale through such a clearing agency.
2. Subparagraphs (1)(a)(i), (1)(a)(ii), (1)(b)(i) and (1)(b)(ii) set forth the
basic methods of fulfilling the duty to transfer in exchange transactions.
The selling customer can fulfill his duty by physically delivering a
certificated security to the selling broker or by effecting the transfer of an
uncertificated security to him on the records of the issuer. Similarly the
selling broker can satisfy its duty to transfer to the buying broker by
delivering a certificate or causing registration of an uncertificated security.
Further, with respect to exchange transactions subparagraphs (a)(iv) and
(b)(iii) of subsection (1) provide that the duty to transfer can be condition-
ally satisfied by the delivery of an instruction. Such delivery does not
constitute complete performance if the instruction is timely presented for
registration and the issuer refuses to comply with its request. The burden
of timely presentment is placed on the recipient of the instruction and it is
not intended that instructions so given will circulate in the manner in which
certificated securities now commonly circulate by indorsement. It is
contemplated that this method of performance will be commonly employed
in transactions settled through brokers, within many cases, the selling
broker specifically guaranteeing the signature of the originator of the
instruction pursuant to Section 8-312(3).
3. Under subsection (2), absent agreement, one transferring a security
to a purchaser in a transaction a security to a purchaser in a transaction not
consummated on an exchange or through brokers must either make physical
delivery of a certificated security or cause the registration of transfer of an
uncertificated security. Further, at the request of the purchaser he can
satisfy his duty by causing acknowledgement to be given to the purchaser
by a third person who controls the security (Section 8-313(1)(d) and (e)).
He cannot, for example, just put a certificated security in transit and impose
the risk of loss upon the recipient; nor can he fulfill his duty by delivering
to the purchaser a transfer instruction.
4. Subsection (3) covers the situation in which one in business as a
broker is, in the particular transaction, his own customer. When he buys or
sells for a customer other than himself, whether as agent or as principal, he
is a "broker" under this Article (Section 8-303) and the
transaction is within subsection (1) of this section.
South Carolina Reporter's Comments to the 1991 Amendment
Former law, applying only to certificated securities, provided four ways
in which to satisfy a duty to deliver the security upon sale: By delivery of
the certificate either to the buyer's broker or to one designated by such
broker, by causing a third-party holder to make an acknowledgment to the
purchaser that the security is held for him or by effecting clearance
according to exchange rules. These methods of transfer are preserved in
subparagraphs (1)(a)(i), (1)(b)(i), (2)(a), 1(a)(iii), 2(c) and (1)(b)(iv). As to
these provisions, no substantive change has been made in this section.
Parallel methods of satisfying a duty to deliver an uncertificated security
are provided in subsections (1)(a)(ii), (1)(b)(ii) and 2(b). These subsections
permit the transferor to satisfy his duty by causing the registration of
transfer of an uncertificated security to the purchaser or the purchaser's
designee. Subsections (1)(a)(iii), 2(c) and (1)(b)(iv) have been extended to
apply to uncertificated as well as to certificated securities.
Subsections (1)(a)(iv) and (1)(b)(iii), which apply to brokerage
transactions only, permit a seller conditionally to satisfy his duty of
delivery by delivery of an instruction to the buying broker. Delivery of the
instruction for registration, even if timely, does not constitute complete
performance if the issuer refuses to execute the instruction. For this reason,
it is anticipated that in many cases the selling broker will specially
guarantee the signature of the originator of the instruction as provided in
section 36-8-312(3). It is not intended that such instructions circulate by
indorsement, as if they were certificates.
Section 36-8-315. Action against transferee based upon wrongful
transfer.
(1) Any person against whom the transfer of a security is wrongful for
any reason, including his incapacity, as against anyone except a bona fide
purchaser, may:
(a) reclaim possession of the certificated security wrongfully
transferred;
(b) obtain possession of any new certificated security
representing all or part of the same rights;
(c) compel the origination of an instruction to transfer to him or a
person designated by him an uncertificated security constituting all or part
of the same rights; or
(d) have damages.
(2) If the transfer is wrongful because of an unauthorized indorsement
of a certificated security, the owner may also reclaim or obtain possession
of the security or a new certificated security, even from a bona fide
purchaser, if the ineffectiveness of the purported indorsement can be
asserted against him under the provisions of this chapter on unauthorized
indorsements (Section 36-8-311).
(3) The right to obtain or reclaim possession of a certificated security
or to compel the origination of a transfer instruction may be specifically
enforced and the transfer of a certificated or uncertificated security
enjoined and a certificated security impounded pending the litigation.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 7. Uniform Stock Transfer Act.
Purposes:
1. This section grants to all owners of securities - certificated or
uncertificated - a remedy for wrongful transfer. The general rule permitting
an owner to reclaim possession of a certificated security wrongfully
transferred is continued in paragraph (1)(a). Also, the owner of either a
certificated or uncertificated security that has been wrongfully transferred
may obtain a certificated security representing the same rights or may
compel the origination of an effective transfer instruction for an
uncertificated security comprising the same rights. Finally, the owner may
have damages.
An exception is made, as in the prior law, in favor of bona fide
purchasers. However, where the transfer is based upon a forged or
unauthorized indorsement the exception operates in favor only of a good
faith purchaser who is protected by Section 8-311. See that section and the
comments thereto.
2. This section is not intended to exclude any rights an owner may have
to damages for conversion under the case law. But see Section 8-318,
which protects innocent brokers and other agents and bailees from liability
for conversion.
South Carolina Reporter's Comments to the 1991 Amendment
The 1991 amendments made no change in former law relating to
certificated securities. The scope of this section was broadened to include
uncertificated securities, with forced registration of transfer serving as the
analogue to re-delivery of certificates.
Section 36-8-316. Purchaser's right to requisites for registration of
transfer, pledge, or release on books.
Unless otherwise agreed, the transferor of a certificated security or the
transferor, pledgor, or pledgee of an uncertificated security on due demand
must supply his purchaser with any proof of his authority to transfer,
pledge, or release or with any other requisite necessary to obtain
registration of the transfer, pledge, or release of the security but if the
transfer, pledge, or release is not for value, a transferor, pledgor, or pledgee
need not do so unless the purchaser furnishes the necessary expenses.
Failure within a reasonable time to comply with a demand made gives the
purchaser the right to reject or rescind the transfer, pledge, or release.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. The registration of the transfer of a security is a matter of vital
importance to a purchaser and he is here provided with the means of
obtaining such formal requirements for registration as signature guarantees,
proof of authority, transfer tax stamps and the like. The transferor is the
one in a position to supply most conveniently whatever documentation may
be requisite for registration of transfer, and his duty to do so upon demand
within a reasonable time is here stated affirmatively. But if the transfer is
not for value the transferee should pay expenses. For these purposes a
release from pledge by a secured party to a debtor is a transfer for
value.
2. If the transferor's duty is not performed the transferee may reject or
rescind the contract to transfer, pledge or release. He is not bound to do so
- he may prefer his action for damages for breach of contract. If an
essential item is peculiarly within the province of the transferor so that he is
the only one who can obtain it, the purchaser may specifically enforce his
right. Compare Section 8-307.
South Carolina Reporter's Comments to the 1991 Amendment
The 1991 amendments made no change in former law relating to
certificated securities. The scope of this section was broadened to take into
account transfers of registration, including registrations of pledge and
release, of uncertificated securities.
Section 36-8-317. Creditors' Rights.
(1) Subject to the exceptions in subsections (3) and (4), no attachment
or levy upon a certificated security or any share or other interest
represented thereby which is outstanding is valid until the security is
actually seized by the officer making the attachment or levy, but a
certificated security which has been surrendered to the issuer may be
reached by a creditor by legal process at the issuer's chief executive office
in the United States.
(2) An uncertificated security registered in the name of the debtor may
not be reached by a creditor except by legal process at the issuer's chief
executive office in the United States.
(3) The interest of a debtor in a certificated security that is in the
possession of a secured party not a financial intermediary or in an
uncertificated security registered in the name of a secured party not a
financial intermediary (or in the name of a nominee of the secured party)
may be reached by a creditor by legal process upon the secured party.
(4) The interest of a debtor in a certificated security that is in the
possession of or registered in the name of a financial intermediary or in an
uncertificated security registered in the name of a financial intermediary
may be reached by a creditor by legal process upon the financial
intermediary on whose books the interests of the debtor appears.
(5) Unless otherwise provided by law, a creditor's lien upon the
interest of a debtor in a security obtained pursuant to subsection (3) or (4) is
not a restraint on the transfer of the security, free of the lien, to a third party
for new value; but in the event of a transfer, the lien applies to the proceeds
of the transfer in the hands of the secured party or financial intermediary,
subject to any claims which have priority.
(6) A creditor whose debtor is the owner of a security is entitled to aid
from courts of appropriate jurisdiction, by injunction or otherwise, in
reaching the security or in satisfying the claim by means allowed at law or
in equity in regard to property that cannot readily be reached by ordinary
legal process.
Amended Official Comment
Prior Uniform Statutory Provisions:
Section 13, 14, Uniform Transfer Act.
Purposes:
1. In dealing with certificated securities the instrument itself is the vital
thing, and therefore a valid levy cannot be made unless all possibility of the
security's wrongfully finding its way into a transferee's hands has been
removed. This can be accomplished only when the security is in the
possession of a public officer, the issuer, or an independent third party. A
debtor who has been enjoined can still transfer the security in contempt of
court. See Overlock v. Jerone-Portland Copper Mining Co., 29 Ariz. 560,
243 P. 400 (1926). Therefore, although injunctive relief is provided in
subsection (6) so that creditors may use this method to gain control of the
security, the security itself must be reached to constitute a proper levy
whenever the debtor has possession. The method used in Hodes v. Hodes,
176 Or. 102, 155 P.2d 564 (1945), where the Oregon court enjoined the
transfer of a security in a safe deposit box in the state of Washington,
directing a copy of the writ to be served upon the issuer, although not
operative as an effective levy, is a method of reaching the security
approved by the section.
2. Whenever the security is not in the form of a negotiable instrument
in the debtor's possession, an effective levy can be made by serving process
upon the person controlling transfer. Thus subsection (2) provides that
when the security is uncertificated and registered in the debtor's name - or,
what in effect is the same situation, whenever a certificated security is in
the issuer's possession (Section 8-102(1)(c) - levy can be made only by
serving process upon the issuer. The most logical place to serve the issuer
would be the place where the transfer records are maintained, but that
location might be difficult to identify, especially when the separate
elements of a computer network might be situated in different places. The
chief executive office is selected as the appropriate place by analogy to
Section 9-103(3)(d). See Comment 5(c) to that section.
This section indicates only how attachment is to be made, not when it is
legally justified. For that reason there is no conflict between this section
and Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683
(1977).
3. An attachment filed at the issuer's office against certificate securities
is ineffective unless the security itself has been surrendered to the issuer.
The case law holdings that priority in time of transfer or attachment
governed the validity of the levy are rejected under this Article as under the
Stock Transfer Act. See for example, National Bank of the Pacific v.
Western Pac. R. Co., 157 Cal. 573, 108 P. 676, 27 L.R.A., N.S., 987, 21
Ann. Cas. 1391 (1910).
4. Subsection (3) provides that when a security, either certificated or
uncertificated, is controlled by a secured party, an effective lien can be
established by service on the secured party. This section does not attempt
to provide for rights as between the creditor and the secured party, as, for
example, whether or when the secured party must liquidate the security.
Subsection (4) recognizes that securities are frequently held in account
for customers by banks or brokers and that such securities may be
registered not only in the name of the debtor but, more commonly, in street
or other nominee name. Additionally, in such cases, the securities may
have been commingled, repledged or deposited so that no particular
security could be identified as that of the debtor. The subsection provides
that the debtor's account can be reached by process upon the entity upon
whose books the interest of the debtor appears. This appears to be the most
effective way of preventing the transfer of the debtor's interest and thus
protecting the creditor. It is only that entity that is aware of the debtor's
interest, irrespective of where the securities are located or in what name
they happen to be registered.
Subsection (5) expressly provides that securities in which the debtor's
interest is reached pursuant to subsection (3) or (4) may be transferred for
new value, free of the creditor's lien, but also provides that when and if they
are transferred, the lien will be transferred to the proceeds. Nothing in
subsection (5) is intended to validate any transfer that would otherwise
constitute a fraudulent conveyance. Furthermore, subsection (5) is
expressly subject to the procedural laws of the states, and no attempt has
been made to prescribe the consequences of obtaining such a lien or the
procedures for its enforcement.
5. Particular terms to describe creditor's process have been avoided in
this section. This section is not intended to have any effect on the
availability of garnishment or similar third-party process as a pre-judgment
or post-judgment remedy. Cf. Sniadach v. Family Finance Corp., 395 U.S.
337, 23 L.Ed.2 349, 89 S.Ct. 1820 (1969); Fuentes v. Shevin, 407 U.S. 67,
32 L.Ed.2d 556, 92 S.Ct. 1983 (1972); Mitchell v. W.T. Grant Co., 416
U.S. 600, 40 L.Ed.2d 406 94 S.Ct. 1895 (1974). Such matters are a proper
concern of the procedural rules of the states, subject, of course, to constitu-
tional limitations.
6. This section deals with the problems of attaching or levying
creditors. It does not apply in cases where a governmental agency, for
reasons of public safety or the like, seeks to confiscate securities. See, for
example, the situation in Silesian American Corp. v. Clark, 332 U.S. 469,
68 S.Ct. 179, 92 L.Ed. 81 (1947), upon which this section has no
bearing.
South Carolina Reporter's Comments to the 1991 Amendment
This section has been amended as to certificated securities, as well as to
include uncertificated securities, as a part of the movement of rules
concerning security interests in securities from Chapter 9 of this title to
Chapter 8.
Subsection (1) preserves the fundamental rule of former law, that a
certificated security cannot be attached or levied upon until actually seized,
whether in possession of the debtor in the case of outstanding securities, or,
if the security has been surrendered to the issuer, by legal process directed
at the issuer. Words have been added to make clear that such legal process
must be directed to the issuer's "chief executive office in the United
States." Subsection (1) has no application where a person other than
the debtor or, through surrender, the issuer, has control of the security.
Subsection (2) embodies a rule for uncertificated securities analogous to
that of subsection (1), permitting attachment or levy of an uncertificated
security under control of the debtor to be accomplished only through legal
process at the issuer's chief executive office in the United States.
Subsection (3) provides a method of creating an effective line upon
securities in the hands of secured parties other than financial
intermediaries: By service on the secured party in possession, in the case
of certificated securities, or upon the secured party in whose name the
security is registered, in the case of uncertificated securities. This section
does not address relative rights between the creditor and the secured
party.
Subsection (4) applies where the security is held by a financial
intermediary by possession or registration. Holdings in street name are
included. Subsection (4) provides that an effective lien may be created by
process upon the entity on whose books the debtor's account appears.
Subsection (5) provides that a lien under this section will not impede
transfer of the security for new value, but that the lien will attach to the
proceeds. The security would pass free of the lien.
As under former law, procedures for obtaining liens, and the
consequences of so doing, are not addressed in this Chapter, but are left to
the general law of South Carolina.
Section 36-8-318. No conversion by good faith conduct.
An agent or bailee who in good faith (including observance of
reasonable commercial standards if he is in the business of buying, selling,
or otherwise dealing with securities) has received certificated securities and
sold, pledged, or delivered them or has sold or caused the transfer or pledge
of uncertificated securities over which he had control according to the
instructions of his principal, is not liable for conversion or for participation
in breach of fiduciary duty although the principal had no right so to deal
with the securities.
Amended Official Comment
South Carolina Reporter's Comments to the 1991 Amendment
No change has been made in prior South Carolina law relating to
certificated securities. This section has been broadened to apply to
uncertificated securities.
Prior Uniform Statutory Provision:
None.
Purposes:
This section negates the liability of agents, including brokers, and of
bailees for innocent conversion or participation in breach of fiduciary duty.
Gruntal v. National Surety Co., 254 N.Y. 4658, 173 N.E. 682 (1930) is
followed. Compare Section 7(a) of the Uniform Act for Simplification of
Fiduciary Security Transfers.
Notice that the concept of good faith includes the objective element of
observing reasonable commercial standards when the agent or bailee is in
the business of dealing with securities.
Section 36-8-319. Statute of frauds.
A contract for the sale of securities is not enforceable by way of action
or defense unless:
(a) there is some writing signed by the party against whom
enforcement is sought or by his authorized agent or broker, sufficient to
indicate that a contract has been made for sale of a stated quantity of
described securities at a defined or stated price;
(b) delivery of a certificated security or transfer instruction has
been accepted, or transfer of an uncertificated security has been registered
and the transferee has failed to send written objection to the issuer within
ten days after receipt of the initial transaction statement confirming the
registration, or payment has been made but the contract is enforceable
under this provision only to the extent of the delivery, registration, or
payment;
(c) within a reasonable time a writing in confirmation of the sale or
purchase and sufficient against the sender under paragraph (a) has been
received by the party against whom enforcement is sought and he has failed
to send written objection to its contents within ten days after its receipt;
or
(d) the party against whom enforcement is sought admits in his
pleading, testimony, or otherwise in court that a contract was made for sale
of a stated quantity of described securities at a defined or stated price.
Amended Official Comment
Prior Uniform Statutory Provision:
Section 4, Uniform Sales Act (which was based on Section 17 of the
statute of 29 Charles II).
Purposes:
1. This Section is intended to conform the statute of frauds provisions
with regard to securities to the policy of the like provisions in Article 2
(Section 2-201). The chief difference is that this Section requires that
quantity and price be specified.
2. What will be sufficient specification will vary with the
circumstances. Where the transaction is on an exchange or an
over-the-counter market where daily quotations of the security are available
"100 shares X. Corp. comm. at market" should suffice. If there
is no readily available standard to interest "at market" there is
no "defined or stated price."
3. Paragraph (b) sets forth several actions which, if taken by a
transferee, constitute manifestation of intent to purchase. The person
receiving an initial transaction statement is given a period of 10 days to
subject, since there is no overt manifestation of intent. While acceptance of
delivery of a certificate or instruction is seen as an overt manifestation so
that there is no grace period, in practice there will often be a question as to
what constitutes acceptance by an organization. Failure to object to
delivery within a reasonable period will be a factor to consider. Making
payment is a more definite indication of intent.
4. Paragraph (c) is particularly important in the relationship of broker
(Section 8-303) and customer. Normally a great volume of such business is
done over the telephone. Orders are executed almost immediately and
confirmed on the same or the next business day, usually on standard forms
which as to the broker more than met the minimal requirements of
paragraph (a). It is reasonable to require the customer to raise his
objection, if any, within ten days after the confirmation has been received
(Section 1-201).
South Carolina Reporter's Comments to the 1991 Amendment
No change has been made in this section so far as it relates to
certificated securities. Coverage of the section has been broadened to
include uncertificated securities. The part-performance exception of
subsection (b) has been modified to include registration of transfer of an
uncertificated security as an analogue to delivery of a certificate.
Subsection (b) does not give the transferor an opportunity to object in
writing, because, in order for transfer to have been accomplished, a writing
must have originated with the transferor, putting transferors within
subsection (a).
Section 36-8-320. Transfer or pledge within a central depository
system.
(1) In addition to other methods, a transfer, pledge, or release of a
security or any interest therein may be effected by the making of
appropriate entries on the books of a clearing corporation reducing the
account of the transferor, pledgor, or pledgee and increasing the account of
the transferee, pledgee, or pledgor by the amount of the obligation or the
number of shares or rights transferred, pledged, or released, if the security
is shown on the account of a transferor, pledgor, or pledgee on the books of
the clearing corporation; is subject to the control of the clearing
corporation; and
(a) if certificated
(i) is in the custody of a clearing corporation, another clearing
corporation, a custodian bank, or a nominee of any of them; and
(ii) is in bearer form or indorsed in blank by an appropriate
person or registered in the name of the clearing corporation, or a nominee
of any of them; or
(b) if uncertificated, is registered in the name of the clearing
corporation, another clearing corporation, a custodian bank, or a nominee
of any of them.
(2) Under this section entries may be with respect to like securities or
interests therein as a part of a fungible bulk and may refer merely to a
quantity of a particular security without reference to the name of the
registered owner, certificate or bond number, or the like, and, in appropriate
cases, may be on a net basis taking into account other transfers, pledges, or
releases of the same security.
(3) A transfer under this section is effective (Section 36-8-313) and the
purchaser acquires the rights of the transferor (Section 36-8-301). A
pledge or release under this section is the transfer of a limited interest. If a
pledge or the creation of a security interest is intended, the security interest
is perfected at the time when both value is given by the pledgee and the
appropriate entries are made (Section 36-8-321). A transferee or pledgee
under this section may be a bona fide purchaser (Section 36-8-302).
(4) A transfer or pledge under this section is not a registration of
transfer under Part 4 of this chapter.
(5) That entries made on the books of the clearing corporation as
provided in subsection (1) are not appropriate does not affect the validity or
effect of the entries or the liabilities or obligations of the clearing
corporation to any person adversely affected thereby.
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. Consistent with the underlying purposes and policies of this Act
"to permit the continued expansion of commercial practices through
custom, usage and agreement of the parties" -- subsection (2)(b) of
Section 1-102 -- this Section expressly authorizes a newly developing and
commercially useful method of transferring or pledging securities on the
organized securities markets, particularly among brokers and banks but not
necessarily so limited. A clearing corporation is a special kind of financial
intermediary. It holds securities on deposit from brokers, banks and other
financial institutions, and clears trades among its depositors by making
entries on its records. This section sets forth rules for determining when
such entries are effective to constitute a transfer (Section 8-313(1)(g)).
The basic requirements, outlined in subsection (1), are that the security
ultimately be subject to the control of the clearing corporation making the
entries and that the security be in a form that would allow the clearing
corporation (or a person acting subject to its orders) to have a new security
registered in the name of, and transferred to, a purchaser. The latter
requirement is specified in some detail. A certificated security must be in
the custody of either the clearing corporation making the entries, another
clearing corporation, a custodian bank or nominee; and it must either be in
bearer form, registered in the name of the clearing corporation (or of one of
the clearing corporations if there are more than one involved), or else
indorsed so that the clearing corporation (or one of them) could obtain
registration of transfer from the issuer. (The phrase "registered in the
name of the clearing corporation" in subparagraph (1)(a)(ii) should be
interpreted liberally so as to include restrictive indorsements and also to
include registration or indorsement to either of the clearing corporations.)
An uncertificated security must be registered in the name of a clearing
corporation, a custodian bank or a nominee.
The requirement that the security be subject to the control of the
clearing corporation means that if a certificated security is in the custody
of, or an uncertificated security is registered in the name of, another
clearing corporation or a custodian bank, the clearing corporation on whose
records the entries in question are made must have the right to give orders
to that person as to how and when to dispose of the security. That right
may be an indirect one -- for example, a security is subject to the control of
Clearing Corporation A if the security is certificated and has been
deposited in A's account with Clearing Corporation B, which in turn has
deposited the security in its account with C, which may be either another
clearing corporation or a custodian bank. Clearing Corporation A can give
orders to B which in turn can give orders to C.
2. Subsection (2) makes clear that securities of the same issue may be
treated as fungible interests, and that entries may be merely debits and
credits to the accounts of the participants.
3. Subsection (4) makes clear that transfer, pledge or release under this
Section does not affect the registration of ownership or pledge on the
issuer's records.
Subsection (5) states the entries made pursuant to this Section are
effective to transfer the subject securities regardless of the fact that the
entries were not appropriate. A person wronged by an inappropriate
transfer may pursue his remedies against the transferee and against the
clearing corporation. The nature of the rights between the clearing
corporation and the participants is left to private contract and case law. See
Section 8-315 as to actions against the transferee.
South Carolina Reporter's Comments to the 1991 Amendment
No change has been made in former law relating to certificated
securities, but parts of this section have been rewritten for purposes of
clarification. Subsection (1) has been rewritten to clarify that it applies to
securities which one clearing corporation controls though its account in
another clearing corporation. Subsection (3) has been rewritten to address
certain consequences directly, rather than by analogy.
The section has been broadened to contemplate uncerificated securities.
This will permit several simplifications in the operations of securities
depositories: (i) Customers will be able to add to their accounts without
delivery of certificates. (ii) Depositories will be able to maintain holdings
of securities in uncertificated form, reducing the burden of custody. (iii)
Depositories, now able to transfer securities to customers in uncertificated
form, will be able to reduce physical inventories.
Section 36-8-321. Enforceability, attachment, perfection, and
termination of security interests.
(1) A security interest in a security is enforceable and can attach only
if it is transferred to the secured party or a person designated by him
pursuant to a provision of Section 36-8-313(1).
(2) A security interest so transferred pursuant to agreement by a
transferor who has rights in the security to a transferee who has given value
is a perfected security interest, but a security interest that has been
transferred solely under subparagraph (i) of Section 36-8-313(1) becomes
unperfected after twenty-one days unless, within that time, the requirements
for transfer under any other provision of Section 36-8-313(1) are
satisfied.
(3) A security interest in a security is subject to the provisions of
Chapter 9 of this title, but:
(a) no filing is required to perfect the security interest; and
(b) no written security agreement signed by the debtor is
necessary to make the security interest enforceable, except as provided in
paragraph (h), (i), or (j) of Section 36-8-313(1). The secured party has the
rights and duties provided under Section 36-9-207, to the extent they are
applicable, whether or not the security is certificated, and, if certificated,
whether or not it is in his possession.
(4) Unless otherwise agreed, a security interest in a security is
terminated by transfer to the debtor or a person designated by him pursuant
to a provision of Section 36-8-313(1). If a security is thus transferred, the
security interest, if not terminated, becomes unperfected unless the security
is certificated and is delivered to the debtor for the purpose of ultimate sale
or exchange or presentation, collection, renewal, or registration of transfer.
In that case, the security interest becomes unperfected after twenty-one
days unless, within that time, the security (or securities for which it has
been exchanged) is transferred to the secured party or a person designated
by him pursuant to a provision of Section 36-8-313(1).
Amended Official Comment
Prior Uniform Statutory Provision:
None.
Purposes:
1. This section is intended to govern the creation, perfection and
termination of security interests in all securities, certificated and
uncertificated. Subsection (1) requires an effective transfer under Section
8-313(1) as formal evidence of the security interest. The requirement that
there be formal evidence of the creation of a security interest in collateral
other than securities can be satisfied by having the debtor sign a security
agreement or by having the secured party take possession of the collateral.
Section 9-203. Transfers pursuant to paragraphs (a)-(g) of Section 8-313(1)
all involve either delivery to the secured party or else some other specific
event that is the functional equivalent of delivery. Transfers pursuant to
paragraphs (h)-(j) do not involve any event that serves that function, but
they require a security agreement signed by the debtor.
2. Subsection (2) provides that when value has been given and the
debtor has rights in the collateral, an appropriate transfer will result not
only in an enforceable security interest but also in one that is perfected.
Under this section, an unperfected security interest in a security cannot be
created. A security interest created by transfer under Section 8-313(1)(i),
however, may become unperfected if, within 21 days, the requirements of
another method of effective transfer are not satisfied.
3. Subsection (3) expressly makes a security interest in securities
subject to the provisions of Article 9 except those provisions dealing with
the creation and perfection of security interests. Those matters are
governed by these sections. In addition, the provisions of Section 9-207,
which govern the rights and duties of the pledgee of a certificated security,
are extended, to the extent they are applicable, to all secured parties,
whether or not the possession of a certificated security is involved. Thus,
in the absence of agreement to the contrary, the secured party, who might
be the registered owner of an uncertificated security, would have the duty
to remit dividends he received to the debtor or to apply them in reduction of
the obligation under Section 9-207(2)(c).
4. Subsection (4) provides that a security interest is terminated by
retransfer to the debtor unless the parties otherwise agree. Even when the
parties agree that the security interest is to continue, it will become
unperfected unless there is delivery of a certificated security for the limited
purposes described in the second sentence. Compare Section 9-304(5) and
(6).
South Carolina Reporter's Comments to the 1991 Amendment
This section is entirely new. Together with new Sections 36-8-313 and
36-8-317, it serves to move the main provisions governing creation and
perfection of security interests in securities from Chapter 9 of this title to
Chapter 8. This section governs the creation, perfection and termination of
security interests in certificated and uncertificated securities.
Subsection (1) provides that an enforceable security interest cannot be
created without an effective transfer under Section 36-8-313(1). Section
36-9-203(1), which permits an enforceable security interest to be created
without possession if the debtor has signed a security agreement, has been
made expressly subject to this section.
Subsection (2) establishes the elements of perfection of a security
interest in securities. Perfection occurs upon an appropriate transfer, where
the debtor has rights in the securities and value has been given. In effect,
an unperfected security interest cannot be created in a security. Perfection
under Section 36-8-313(1)(i) will lapse after 21 days, however, unless some
other method of transfer under Section 36-8-313 has been accomplished
first. This result is the same as under Section 36-9-304(4); securities are
now expressly excluded from the operation of that section.
Subsection (3) provides that creation and perfection of security interests
in securities are to be governed by Article 8, and all other matters relating
to security interests in securities remain subject to Chapter 9. In addition,
Section 36-9-207, which establishes the rights and duties of the pledgee of
a certificated security, is expanded to apply to all secured parties.
Pursuant to subsection (4), a security interest is terminated upon its
transfer to the debtor, unless the parties have agreed otherwise, and, even
so, the security interest will cease to be perfected unless there is a delivery
of a certificated security to the debtor for the purposes described in the
second sentence of subsection (4). Such provisional perfection is limited in
time to 21 days unless the security is redelivered to the secured party; see
also Section 36-9-304(5).
Part 4
Registration
Section 36-8-401. Duty of issuer to register transfer, pledge, or
release.
(1) If a certificated security in registered form is presented to the
issuer with a request to register transfer or an instruction is presented to the
issuer with a request to register transfer, pledge, or release, the issuer shall
register the transfer, pledge, or release as requested if:
(a) the security is indorsed or the instruction was originated by the
appropriate person or persons (Section 36-8-308);
(b) reasonable assurance is given that those indorsements or
instructions are genuine and effective (Section 36-8-402);
(c) the issuer has no duty as to adverse claims or has discharged the
duty (Section 36-8-403);
(d) any applicable law relating to the collection of taxes has been
complied with; and
(e) the transfer, pledge, or release is in fact rightful or is to a bona fide
purchaser.
(2) If an issuer is under a duty to register a transfer, pledge, or release
of a security, the issuer is also liable to the person presenting a certificated
security or an instruction for registration or his principal for loss resulting
from any unreasonable delay in registration or from failure or refusal to
register the transfer, pledge, or release.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
None.
Purposes:
1. Section 8-201(3) defines "issuer" as used in this Part 4
as the person on whose behalf transfer books are maintained. Transfer
agents, registrars or the like have rights and duties under this Part within
the scope of their respective functions, similar to those of the issuer
(Section 8-406).
2. There is a substantial and heterogeneous body of case law as to the
issuer's duty to register a transfer and as to his ability for improper
registration, e.g., on an unauthorized signature (Section 8-311), or where
the indorsement is not that of an appropriate person (Section 8-308), and
generally under circumstances where the issuer is deemed to have had
notice of an adverse claim (Section 8-302) and thus of the possible
wrongfulness of the transfer.
In general this section and those which follow it continue the
well-settled rules found in the case law as to duty to register and as to
liability for improper registration on an unauthorized signature, or where
the indorsement is not that of an appropriate person. They also extend the
application of those rules to uncertificated securities.
In all other areas, the issuer's potential liability for wrongful registration
of transfer has been substantially reduced. The rules found in the case law
are drastically modified in furtherance of a considered policy to speed up
the registration process by narrowing the field in which the issuer
historically has first sought to assure itself that it cannot be held to be on
notice of an adverse claim, and, failing that assurance, has imposed
rigorous requirements of proof that there is no possible impropriety.
3. This section states the basic duty of the issuer to register transfers. It
states that a duty exists, but only if certain preconditions exist. If any of the
preconditions do not exist, there is no duty to register transfer. If the
indorsement on a security is a forgery, there is no duty. If the instruction to
transfer an uncertificated security is not originated by an appropriate
person, there is no duty. If there has not been compliance with applicable
tax laws, there is no duty. If the security is properly indorsed but
nevertheless the transfer is in fact wrongful, there is no duty unless the
transfer is to a bona fide purchaser (and the other preconditions exist). Cf.
Kaiser-Frazer Corp. v. Otis & Co., 195 F.2d 838 (2d Cir. 1952),
certiorari denied 73 S.Ct. 89, 344 U.S. 856, 97 L.Ed. 664.
This section does not constitute a mandate that all preconditions must be
met before the issuer registers a transfer. If it so desires, the issuer can
waive the reasonable assurances specified in paragraph (b). If it has
confidence in the responsibility of the persons requesting transfer, it can
ignore questions of compliance with tax laws. If it has no duty to inquire
into or otherwise recognize adverse claims, it can and it should register
transfer without inquiry as to the rightfulness of a transfer.
Sections 8-402 and 8-403 are the sections dealing with the specific rules
as to assurances and duty to inquire.
4. By subsection (2) the person entitled to registration may not only
compel it but may hold the issuer liable in damages for unreasonable
delay.
5. See Section 8-404 as to the issuer's liability for wrongful registration
of transfer.
South Carolina Reporter's Comment to the 1991 Amendment
The proposed revision makes no change to an issuer's duty under South
Carolina law to register the transfer of a certificated security. New
language has been inserted to create parallel duties for an issuer who
receives an instruction to register the transfer, pledge, or release of an
uncertificated security, if the instruction meets the requirements of
paragraphs (a), (b), (c), (d), and (e) of subsection (1). Subsection (2)
extends an issuer's liability for loss caused by delay or failure to register the
transfer of a certificated security to situations in which the issuer has
unreasonably delayed to register the transfer, pledge, or release of an
uncertificated security.
Section 36-8-402. Assurance that indorsements and instructions are
effective.
(1) The issuer may require the following assurance that each necessary
indorsement of a certificated security or each instruction (Section 36-8-308)
is genuine and effective:
(a) in all cases, a guarantee of the signature (subsection (1) or (2) of
Section 36-8-312) of the person indorsing a certificated security or
originating an instruction including, in the case of an instruction, a
warranty of the taxpayer identification number or, in the absence thereof,
other reasonable assurance of identity;
(b) if the indorsement is made or the instruction is originated by
an agent, appropriate assurance of authority to sign;
(c) if the indorsement is made or the instruction is originated by a
fiduciary, appropriate evidence of appointment or incumbency;
(d) if there is more than one fiduciary, reasonable assurance that
all who are required to sign have done so; and
(e) if the indorsement is made or the instruction is originated by a
person not covered by any of the foregoing, assurance appropriate to the
case corresponding as nearly as may be to the foregoing.
(2) A `guarantee of the signature' in subsection (1) means a guarantee
signed by or on behalf of a person reasonably believed by the issuer to be
responsible. The issuer may adopt standards with respect to responsibility
if they are not manifestly unreasonable.
(3) `Appropriate evidence of appointment of incumbency' in
subsection (1) means:
(a) in the case of a fiduciary appointed or qualified by a court, a
certificate issued by or under the direction or supervision of that court or an
officer thereof and dated within sixty days before the date of presentation
for transfer, pledge, or release; or
(b) in any other case, a copy of a document showing the
appointment or a certificate issued by or on behalf of a person reasonably
believed by the issuer to be responsible or, in the absence of that document
or certificate, other evidence reasonably deemed by the issuer to be
appropriate. The issuer may adopt standards with respect to the evidence
they are not manifestly unreasonable. The issuer is not charged with notice
of the contents of any document obtained pursuant to this paragraph (b)
except to the extent that the contents relate directly to the appointment or
incumbency.
(4) The issuer may elect to require reasonable assurance beyond that
specified in this section but if it does so and, for a purpose other than that
specified in subsection (3)(b), both requires and obtains a copy of a will,
trust, indenture, articles of copartnership, bylaws, or other controlling
instrument, it is charged with notice of all matters contained therein
affecting the transfer, pledge, or release.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
None.
Purposes:
1. As is noted in the Comment to Section 8-401, the issuer is absolutely
liable for wrongful registration of transfer when the signature of the
indorser if unauthorized or is not that of an appropriate person or when an
instruction is not originated by an appropriate person. The issuer is entitled
to require such assurance as is reasonable under the circumstances that all
necessary indorsements are effective, and thus to minimize its risk. This
section establishes the requirements the issuer may make in terms of
documentation which, except in the rarest of instances, should be easily
furnished. If a demand for further assurance is reasonable under the
circumstances, subsection (4) applies.
2. Under subsection (1)(a) the issuer may require in all cases a
guarantee of signature (Section 8-312). When an instruction is presented
the issuer always may require either a warranty of taxpayer identification
number or some other reasonable assurance as to the identity of the
originator. Subsection (2) allows the issuer to require that the person
making these guarantees be one reasonably believed to be responsible, and
the issuer may adopt standards of responsibility which are not manifestly
unreasonable. In this aspect this section approves the practice of the
organized securities markets.
3. This section, by paragraphs (b) through (e) of subsection (1), permits
the issuer to seek confirmation of the effectiveness of the indorsement or
instruction. The permitted methods act as a double check on matters
which are within the warranties of the guarantor of signature. See Section
8-312. In addition, to some extent they act also as a check on the right to
transfer (i.e., to deliver the indorsed certificated security or to transmit an
instruction). Thus, an agent may be required to submit his power of
attorney, a corporation to submit a certified resolution evidencing the
authority of its signing officer to sign, an executor or administrator to
submit the usual "short-form certificate", etc. But failure of a
fiduciary to obtain court approval of the transferor to comply with other
requirements does not make his signature unauthorized. Section 8-308(11).
Hence court orders and other controlling instruments are omitted from
subsection (1).
Subsection (1)(c) authorizes the issuer to require "appropriate
evidence" of appointment or incumbency, and subsection (3)
indicates what evidence will be "appropriate". In the case of a
fiduciary appointed or qualified by a court that evidence will be a court
certificate dated within sixty days before the date of presentation. Where
the fiduciary is not appointed or qualified by a court, as in the case of a
successor trustee, subsection (3)(b) applies. Compare Section of the
Uniform Act for Simplification of Fiduciary Security Transfers. If the
security is registered in the name of the fiduciary, the issuer may under
Section 8-403(3)(a) assume without inquiry that the fiduciary status
continues until written notice to the contrary is received. Hence no
evidence of appointment or incumbency is needed unless such a notice has
been received. Compare Section 2 of the Uniform Act for Simplification of
Fiduciary Security Transfers.
Where subsection (3)(b) applies, the issuer may require a copy of a trust
instrument or other document showing the appointment, or it may require
the certificate of a responsible person. In the absence of such a document
or certificate, it may require other appropriate evidence. If a document is
obtained solely as "appropriate evidence of appointment or
incumbency" under subsection (3)(b), the issuer is not charged with
notice of its contents except to the extent that the contents relate directly to
the appointment or incumbency. But if the document is obtained for any
other purpose, the issuer may be charged under subsection (4). See Point 6
below.
4. There are many other types of situations where, under the case law,
the issuer would be deemed to have notice of possible adverse claims, and
therefore would register transfer at its peril. Typical are: knowledge that
the registered owner is dead, the fact that he is described or identifiable as a
fiduciary, etc. Perhaps the most ubiquitous is where a will, trust indenture
or other controlling instrument is on file with the issuer or transfer agent for
some other purpose (e.g., in the banking as distinct from the corporate
agency department of a trust company), but, unless specifically asked for,
would not come to the attention of the officers responsible for the
registration of security transfers. Here, under the cases, there is an area of
liability based upon notice of possible adverse claims affecting the right to
deliver the security, an area to which the warranties of the guarantor of
signature specifically do not extend. See Section 8-312(4). Also, it is the
area in which in the past issuers and their agents, fearing possible lawsuits
based upon unauthorized transfers by fiduciaries and the like, have made it
a practice to demand complete and convincing evidence that the transfer is
proper in all of its aspects. Section 8-403 and 8-404 strictly circumscribe
the issuer's liability in such cases, and this section therefore makes no
provisions for assurances to cover them.
5. Circumstances may indicate that a necessary signature was
unauthorized or was not that of an appropriate person. Such circumstances
would be ignored at risk of absolute liability, and to minimize that risk that
issuer may properly exercise the option given by subsection (4) to require
assurance beyond that specified in subsection (1). On the other hand, the
facts at hand may reflect only on the rightfulness of the transfer. Such facts
do not operate, as they did under prior law, automatically to create a duty of
inquiry, unless there is timely notification of the existence of an adverse
claim. See Section 8-403(1) and (4). If there is a duty of inquiry under
Section 8-403, the issuer may follow the procedure provided in Section
8-403(2) or (5), or it may discharge the duty of inquiry as to certificated
security "by any reasonable means". The same is true if the
issuer's overriding duty to conduct its functions in good faith (Section
1-203) comes into play - e.g., where the certificates security is indorsed or
the instruction is originated by a person known to the employee handling
the transaction for the issuer to be wanted by the police.
6. Specifically to implement the policy of this Act to discourage issuers
from requiring excessive documentation, subsection (4) provides that if the
issuer elects to require additional documentation for any purpose other than
to obtain "appropriate evidence of appointment or incumbency"
under subsection (3)(b) and both requires and obtains a copy of a will, trust,
indenture, article of co-partnership, by-laws or other controlling instrument,
it is charged with notice of all matters contained therein affecting the
transfer. It follows that an instrument voluntarily submitted, without
having been "required" by the issuer, may be returned without
examination.
But if the issuer has no duty to inquire and demands more than
reasonable assurance that the instruction or the certificated security may
refuse the demand and sue for improper refusal to register Section
8-401.
South Carolina Reporter's Comment to the 1991 Amendment
This section makes no change to South Carolina law with respect to the
issuer's ability to demand assurances of the effectiveness of the
indorsement of an uncertificated security. New language is added to permit
issuers to require similar assurances that an instruction is effective. In
addition, a new provision is added to subsection (1)(a) permitting issuers to
require reasonable proof of identity of persons originating instructions.
This new provision relates only to instructions and therefor only to
uncertificated securities.
Section 36-8-403. Issuer's Duty as to Adverse Claims.
(1) An issuer to whom a certificated security is presented for registra-
tion shall inquire into adverse claims if:
(a) a written notification of an adverse claim is received at a time and
in a manner affording the issuer a reasonable opportunity to act on it prior
to the issuance of a new, reissued, or reregistered certificated security and
the notification identifies the claimant, the registered owner, and the issue
of which the security is a part, and provides an address for communications
directed to the claimant; or
(b) the issuer is charged with notice of an adverse claim from a
controlling instrument it has elected to require under subsection (4) of
Section 36-8-402.
(2) The issuer may discharge any duty of inquiry by any reasonable
means, including notifying an adverse claimant by registered or certified
mail at the address furnished by him or, if there be no such address, at his
residence or regular place of business that the certificated security has been
presented for registration of transfer by a named person, and that the
transfer will be registered unless within thirty days from the date of mailing
the notification, either:
(a) an appropriate restraining order, injunction, or other process issues
from a court of competent jurisdiction; or
(b) there is filed with the issuer an indemnity bond sufficient in
the issuer's judgment to protect the issuer and any transfer agent, registrar,
or other agent of the issuer involved, from any loss it or they may suffer by
complying with the adverse claim.
(3) Unless an issuer is charged with notice of an adverse claim from a
controlling instrument which it has elected to require under subsection (4)
of Section 36-8-402 or receives notification of an adverse claim under
subsection (1) of this section, if a certificated security presented for
registration is indorsed by the appropriate person or persons the issuer is
under no duty to inquire into adverse claims. In particular:
(a) an issuer registering a certificated security in the name of a person
who is a fiduciary or who is described as a fiduciary is not bound to inquire
into the existence, extent, or correct description of the fiduciary
relationship; and thereafter the issuer may assume without inquiry that the
newly registered owner continues to be the fiduciary until the issuer
receives written notice that the fiduciary is no longer acting as such with
respect to the particular security;
(b) an issuer registering transfer on an indorsement by a fiduciary
is not bound to inquire whether the transfer is made in compliance with a
controlling instrument or with the law of the state having jurisdiction of the
fiduciary relationship, including any law requiring the fiduciary to obtain
court approval of the transfer; and
(c) the issuer is not charged with notice of the contents of any court
record or file or other recorded or unrecorded document even though the
document is in its possession and even though the transfer is made on the
indorsement of a fiduciary to the fiduciary himself or to his nominee.
(4) An issuer is under no duty as to adverse claims with respect to an
uncertificated security except:
(a) claims embodied in a restraining order, injunction, or other legal
process served upon the issuer if the process was served at a time and in a
manner affording the issuer a reasonable opportunity to act on it in
accordance with the requirements of subsection (5);
(b) claims of which the issuer has received a written notification
from the registered owner or the registered pledgee if the notification was
received at a time and in a manner affording the issuer a reasonable
opportunity to act on it in accordance with the requirements of subsection
(5);
(c) claims (including restrictions on transfer not imposed by the
issuer) to which the registration of transfer to the present registered owner
was subject and were so noted in the initial transaction statement sent to
him; and
(d) claims as to which an issuer is charged with notice from a
controlling instrument which it has elected to require under subsection (4)
of Section 36-8-402.
(5) If the issuer of an uncertificated security is under a duty as to an
adverse claim, he discharges that duty by:
(a) including a notation of the claim in any statements sent with
respect to the security under subsections (3), (6), and (7) of Section
36-8-408; and
(b) refusing to register the transfer or pledge of the security
unless the nature of the claim does not preclude transfer or pledge subject
thereto.
(6) If the transfer or pledge of the security is registered subject to an
adverse claim, a notation of the claim must be included in the initial
transaction statement and all subsequent statements sent to the transferee
and pledgee under Section 36-8-408.
(7) Notwithstanding subsections (4) and (5), if an uncertificated
security was subject to a registered pledge at the time the issuer first came
under a duty as to a particular adverse claim, the issuer has no duty as to
that claim if transfer of the security is requested by the registered pledgee
or an appropriate person acting for the registered pledgee unless:
(a) the claim was embodied in legal process which expressly provides
otherwise;
(b) the claim was asserted in a written notification from the
registered pledgee;
(c) the claim was one as to which the issuer was charged with notice
from a controlling instrument it required under subsection (4) of Section
36-8-402 in connection with the pledgee's request for transfer; or
(d) the transfer requested is to the registered owner.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
Section 3, Uniform Fiduciaries Act.
Purposes:
1. In consonance with the general policy of this Part 4 (See the
Comments to Sections 8-401 and 8-402), and subject always to the
overriding duty of good faith in the performance of its functions (Section
1-203) this section limits the issuer's duty as to adverse claims to the
specific situations stated in subsections (1) as to certificated securities and
(4) as to uncertificated securities.
Paragraph (a) of subsection (1) is the ordinary "stop
transfer" notice commonly resorted to by the owner of a lost or stolen
certificated security or in a situation where breach of trust, disregard of a
valid restriction on transfer, or other improper action is feared to have
occurred or to be about to occur.
Notification under paragraph (a) of subsection (1) must be
"written" (Section 1-201(46)) and must be
"received" (Section 1-201(26)) "at a time and in a manner
which affords the issuer a reasonable opportunity to act on it prior to the
issuance of a new, reissued, or re-registered security". Cf. Section
1-201(27). Its contents must be such as to make reasonably clear who
makes the claim and with respect to what security and where
communications may be addressed to him. Compare Section 5(a) of the
Uniform Act for Simplification of Fiduciary Security Transfers.
A notification once so received is easily keyed to the appropriate
records. Therefore, no defense of "forgotten notice", possibly
relevant on the issue of bona fide purchase as to bearer form securities, is
available under this section.
As to paragraph (b) see the Comments to Section 8-402.
2. With respect to certificated securities subsection (2) does not limit
the issuer to any specific method of discharging a duty of inquiry. It may
use "any reasonable means" including the procedure spelled out
in the subsection. That procedure, based on a New York statute respecting
adverse claims to bank deposits and on commercial practice, should be
effective in the large majority of cases to protect the rights of all interested
parties and relieve the issuer of further responsibility. No delay during the
thirty-day period will be "reasonable" under Section
8-401(2).
3. Subsection (3) is the converse of subsection (1) and spells out some
specific situations in which under prior law a duty to inquire existed or may
have existed. Compare Sections 2 and 3 of the Uniform Act for
Simplification of Fiduciary Security Transfers. As to the effect of
subsection (3)(a) on the effectiveness of an indorsement, see the Comment
to Section 8-404.
4. Transfer of uncertificated securities does not take place until
registration so that any mandated delay seriously impairs an owner's ability
to sell or pledge his security. Since a prudent purchaser may not pay unless
he receives a clean initial transaction statement, the effect of a rule giving
the issuer a duty to inquire any time it received any written notice of an
adverse claim, however frivolous, would be disastrous. Because of this
important difference between certificated and uncertificated securities,
there are separate provisions as to duty to inquire. Subsections (4), (5), (6),
and (7) apply only to uncertificated securities and are intended to
accommodate the interests of owners, purchasers, issuers, and adverse
claimants.
Subsection (4) states that an issuer has no duty as to adverse claims
except in four described situations. Mere written notifications result in a
duty only when they come from existing owners and pledgees and are
analogous to stop payment orders on checks. There is a duty as to claims to
which the security was subject when it was purchased by the present owner,
a situation with which the owner is already familiar. There is a duty as to
claims arising from the issuer's request for documentation under Section
8-402.
The significant difference of subsection (4) from subsection (1) is that
claims asserted by third parties, in order to impose a duty on the issuer,
must be supported by legal process. This will constitute assurance that the
claim is not merely frivolous and that its assertion is more than harassment.
In most cases the owner will have been notified and have had the
opportunity to be heard. While claims thus asserted may ultimately be
adjudged invalid, the owner will not be tied up by a bare written
communication from the claimant. On the other hand, while a more
substantial burden is imposed on the claimant, there is a channel through
which he can assert his claim before the rights of a bona fide purchaser
intervene.
If the claimant sues the owner in a court that has no jurisdiction over the
issuer and an injunction is issued against the owner forbidding him to
transfer the security, the issuer has a duty under paragraph (4)(a) if it
receives an authenticated copy of the order. Even though in that situation
the order is not directed to the issuer it is "legal process served upon
the issuer" for purposes of paragraph (4)(a). There is sufficient
guarantee that the complaint is not frivolous. Further, the issuer might
breach its duty to act in good faith if it registered a transfer in spite of such
clear evidence of impropriety.
5. Once it is established that the claim imposes a duty on the issuer,
notations of the claim must be contained in all statements sent with respect
to the security, and registration of transfer or pledge must be refused unless
the nature of the claim is consistent with transfer or pledge subject to the
claim. When transfer or pledge is registered subject to the claim,
subsection (6) requires that the claim be noted in all statements sent to the
transferee or pledgee.
Subsection (7) deals with the situation in which an uncertificated
security is already subject to as registered pledge when the issuer first
learns of an adverse claim as to which it has a duty. In that event, the
registered pledgee who became such without notice of the claim may be a
bona fide purchaser with the right to transfer the security free of the claim.
That right cannot be curtailed by the claim of a third party (including the
registered owner) unless legal process embodying the claim expressly deals
with the pledgee's interest. There is obviously no curtailment of the
pledgee's right when the claim is asserted by the pledgee himself. It should
be curtailed if the pledgee's right to obtain registration of transfer is called
into question by a controlling instrument which the issuer elects to require
before acting on the pledgee's request. Since the transfer to the registered
owner is the equivalent of a release of the pledge, such a transfer does not
terminate the issuer's duty as to the claim.
South Carolina Reporter's Comment to the 1991 Amendment
The 1991 amendments made no changes to South Carolina law relating
to issuers' duties to inquire as to adverse claims relating to certificated
securities. Prior law is preserved in subsections (1) through (3), with
wording changes made to indicate that these subsections relate only to
certificated securities, and for clarity. No change was made in the
substance of subsections (1) through (3).
New subsections (4) through (7) establish issuers' duties to inquire as to
adverse claims relating to uncertificated securities. These duties are quite
different than those relating to certificated securities, chiefly because, at the
time that an issuer is asked to register a certificated security, effective
transfer has already taken place by delivery of the certificate, so that the
parties' relative rights are already established, and notice of an infirmity
usually results only in delay of registration; in the case of an uncertificated
security, however, transfer cannot take place until the issuer registers the
transfer, and the issuer's delay in making such registration can seriously
impair the rights of the transferror and transferee. Accordingly, the issuer's
duties of inquiry relating to uncertificated securities are more explicit and
strict. Thus, while an issuer asked to register the transfer of a certificated
security may be put on notice, raising a duty of inquiry, by a simple
writing, one asked to register the transfer of an uncertificated security is
under no duty of inquiry except in the four circumstances described in
subsections (4). Most significantly, notices of adverse claims of third
parties must be supported by legal process. The triggers of subsections
(1)(a) (written notice) and (b) (controlling documents), relating to
certificated securities, are echoed in subsections (4)(b) and (d),
respectively, except that subsection (4)(b) is limited to written notices
originating with the registered owner or pledgee.
The safe harbors for discharge of the duty of inquiry are also more
particularized with respect to uncertificated securities. While a simple
notice to an adverse claimant will do for certificated securities, the issuer of
an uncertificated security must note the claim on any statements it issues
relating to the security in question, and must refuse to register the transfer if
the claim is of a nature precluding transfer (subsections (5) and (6)). The
latter action, in particular, could expose an issuer to liability (see Section
36-8-404), and fully justifies the narrow circumstances under which an
issuer of uncertificated securities is put on notice of inquiry.
Under subsection (7), registered pledgees who become such before the
issuer receives notice of adverse claims are given special rights to reflect
the possibility of their status as bona fide purchasers with a right to transfer
free of such claims. Such a pledgee's right to transfer cannot be affected by
any third-party claim except one embodied in legal process dealing directly
with the pledgee's interest (subsection (7)(a)) or one reflected in a
controlling instrument (subsection (7)(c)). Such a pledgee's right does not,
however, survive his own admission of a claim (subsection (7)(b)). If such
a pledgee seeks to transfer his interest back to the registered owner, the
pledgee needs no further protection (subsection (7)(d)).
Section 36-8-404. Liability and nonliability for registration.
(1) Except as otherwise provided in any law relating to the collection
of taxes, the issuer is not liable to the owner, pledgee, or any other person
suffering loss as a result of the registration of a transfer, pledge, or release
of a security if:
(a) there were on or with a certificated security the necessary
indorsements or the issuer had received an instruction originated by an
appropriate person (Section 36-8-308); and
(b) the issuer had no duty as to adverse claims or has discharged
the duty (Section 36-8-403).
(2) If an issuer has registered a transfer of a certificated security to a
person not entitled to it, the issuer on demand shall deliver a like security to
the true owner unless:
(a) the registration was pursuant to subsection (1);
(b) the owner is precluded from asserting any claim for
registering the transfer under subsection (1); or
(c) the delivery would result in overissue, in which case the issuer's
liability is governed by Section 36-8-104.
(3) If an issuer has improperly registered a transfer, pledge, or release
of an uncertificated security, the issuer on demand from the injured party
shall restore the records as to the injured party to the condition that would
have obtained if the improper registration had not been made unless:
(a) the registration was pursuant to subsection (1); or
(b) the registration would result in overissue, in which case the
issuer's liability is governed by Section 36-8-104.
OFFICIAL COMMENT
Prior Uniform Statutory Provisions:
None.
Purposes:
1. This section states the basic exonerative policy of this Article where
there is no duty to inquire into adverse claims and the certificated security
is appropriately indorsed or the issuer receives an instruction from an
appropriate person.
Note that under subsection (1)(a) exoneration depends on whether or
not the necessary indorsements were in fact on or with the security. The
issuer cannot, for example, defend a suit based on its having registered a
transfer on a forged indorsement on the ground that it received the
assurances listed in Section 8-402 and was under no duty to go further. It
has that option under Section 8-402(4).
Note, however, that this Act excludes from the category of
"unauthorized indorsement" (Section 8-311) certain situations
that might have been included in that category under prior law - e.g., where
there has been a change of circumstances subsequent to the signature
(subsection (10) of Section 8-308), and where the signature is that of a
fiduciary who has failed to obtain court approval of the transfer (subsection
(11) of Section 8-308). Similarly, when an issuer acts on the assumption
permitted by section (3)(a) of Section 8-403, that a fiduciary registered
owner continues to act as such, the "necessary indorsement"
under subsection (1)(a) of this section is that of the registered owner under
Section 8-308(8)(a), even though a successor has in fact been appointed. In
these and other cases, where the question is one affecting only the
rightfulness of the transfer, the issuer need only establish that it had no duty
under Section 8-403 to inquire into adverse claims or that it has discharged
any such duty.
2. The registered owner's right to receive a new security where the
issuer has wrongfully registered a transfer is established, but the cases have
also recognized his right to elect between an equitable action to compel
issue of a new security and an action for damages. Cf. Casper v.
Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754 (1914). Such
election of remedies is no longer available. The true owner of a certificated
security is now required to take a new security except where an overissue
would result and a similar security is not reasonably available for purchase.
See Section 8-104. The true owner of an uncertificated security is entitled
and required to take restoration of the records to their proper state, with a
similar exception for overissue.
Nothing in subsections (2) and (3) is intended to deny the owner the
right to choose the form of his security whenever the issuer maintains
securities of the same issue in both certificated and uncertificated form
(Section 8-407).
South Carolina Reporter's Comment to the 1991 Amendment
The 1991 amendments made no change to South Carolina law relating
to certificated securities. Similar limits on liability of issuers were
introduced for uncertificated securities, with receipt of an instruction
originated by an appropriate person serving as the analogue to receipt of a
certificated security bearing proper indorsements.
New subsection (3) establishes the remedies for improper registration,
pledge or release relating to uncertificated securities, with exceptions
parallel to those relating to certificated securities found in subsection
(2).
Section 36-8-405. Lost, destroyed, and stolen certificated securities.
(1) If a certificated security has been lost, apparently destroyed, or
wrongfully taken and the owner fails to notify the issuer of that fact within
a reasonable time after he has notice of it and the issuer registers a transfer
of the security before receiving notification, the owner is precluded from
asserting against the issuer any claim for registering the transfer under
Section 36-8-404 or any claim to a new security under this section.
(2) If the owner of a certificated security claims that the security has
been lost, destroyed, or wrongfully taken, the issuer shall issue a new
certificated security or, at the option of the issuer, an equivalent
uncertificated security in place of the original security if the owner:
(a) so requests before the issuer has notice that the security has been
acquired by a bona fide purchaser;
(b) files with the issuer a sufficient indemnity bond; and
(c) satisfies any other reasonable requirements imposed by the
issuer.
(3) If, after the issue of the new certificated or uncertificated security,
a bona fide purchaser of the original certificated security presents it for
registration of transfer, the issuer must register the transfer unless
registration would result in overissue, in which event the issuer's liability is
governed by Section 36-8-104. In addition to any rights on the indemnity
bond, the issuer may recover the new certificated security from the person
to whom it was issued or any person taking under him except a bona fide
purchaser or may cancel the uncertificated security unless a bona fide
purchaser or any person taking under a bona fide purchaser is then the
registered owner or registered pledgee thereof.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
Section 17, Uniform Stock Transfer Act.
Purposes:
1. By failing to notify the issuer within a reasonable time after he
knows or has reason to know of the loss or theft of his certificated security,
the owner is estopped from asserting the ineffectiveness of a forged or
unauthorized indorsement and the wrongfulness of the registration of the
transfer. Compare Section 8-311. If the lost security was indorsed by the
owner, then the registration of the transfer was not wrongful under Section
8-404 unless notice had been given to the issuer.
2. The long standing corporate practice of voluntarily issuing new
certificated securities to replace lost, destroyed or stolen ones is now
incorporated into law. Where reasonable requirements are satisfied and a
sufficient indemnity bond supplied, a court order is no longer necessary but
of course, the court may compel a recalcitrant issuer to take action.
Subsection (2) gives the issuer the alternative of issuing an
uncertificated security rather than a new certificated security. This
alternative will exist only when the particular issue is partly certificated and
partly uncertificated; and as a practical matter the ultimate choice will
belong to the owner (Section 8-407). Compare Section 8-401 and its
Comment.
3. Where an "original" certificated security has reached the
hands of a bona fide purchaser, the registered owner - who was in the best
position to prevent the loss, destruction or theft of his security - is now
deprived of the new security issued to him as a replacement. If the security
is certificated, the issuer has a right to recover it; and if the security is
uncertificated, the issuer may simply cancel the registration. This changes
the prior law under which the original security was ineffective after the
issue of a replacement except insofar as it might represent an action for
damages in the hands of a bona fide purchaser. Keller v. Eureka Brick
Mach. Mfg. Co., 43 Mo. App. 84, 11 L.R.A. 472 (1890). Where both the
original and the new security have reached bona fide purchasers the issuer
is now required to honor both securities unless an overissue would result
and the security is not reasonably available for purchase. See Section
8-104. In the latter case alone, the bona fide purchaser of the original
security is relegated to an action for damages. In either case, the issuer
itself may recover on the indemnity bond.
South Carolina Reporter's Comment to the 1991 Amendment
The only change to South Carolina law caused by the 1991 amendments
is the provision, in subsection (2), that the issuer of a lost, destroyed or
stolen certificated security may replace the security with an uncertificated
one at the issuer's option. Necessarily, this option would exist only in cases
of "mixed" issues -- that is, issues of securities issuable in
either certificated or uncertificated form. A registered owner dissatisfied
with an uncertificated security received under this section may exchange it,
under Section 36-8-407.
If, after replacement, a security is presented by a bona fide purchaser, an
uncertificated security issued as a replacement may be cancelled under the
same conditions that a replacement certificated security could be
recovered.
Section 36-8-406. Duty of authenticating trustee, transfer agent, or
registrar.
(1) If a person acts as authenticating trustee, transfer agent, registrar,
or other agent for an issuer in the registration of transfers of its certificated
securities or in the registration of transfers, pledges, and releases of its
uncertificated securities, in the issue of new securities, or in the
cancellation of surrendered securities:
(a) he is under a duty to the issuer to exercise good faith and due
diligence in performing his functions; and
(b) with regard to the particular functions he performs, he has the
same obligation to the holder or owner of a certificated security or to the
owner or pledgee of an uncertificated security and has the same rights and
privileges as the issuer has in regard to those functions.
(2) Notice to an authenticating trustee, transfer agent, registrar, or
other agent is notice to the issuer with respect to the functions performed by
the agent.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
None.
Purposes:
1. Transfer agents, registrars and the like are here expressly held liable
to both the issuer and the owner for wrongful refusal to register a transfer
as well as wrongful registration of a transfer in any case within the scope of
their respective functions where the issuer would itself be liable. Those
cases which have regarded these parties solely as agents of the issuer and
have therefore refused to recognize their liability to the owner for mere
non-feasance, i.e., refusal to register a transfer, are now rejected. Hulse v.
Consolidated Quicksilver Mining Corp., 65 Idaho 768, 154 P.2d 149
(1944); Nicholson v. Morgan, 119 Misc. 309, 196 N.Y. Supp. 147 (1922);
Lewis v. Hargadine-McKittrick Dry Goods Co., 305 Mo. 396, 274 S.W.
1041 (1924).
2. The practice frequently followed by authenticating trustees of
issuing certificates of indebtedness rather than authenticating duplicate
certificates where securities have been lost or stolen now becomes obsolete
in view of the provisions of the preceding section of this Article, which
makes express provision for the issue of substitute securities. It can no
longer be considered a breach trust or lack of due diligence for trustees to
authenticate new securities (or initial transaction statements). Cf.
Switzerland General Ins. Co. v. N.Y.C. & H.R.R. Co., 152 App. Div.
70, 136 N.Y.S. 726 (1912).
3. "Good faith and due diligence" require the use of
reasonable care and the observance of "reasonable" commercial
standards, and preclude arbitrary, capricious, over-cautious and
super-technical objections and requirements. See Powers v. Universal Film
Mfg. Co., 162 App. Div. 806, 148 N.Y.S. 114 (1914). Compliance with the
provisions of this Article as to the documents which an issuer may properly
require before registering a transfer in cases where there has been no notice
of adverse claims (Section 8-402) constitutes due diligence on the part of
these agents, and by insisting upon more than could incur liability for
wrongful refusal to register a transfer.
South Carolina Reporter's Comment to the 1991 Amendment
The 1991 amendments made no change in this section, except to add
new language to expand its coverage to the agents of an issuer of
uncertificated securities.
Section 36-8-407. Exchangeability of Securities.
(1) No issuer is subject to the requirements of this section unless it
regularly maintains a system for issuing the class of securities involved
under which both certificated and uncertificated securities are regularly
issued to the category of owners, which includes the person in whose name
the new security is to be registered.
(2) Upon surrender of a certificated security with all necessary
indorsements and presentation of a written request by the person
surrendering the security, the issuer, if he has no duty as to adverse claims
or has discharged the duty (Section 36-8-403), shall issue to the person or a
person designated by him an equivalent uncertificated security subject to all
liens, restrictions, and claims that were noted on the certificated
security.
(3) Upon receipt of a transfer instruction originated by an appropriate
person who so requests, the issuer of an uncertificated security shall cancel
the uncertificated security and issue an equivalent certificated security on
which must be noted conspicuously any liens and restrictions of the issuer
and any adverse claims (as to which the issuer has a duty under subsection
(4) of Section 36-8-403) to which the uncertificated security was subject.
The certificated security must be registered in the name of and delivered
to:
(a) the registered owner, if the uncertificated security was not subject
to a registered pledge; or
(b) the registered pledgee, if the uncertificated security was
subject to a registered pledge.
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
None.
Purposes:
This section deals with the right of the holder of a certificated security
to exchange it for an equivalent uncertificated security and the right of the
registered owner or registered pledge of an uncertificated security to obtain
a certificated security in exchange for it. This section is applicable only in
those situations where both certificated and uncertificated securities exist
within the same issue and either form is available to the particular owner.
Subsection (1) so limits its applicability.
Neither this nor any other section of this Article is intended to mandate
the establishment or continuance of a dual system of registration. It is
contemplated that some issuers may provide for both forms of securities on
a more or less indefinite basis. Issuers of existing issues which are
necessarily wholly certificated may make uncertificated securities available
with the intention to phase out the certificated securities over a period of
time. Some issuers, if permitted by relevant law, may restrict the
availability of uncertificated securities to particular categories of owners,
e.g., brokers, banks and institutions.
Subsection (2) provides the mechanism for the holder of a certificated
security to surrender it to the issuer and have an equivalent uncertificated
security issued in exchange. Subsection (3) provides an analogous
mechanism for the registered owner of an unencumbered uncertificated
security or the registered pledgee of an otherwise unencumbered
uncertificated security to obtain equivalent certificated securities from the
issuer. Since Section 8-403 treats adverse claims with respect to
certificated securities differently from adverse claims with respect to
uncertificated securities, subsection (2) requires the issuer to honor the
request only if it has no duty as to adverse claims. If it honored the request
despite the presence of such a duty, the adverse claimant's right to block
transfer might be modified. For example, if the issuer of a certificated
security had received written notice from the claimant, it would be under a
duty to inquire and to delay registration of transfer pending the results of
the inquiry. However, if it issued an uncertificated security in place of the
certificate, then it would no longer be under a duty (Section 8-403(4)(b))
and would register transfer to a bona fide purchaser without including any
notation of the claim (Section 8-403(5)).
On the other hand, if the issuer is under a duty as to adverse claims with
respect to an uncertificated security it will also be under a similar duty with
respect to a certificate security issued to represent the same interest.
Compare subsections (1) and (4) of Section 8-403. Potential purchasers
will be unable to purchase free of the claim, since they will be given notice
through notation on the certificate. See Sections 8-304, 8-202 and
1-201(25).
South Carolina Reporter's Comment to the 1991 Amendment
This section, new with the 1991 amendments, establishes the limited
duty of an issuer to exchange certificated for uncertificated securities and
vice versa. The section is not intended to require issuers to establish or
maintain dual systems of registration. Except for establishing this duty, no
change was made in South Carolina law by this new section.
Section 36-8-408. Statements of Uncertificated Securities.
(1) Within two business days after the transfer of an uncertificated
security has been registered, the issuer shall send to the new registered
owner and, if the security has been transferred subject to a registered
pledge, to the registered pledgee a written statement containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the number of shares or units transferred;
(c) the name and address and any taxpayer identification number of
the new registered owner and, if the security has been transferred subject to
a registered pledge, the name and address and any taxpayer identification
number of the registered pledgee;
(d) a notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under subsection (4) of
Section 36-8-403) to which the uncertificated security is or may be subject
at the time of registration or a statement that there are none of those liens,
restrictions, or adverse claims; and
(e) the date the transfer was registered.
(2) Within two business days after the pledge of an uncertificated
security has been registered, the issuer shall send to the registered owner
and the registered pledgee a written statement containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the number of shares or units pledged;
(c) the name and address and any taxpayer identification number of
the registered owner and the registered pledgee;
(d) a notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under subsection (4) of
Section 36-8-403) to which the uncertificated security is or may be subject
at the time of registration or a statement that there are none of those liens,
restrictions, or adverse claims; and
(e) the date the pledge was registered.
(3) Within two business days after the release from pledge of an
uncertificated security has been registered, the issuer shall send to the
registered owner and the pledgee whose interest was released a written
statement containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the number of shares or units released from pledge;
(c) the name and address and any taxpayer identification number of
the registered owner and the pledgee whose interest was released;
(d) a notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under subsection (4) of
Section 36-8-403) to which the uncertificated security is or may be subject
at the time of registration or a statement that there are none of those liens,
restrictions, or adverse claims; and
(e) the date the release was registered.
(4) An `initial transaction statement' is the statement sent to:
(a) the new registered owner and, if applicable, to the registered
pledgee pursuant to subsection (1);
(b) the registered pledgee pursuant to subsection (2); or
(c) the registered owner pursuant to subsection (3).
Each initial transaction statement must be signed by or on behalf of the
issuer and must be identified as `Initial Transaction Statement'.
(5) Within two business days after the transfer of an uncertificated
security has been registered, the issuer shall send to the former registered
owner and the former registered pledgee, if any, a written statement
containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the number of shares or units transferred;
(c) the name and address and any taxpayer identification number of
the former registered owner and of any former registered pledgee; and
(d) the date the transfer was registered.
(6) At periodic intervals no less frequent than annually and at any time
upon the reasonable written request of the registered owner, the issuer shall
send to the registered owner of each uncertificated security a dated written
statement containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the name and address and any taxpayer identification number
of the registered owner;
(c) the number of shares or units of the uncertificated security
registered in the name of the registered owner on the date of the
statement;
(d) the name and address and any taxpayer identification number
of any registered pledgee and the number of shares or units subject to the
pledge; and
(e) a notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under subsection (4) of
Section 36-8-403) to which the uncertificated security is or may be subject
or a statement that there are none of those liens, restrictions, or adverse
claims.
(7) At periodic intervals no less frequent than annually and at any time
upon the reasonable written request of the registered pledgee the issuer
shall send to the registered pledgee of each uncertificated security a dated
written statement containing:
(a) a description of the issue of which the uncertificated security is a
part;
(b) the name and address and any taxpayer identification number
of the registered owner;
(c) the name and address and any taxpayer identification number of
the registered pledgee;
(d) the number of shares or units subject to the pledge; and
(e) a notation of any liens and restrictions of the issuer and any
adverse claims (as to which the issuer has a duty under subsection (4) of
Section 36-8-403) to which the uncertificated security is or may be subject
or a statement that there are none of those liens, restrictions, or adverse
claims.
(8) If the issuer sends the statements described in subsections (6) and
(7) at periodic intervals no less frequent than quarterly the issuer is not
obliged to send additional statements upon request unless the owner or
pledgee requesting them pays to the issuer the reasonable cost of furnishing
them.
(9) Each statement sent pursuant to this section must bear a
conspicuous legend reading substantially as follows: `This statement is
merely a record of the rights of the addressee as of the time of its issuance.
Delivery of this statement, of itself, confers no rights on the recipient. This
statement is neither a negotiable instrument nor a security.'"
OFFICIAL COMMENT
Prior Uniform Statutory Provision:
None.
Purposes:
1. This section obliges the issuer of uncertificated securities to send
certain statements. The required statements are of two types. Transaction
statements, required by subsections (1), (2), (3) and (5) are analogous to
debit and credit advices and the periodic statements can be reconciled from
them. Periodic statements, required by subsections (6) and (7) are
analogous to bank statements and will advise owners and pledgees of their
positions at given points in time.
The transaction statements, which are mandated upon the registration of
transfer, pledge or release, must be sent within two days after the relevant
registration, but it is contemplated that such statements will be prepared
virtually simultaneously with the actual registration and sent immediately
thereafter. They are intended to serve two functions. They are notice to the
transferor - (the owner in the case of transfer or pledge, the pledgee in the
case of release from pledge, and both the owner and the pledgee in the case
of transfer subject to a pledge, transfer of the pledge interest alone or
simultaneous transfer and release from pledge) - that his interest has been
altered. In the event of fraudulent, unauthorized or otherwise improper
registration, the transaction statement will serve as notice that timely action
should be taken.
More importantly, these statements are notice to the transferee (new
owner in the case of a transfer, pledgee in the case of a pledge, present
owner in the case of a release) that the increase of his interest has, in fact,
been registered. Furthermore, since all statements except those required by
subsection (5) must include a notation of defeats or an express statement
that there are none, these statements will give the transferee the assurance
equivalent to that afforded by a "clean" certificated security
and create an estoppel against the issuer. Since registration is the critical
step in the transfer of rights, the issuer's transaction statement should
include, and the purchaser who receives the statement should be charged
with notice of, only those claims, liens and restrictions existing at the time
of registration. Compare Section 8-304(2).
It is contemplated that transferees will and should be able to rely on
these statements and in many cases, will not part with their consideration
until they receive them. To ensure that the statements will have the desired
effect of establishing rights for the transferee against the issuer, subsection
(4) requires that the copy of each transaction statement sent to the
transferee, called an "initial transaction statement," be signed.
Note that Section 1-201(39) does not require a manual signature for
compliance with this requirement. Compare also Sections 8-103(b),
8-105(3)(d), 8-202, 8-204(b), 8-205, 8-206, 8-208, 8-304, 8-311, 8-319 and
8-403 for the effects of initial transaction statements.
2. Whenever the issuer registers a transfer of the pledge interest alone,
subsections (2) and (3) read together require the issuer to send transaction
statements to both the registered owner and the former registered pledgee
as well as to the new registered pledgee. Compare Section 8-207(4) and its
Comment 1.
3. The frequency of one year, with which periodic statements must be
sent to owners and pledgees, is intended to be a minimum requirement for
all issuers, including closely held corporations. Owners and pledgees are
entitled to request additional statements of position at any time. It is
contemplated, however, that publicly held issuers will adopt the practice of
sending quarterly statements conforming to the common practice of
sending quarterly reports and dividend checks. For those that do,
subsection (8) eliminates the obligation to furnish additional statements of
position on request unless the issuer is reimbursed for the additional
cost.
4. Subsection (9) requires that a conspicuous legend be borne by each
statement as a protection against unjustified reliance on statements of
uncertificated securities by persons who might deal with them. Except for
this requirement and the requirement of subsection (4) that the words
"Initial Transaction Statement" be included, the form of the
statements required by this section is not prescribed. Perhaps the forms
now used by the transfer agents of mutual funds to confirm acquisitions,
dispositions, reinvestment of dividends, periodic liquidations and
statements of position will serve as a model.
South Carolina Reporter's Comment to the 1991 Amendment
This section, new with the 1991 amendments, establishes the
requirements that issuers of uncertificated securities produce transaction
and periodic statements relating to such securities, and defines the contents
of such statements. This section does not affect prior law relating to
certificated securities.
Other 1976 Code section provisions revised
SECTION 2. (A) Section 36-1-201(5), (14), and (20) of the 1976 Code
are respectively amended to read:
"(5) `Bearer' means the person in possession of an instrument,
document of title, or certificated security payable to bearer or indorsed in
blank.
(14) `Delivery' with respect to instruments, documents of title, chattel
paper or certificated securities means voluntary transfer of possession.
(20) `Holder' means a person who is in possession of a document of title
or an instrument or a certificated investment security drawn, issued, or
indorsed to him or to his order or to bearer or in blank."
South Carolina Reporter's Comment to 1991 Amendment
Subsections (5), (14) and (20) were amended in 1991 to distinguish
securities represented by certificates ("certificated securities")
from those not so represented. See Section 36-8-102(a) and (b).
Subsections (5), (14) and (20), each of which contemplates a physical act or
a writing, apply only to certificated securities.
(B) Section 36-5-114(2) of the 1976 Code is amended to read:
"(2) Unless otherwise agreed when documents appear on their
face to comply with the terms of a credit but a required document does not
in fact conform to the warranties made on negotiation or transfer of a
document of title (Section 36-7-507) or of a certificated security (Section
36-8-306) or is forged or fraudulent or there is fraud in the transaction:
(a) the issuer must honor the draft or demand for payment if honor is
demanded by a negotiating bank or other holder of the draft or demand
under the credit and under circumstances which would make it a holder in
due course (Section 36-3-302) and in an appropriate case would make it a
person to whom a document of title has been duly negotiated (Section
36-7-502) or a bona fide purchaser of a certificated security (Section
36-8-302); and
(b) in all other cases as against its customer, an issuer acting in
good faith may honor the draft or demand for payment despite notification
from the customer of fraud, forgery, or other defect not apparent on the face
of the documents but a court of appropriate jurisdiction may enjoin such
honor."
South Carolina Reporter's Comments to 1991 Amendment
Subsection (2) was amended by addition of the word
"certificated" in two places, to make clear that the provisions of
the subsection apply to securities only when represented by certificates.
See Section 36-8-102(a) and (b). No other change was made in this section
by the 1991 amendment.
(C) Section 36-9-103(3)(a) of the 1976 Code, as last amended by Act
494 of 1988, is further amended to read:
"(a) This subsection applies to accounts (other than an account
described in subsection (5) on minerals) and general intangibles (other than
uncertificated securities) and to goods which are mobile and which are of a
type normally used in more than one jurisdiction, such as motor vehicles,
trailers, rolling stock, airplanes, shipping containers, road building and
construction machinery, and commercial harvesting machinery, and the
like, if the goods are equipment or are inventory leased or held for lease by
the debtor to others and are not covered by a certificate of title described in
subsection (2)."
(D) Section 36-9-103 of the 1976 Code is amended by adding a new
subsection (6) to read:
"(6) Uncertificated securities. The law (including the conflict
of laws rules) of the jurisdiction of organization of the issuer governs the
perfection and the effect of perfection or nonperfection of a security interest
in uncertificated securities."
South Carolina Reporter's Comment to 1991 Amendment
Subsection (3) was amended to make clear that uncertificated securities
(see Section 36-8-102(a) and (b)) are not intended to be general intangibles.
A new subsection (6) was added to designate the law governing matters
relating to perfection of uncertificated securities.
(E) Section 36-9-105(1)(i) of the 1976 Code, as last amended by Act
494 of 1988, is further amended to read:
"(i) `Instrument' means a negotiable instrument (defined in
Section 36-3-104) or a certificated security (defined in Section 36-8-102) or
any other writing which evidences a right to the payment of money and is
not itself a security agreement or lease and is of a type which is in ordinary
course of business transferred by delivery with any necessary endorsement
or assignment;".
South Carolina Reporter's Comment to 1991 Amendment
Subsection (1)(i) was amended by the addition of the word
"certificated", to make clear that securities represented by
certificates, but not uncertificated securities, are instruments. See Section
36-8-102(a) and (b).
(F) Section 36-9-203(1) of the 1976 Code, as last amended by Act 494
of 1988, is further amended to read:
"(1) Subject to the provisions of Section 36-4-208 on the
security interest of a collecting bank, Section 36-8-321 on security interests
in securities, and Section 36-9-113 on a security interest arising under the
chapter on Sales, a security interest is not enforceable against the debtor or
third parties with respect to the collateral and does not attach unless:
(a) the collateral is in the possession of the secured party
pursuant to agreement, or the debtor has signed a security agreement which
contains a description of the collateral and in addition, when the security
interest covers crops growing or to be grown or timber to be cut, a
description of the land concerned;
(b) value has been given;
(c) the debtor has rights in the collateral."
South Carolina Reporter's Comment to 1991 Amendment
Subsection (1) was amended by reference to Section 36-8-321, to make
clear that the operation of this section is expressly subject to the operation
of Section 36-8-321. See the South Carolina Reporter's Comment to the
1991 Amendment to Section 36-8-321.
(G) Section 36-9-302(1)(f) of the 1976 Code is amended to read:
"(f) a security interest of a collecting bank (Section 36-4-208)
or in securities (Section 36-8-321) or arising under the chapter on Sales
(Section 36-9-113) or covered in subsection (3) of this section;".
South Carolina Reporter's Comment to 1991 Amendment
Subsection (1)(f) was amended by the addition of a reference to
securities, to make clear that the provisions for perfection in a security were
moved, by the 1991 amendments, to Section 36-8-321.
(H) Section 36-9-304 of the 1976 Code, as last amended by Act 494 of
1988, is further amended to read:
"Section 36-9-304. (1) A security interest in chattel paper
or negotiable documents may be perfected by filing. A security interest in
money or instruments (other than certificated securities or instruments
which constitute part of chattel paper) can be perfected only by the secured
party's taking possession, except as provided in subsections (4) and (5) of
this section and subsections (2) and (3) of Section 36-9-306 on
proceeds.
(2) During the period that goods are in the possession of the
issuer of a negotiable document therefor, a security interest in the goods is
perfected by perfecting a security interest in the document, and any security
interest in the goods otherwise perfected during such period is subject
thereto.
(3) A security interest in goods in the possession of a bailee other
than one who has issued a negotiable document therefor is perfected by the
issuance of a document in the name of the secured party or by the bailee's
receipt of notification of the secured party's interest or by filing as to the
goods.
(4) A security interest in instruments or negotiable documents is
perfected without filing or the taking of possession for a period of twenty-one days from the time it attaches to the extent that it arises for new value
given under a written security agreement.
(5) A security interest remains perfected for a period of
twenty-one days without filing where a secured party having a perfected
security interest in an instrument (other than a certificated security), a
negotiable document, or goods in possession of a bailee other than one who
has issued a negotiable document for the goods:
(a) makes available to the debtor the goods or documents
representing the goods for the purpose of ultimate sale or exchange or for
the purpose of loading, unloading, storing, shipping, transshipping,
manufacturing, processing, or otherwise dealing with them in a manner
preliminary to their sale or exchange, but priority between conflicting
security interest in the goods is subject to subsection (3) of Section 36-9-312; or
(b) delivers the instrument to the debtor for the purpose of
ultimate sale or exchange or of presentation, collection, renewal, or
registration of transfer.
(6) After the twenty-one day period in subsections (4) and (5)
perfection depends upon compliance with the applicable provisions of this
chapter."
South Carolina Reporter's Comment to 1991 Amendment
Subsections (1) and (5) were amended to make clear that perfection in
securities, including those represented by certificates which are treated as
instruments (Section 36-9-105(1)(i)), is no longer dealt with by this section.
See Section 36-8-321.
(I) Section 36-9-305 of the 1976 Code, as last amended by Act 494 of
1988, is further amended to read:
"Section 36-9-305. A security interest in letters of credit and
advice of credit (subsection (2)(a) of Section 36-5-116), goods, instruments
(other than certificated securities), money, negotiable documents, or chattel
paper may be perfected by the secured party's taking possession of the
collateral. If such collateral other than goods covered by a negotiable
document is held by a bailee, the secured party is considered to have
possession from the time the bailee receives notification of the secured
party's interest. A security interest is perfected by possession from the time
possession is taken without a relation back and continues only so long as
possession is retained, unless otherwise specified in this chapter. The
security interest may be otherwise perfected as provided in this chapter
before or after the period of possession by the secured party."
South Carolina Reporter's Comment to 1991 Amendment
This section was amended in 1991 by addition of the parenthetical in
the first sentence, making clear that matters relating to perfection in
securities represented by certificates are now found in Chapter 8 of this
Title. See Section 36-8-321.
(J) Section 36-9-309 of the 1976 Code, as last amended by Act 494 of
1988, is further amended to read:
"Section 36-9-309. Nothing in this chapter limits the rights of a
holder in due course of a negotiable instrument (Section 36-3-302) or a
holder to whom a negotiable document of title has been duly negotiated
(Section 36-7-501) or a bona fide purchaser of a security (Section
36-8-302), and the holders or purchasers take priority over an earlier
security interest even though perfected. Filing under this chapter does not
constitute notice of the security interest to the holders or
purchasers."
South Carolina Reporter's Comment to 1991 Amendment
This section was amended in 1991 to reflect the movement of the
definition of a bona fide purchaser of a security to Section 36-8-302.
(K) Section 36-9-312(7) of the 1976 Code, as added by Act 494 of
1988, is amended to read:
"(7) If future advances are made while a security interest is
perfected by filing or the taking of possession or under Section 36-8-321 on
securities, the security interest has the same priority for the purposes of
subsection (5) with respect to the future advances as it does with respect to
the first advance. If a commitment is made before or while the security
interest is perfected, the security interest has the same priority with respect
to advances made thereto. In other cases a perfected security interest has
priority from the date the advance is made."
South Carolina Reporter's Comment to 1991 Amendment
Subsection (7) was amended in 1991 to reflect the movement of
provisions governing perfection in securities to Section 36-8-321.
Analysis lines, Official Comments, and Reporter's Comments
SECTION 3. The analysis lines, the amended official comments, and
the South Carolina Reporter's Comments in or after each code section of
Chapter 8 of Title 36 of the 1976 Code, as contained in Section 1 are for
informational purposes only and are not deemed to be part of the code
section itself.
Time effective
SECTION 4. This act takes effect upon approval by the Governor.
Approved the 12th day of June, 1991. |