The Role of Transfer Agents in Corporate Actions

When it comes to corporate actions, some are routine and some are highly complex, but no two are exactly alike. But they all require a competent and experienced transfer agent.

A corporate action is any undertaking by an organization, public or private, that impacts the stock, the way it is traded or the company’s bondholders or shareholders. An action can be as simple as paying a dividend, or as complex as a Reverse Morris Trust transaction. More complicated events tend to involve the exchange of securities, a new entity or the creation of a new shareholder base. Any corporate action that involves shareholders requires a transfer agent; if two companies are involved, they can select either company’s transfer agent to handle the action.

Common corporate actions include:

  • deSPACs
  • Mergers and acquisitions
  • Initial and secondary public offerings
  • Spin-offs
  • Dutch auctions
  • Tender offers
  • Reorganizations
  • Exchanges
  • Emergence from bankruptcy
  • Corporate rebranding
  • Forward or reverse stock splits
  • Rights offerings

Corporate actions can be stressful for everyone involved. There’s a high level of complexity, involving several different entities, with lots of moving parts. These actions require knowledge, excellent communication and perfect timing. If something goes wrong, there are no do-overs.

An experienced transfer agent can take the pressure off the company’s shoulders and guide everyone through the process. They work with the legal, trading, and settlement teams to make sure everyone fully understands the transaction and the timing. Part of that is knowing and following best practices for each type of corporate action to anticipate and prevent problems.

Five Things to Help See the Bigger Picture
Communication is the most important aspect of a successful corporate action. The involvement of multiple entities means greater coordination — everybody needs to be on the same page. A transfer agent can orchestrate this process and provide the consistency of a single point of contact. Most companies rely heavily on their legal advisors to guide them through a corporate action. While a law firm may fully understand the objectives and the legalities of the transaction — depending on the complexity of the transaction — they may not always be familiar with the trading aspect or the settlement aspect. There may also be inconsistencies with handlings various tasks at a law firm. That’s where a transfer agent comes in.

5 important things to consider:

  1. There is no “one size fits all” process.
  2. Actions may involve a high level of complexity with numerous entities.
  3. It’s critical that everyone is on the same page.
  4. Companies have a choice in who they engage to handle this process.
  5. Firms have only one chance to get it right.

A transfer agent with lots of corporate actions experience is often the best choice to facilitate the process. An agent acts as the conduit from the legal team to the trading team (wherever the stock is traded or not traded), to the settlement team at the Depository Trust Company (DTC). They know who to talk to and when, what’s expected and how it has to work. They will layout a timeline, down to the day, for each step.

The transfer agent is not just a facilitator; they’re a trusted partner acting on behalf of the company that engaged them. In addition to strategic advice, the transfer agent assists with the vital functions of payments, reporting and mailings, including:

  • Shareholder materials
  • Shareholder communication
  • Processing and mailing of proceeds
  • Advice regarding communication with exchanges and settlement facilitators
  • Tax reporting
  • Post-merger services

Engaging a transfer agent can help your next corporate action or transaction go smoothly and keep shareholder engagement strong.

Policing Your S Corporation Status: Six Simple Steps


s-corporation-12-30-15.pngS corporations have an obligation to police their shareholder base to see that all shareholders remain eligible. A common problem S corporations face is making sure that after the subchapter S election is made, it stays effective. When a bank is gearing up to make its S election, attorneys and accountants are typically reviewing shareholder documentation to confirm eligibility. But, after the S election is effective, most banks do not regularly review their shareholders’ list to confirm eligibility. Actions beyond the bankers’ control, such as the death or divorce of a shareholder, can result in an inadvertent termination of the S election. The tax consequences for the company and its shareholders can be disastrous.

Here is a common scenario.  A bank has a shareholder who passes away. The executor, who is much more concerned with administering the estate than protecting the bank’s S election, either transfers the bank shares to an ineligible shareholder, such as a corporation, or does nothing and leaves the shares in the estate. While an estate is an eligible shareholder, an estate does terminate for tax purposes at some point, so as a general rule, shares cannot be held in an estate indefinitely. The executor fails to notify the bank that the shareholder has passed away for several years. Dividend checks continue to be cashed in the name of the deceased shareholder. All the while, the bank is not aware of what has happened

Then, sometimes years later, something raises the issue. For example, the executor may finally contact the bank to effect the transfer of the shares, or a new review of the bank’s shareholder list may raise questions about why an estate is still a shareholder. Only then does the bank realize that the shareholder’s will transferred the shares to a corporation or that the shares have been sitting in the estate for many years. As a result, the S election has been compromised.

The good news is that the IRS has a program in place for S corporations to request relief for inadvertent terminations. However, consent of 100 percent of the S corporation shareholders is required, along with a filing to the IRS and a substantial filing fee.

It can be time consuming to obtain the requested relief from the IRS, but going through the process is essential if there has been an inadvertent termination. However, through the suggestions below, bankers may be able to avoid the inadvertent termination in the first place, which is obviously preferable:

  1. Review shareholders’ list: The bank should conduct a detailed review of the list of shareholders at least annually to confirm all shareholders are eligible. In addition, every two years, the bank’s accountants or attorneys should conduct a detailed review of the list.
  2. Review the shareholders’ agreement: Most S corporations have a shareholders’ agreement in place to protect the S election. If the shareholders’ agreement was drafted several years ago, an attorney should review it to confirm that the agreement is up to date with current law. In addition, the agreement should contain protections in the event the S election is inadvertently terminated, such as shareholder indemnification of the expenses incurred in connection with obtaining relief for the inadvertent termination and a covenant by the shareholders to take all steps necessary to remedy the inadvertent termination. There are other provisions that are useful as well.
  3. Shareholder communication: On an annual basis, banks should send a certification to each shareholder to confirm the shareholder still qualifies as an eligible shareholder. This annual certification requirement can be built into the shareholders’ agreement or something that the bank just sends out on its own each year.
  4. Remind shareholders of estate planning issues: Either in conjunction with the annual certification or separately, remind shareholders about the consequences upon the shareholder’s death. For example, a shareholder should talk with the attorney who drafted his or her will to confirm that the shares pass to an eligible shareholder.
  5. Train the bank’s corporate secretary: The corporate secretary should be mindful of S corporation qualifications and eligibility issues as well as common issues that could impact the S election. The corporate secretary can possibly help avoid an inadvertent termination by being proactive and asking the right questions.
  6. Road map memos: Banks should consider requiring shareholders, for example, as part of the shareholders’ agreement, to have their estate planning attorneys provide the bankers with a letter or memorandum detailing what happens to the shares upon the death of a shareholder, especially if the shares are already held in a trust.

By taking the steps above, a potential inadvertent termination of a bank’s subchapter S election can be avoided. An ounce of prevention is worth a pound of cure.