Stock Assignment Agreement: Everything You Need to Know
A stock assignment agreement is the transfer of ownership of stock shares.3 min read
A stock assignment agreement is the transfer of ownership of stock shares. It occurs when one party legally transfers their shares of stock property to another party or to a business. It's like the type of assignment agreement that happens when one person sells a car to another, which can also be referred to as assigning the vehicle's title to a new owner.
Examples of Assignment of Shares
In the first example of assignment of shares, the seller is assigning a certain number of shares to the buyer. That number includes the percentage of the shares that the buyer can potentially forfeit. This is only to the extent that the underwriter over-allowed an option, which is described in the company's statement of registration using Form S-1 and amended under the 1933 Securities Act.
Part of those shares the buyer holds can equal up to 25 percent of the total shares. Those shares are referred to as the "buyer earnout" shares and are potentially forfeited by the buyer in the following manner:
- Half of the buyer earnout shares are potentially forfeited if the last price that the company stock sells at doesn't equal or exceed a specified amount, such as $12 per share. This number is arrived at after any stock splits, reorganization, stock dividends are paid, and any recapitalization. These things may have occurred during any 20-day trading period within the past 30 days of trading. It also may have been within the past two years after the company's initial business combination closing.
- Information on the initial business combination closing date is found in the registration statement of the company. In this example, the buyers pay the seller the aggregated amount for all of the shares. The purchase price is what the seller receives as consideration in exchange for the assignment of the company shares.
- At the time of closing the sale, the seller assigns, conveys, and delivers to the company all rights, titles, and interests that the seller holds. This is done by assigning the shares of stock.
Vague Employer Promises to Employees
Before filing for incorporation, some business founders and some business leaders who are promoting a corporation based on a vision might make promises to employees or attorneys that are a bit vague. These promises might focus on offering the other party a share in the business in exchange for their work.
It's also common for a corporation's owner to offer employees a deal where they can earn some share of ownership in the company for working a certain amount of time. It also happens sometimes that, after the employee has fulfilled their part of the deal by working, that main shareholder or company founder might come to regret the deal made earlier. At that time, the shareholder or founder might delay issuing the shares that were promised or flat-out refuse to issue the shares to the employee.
An Example That Went to Court
This example of an employer making vague promises ended up in court. The defendant was the corporation's only shareholder. The defendant entered into a contract with the plaintiff in which he offered to relinquish the existing business and transfer all of his employees and his customers to the plaintiff. The plaintiff was to get one-quarter ownership of the incorporated business when it reached a specific amount of earnings.
- Then, the defendant regretted the decision to make the agreement after finding out it cost more than he had expected and that the business was losing money. At that time, the defendant went to the plaintiff and insisted that the plaintiff start acting like one of the owners by contributing funds and assuming some of the debt.
- The defendant was angry when the plaintiff wouldn't do that. So, he decided to delay the stock issue that had been promised and even got the plaintiff to agree to the delay. The defendant agreed on the condition that the defendant would get the tax write-off from the losses of the S-corporation.
- In the end, the defendant fired the plaintiff without ever issuing the shares that had been promised. As a result, the judgment for the plaintiff regarding the breach of fiduciary duty, referring the debts of the business that the plaintiff hadn't paid off, was reversed by the Supreme Court on the basis that the plaintiff had no duties because the plaintiff was never a shareholder as had been promised.
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