CO Code § 4-8-204 (2021)
2021 Colorado Code|Title 4 - Uniform Commercial Code|Article 8 - Investment Securities|Part 2 - Issue and Issuer|§ 4-8-204. Effect of Issuer's Restriction on Transfer

 A restriction on transfer of a security imposed by the issuer, even if otherwise lawful, is ineffective against a person without knowledge of the restriction unless:    The security is certificated and the restriction is noted conspicuously on the security certificate; or    The security is uncertificated and the registered owner has been notified of the restriction.     History. Source: L. 96: Entire article R&RE, p. 218, § 2, effective July 1.    Editor's note:   This section is similar to former § 4-8-204 as it existed prior to 1996.   OFFICIAL COMMENT   1. Restrictions on transfer of securities are imposed by issuers in a variety of circumstances and for a variety of purposes, such as to retain control of a close corporation or to ensure compliance with federal securities laws. Other law determines whether such restrictions are permissible. This section deals only with the consequences of failure to note the restriction on a security certificate.   This section imposes no bar to enforcement of a restriction on transfer against a person who has actual knowledge of it.   2. A restriction on transfer of a certificated security is ineffective against a person without knowledge of the restriction unless the restriction is noted conspicuously on the certificate. The word “noted” is used to make clear that the restriction need not be set forth in full text. Refusal by an issuer to register a transfer on the basis of an unnoted restriction would be a violation of the issuer's duty to register under Section 8-401.   3. The policy of this section is the same as in Section 8-202. A purchaser who takes delivery of a certificated security is entitled to rely on the terms stated on the certificate. That policy obviously does not apply to uncertificated securities. For uncertificated securities, this section requires only that the registered owner has been notified of the restriction. Suppose, for example, that A is the registered owner of an uncertificated security, and that the issuer has notified A of a restriction on transfer. A agrees to sell the security to B, in violation of the restriction. A completes a written instruction directing the issuer to register transfer to B, and B pays A for the security at the time A delivers the instruction to B. A does not inform B of the restriction, and B does not otherwise have notice or knowledge of it at the time B pays and receives the instruction. B presents the instruction to the issuer, but the issuer refuses to register the transfer on the grounds that it would violate the restriction. The issuer has complied with this section, because it did notify the registered owner A of the restriction. The issuer's refusal to register transfer is not wrongful. B has an action against A for breach of transfer warranty, see Section 8-108(b)(4)(iii). B's mistake was treating an uncertificated security transaction in the fashion appropriate only for a certificated security. The mechanism for transfer of uncertificated securities is registration of transfer on the books of the issuer; handing over an instruction only initiates the process. The purchaser should make arrangements to ensure that the price is not paid until it knows that the issuer has or will register transfer.   4. In the indirect holding system, investors neither take physical delivery of security certificates nor have uncertificated securities registered in their names. So long as the requirements of this section have been satisfied at the level of the relationship between the issuer and the securities intermediary that is a direct holder, this section does not preclude the issuer from enforcing a restriction on transfer. See Section 8-202(a) and Comment 2 thereto.   5. This section deals only with restrictions imposed by the issuer. Restrictions imposed by statute are not affected. See Quiner v. Marblehead Social Co., 10 Mass. 476 ; 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.   Definitional Cross References:   “Certificated security”. Section 8-102(a)(4)   “Conspicuous”. Section 1-201(10)   “Issuer”. Section 8-201   “Knowledge”. Section 1-201(25)   “Notify”. Section 1-201(25)   “Purchaser”. Sections 1-201(33) 8-116   “Security”. Section 8-102(a)(15)   “Security certificate”. Section 8-102(a)(16)   “Uncertificated security”. Section 8-102(a)(18)   ANNOTATION   Law reviews. For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).   Annotator's note. The following annotations include cases decided under former provisions similar to this section.   Unless this section is followed, any restriction is void, and a purchaser can compel transfer. Age Publ'g Co. v. Becker, 110 Colo. 319 , 134 P.2d 205 (1943) (decided under repealed CSA, C. 41, § 100, uniform stock transfer act).   Comments on this section emphasize that it imposes strict requirement for notice on issuer. Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).   This section represents a change in phraseology, but not in the practical effect. Irwin v. W. End Dev. Co., 342 F. Supp. 687 (D. Colo. 1972 ).   Failure to note the transfer restriction on certificates is no bar to enforcement against one who had actual notice of it. Irwin v. W. End Dev. Co., 342 F. Supp. 687 (D. Colo. 1972 ).   Section does not protect those with actual notice. The purpose of this section was to make ineffective restrictions on transfers to persons without notice. The failure to note the restriction on the certificates is no bar to its enforcement against a person who had actual notice of it. Irwin v. W. End Dev. Co., 481 F.2d 34 (10th Cir. 1973), cert. denied, 414 U.S. 1158, 94 S. Ct. 915, 39 L. Ed. 2d 110 (1974).   Those on inquiry notice not denied protection of section. This section clearly placed the duty on the issuer to note the restriction conspicuously on the certificate, not on the bank to inquire. And the statute's protection was extended to all against an unnoted restriction except those with “actual knowledge of it”. Those who are only on inquiry notice are not denied protection by the code. Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).   Bank as pledgee was among the persons protected generally by this section against a restriction not conspicuously noted on the security, except as to a person with actual knowledge. The wrongful refusal to transfer gave rise to a right to sue as for conversion by the bank as transferor. Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).   Federal securities act does not override section. The absence of a requirement for a notation of the restriction in the federal securities act does not override this section under the doctrine of preemption. This important provision of the code may be read in harmony with the federal statute. Both regulations can be enforced without impairing federal superintendence of the field and thus the state statute need not give way. The securities act shows no intent to prevent such significant regulation by state law. Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).   Bank's right to damages not defeated by federal statute. The prohibition of the federal statute against carrying out transfers of unregistered stock did not defeat the bank's right to damages under this section. The court did not have to decide whether the bank as a bona fide pledgee could enforce specifically the transfer of the collateral to the purchaser. The only question was whether the bank was entitled to damages when the issuer asserted its own restriction which was not conspicuously noted on its stock certificate as a ground for refusing to register a transfer. In these circumstances the bank was entitled to damages for its loss and the recovery of them was not violative of the federal prohibition against transfer. Edina State Bank v. Mr. Steak, Inc., 487 F.2d 640 (10th Cir. 1973), cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974).