First Department sides with stockholder on registration rights and legend removal

December 17, 2025  | By Patrick T. McCloskey

Harsh truth: only an issuer can register resales of its stock with the Securities and Exchange Commission (SEC). For this reason, stockholders often bargain for contractual registration rights (i.e., an agreement from the issuer to register resales by such stockholders). Without registration, owners of restricted securities¹ are subject to a holding period under Rule 144² and the shares almost always bear a restrictive legend.³ If the stockholder is an affiliate, Rule 144 resales are subject to volume restrictions, manner of sale requirements, and trigger a Form 144 filing.⁴ Like registered transactions, Rule 144 resales require action from the issuer.⁵ As a result, most registration rights agreements also include Rule 144 covenants from the issuer.

In Greenland Asset Management Corp. v. MicroCloud Hologram, Inc.,⁶ the First Department affirmed the New York Supreme Court’s denial of a motion to dismiss a breach of contract claim for an issuer’s failure to honor its agreement to register the plaintiff’s shares and a related breach of the implied covenant of good faith and fair dealing for the issuer’s failure to remove a restrictive legend.

According to the New York Supreme Court decision, the plaintiff stockholder sent six separate notices asserting demand registration rights pursuant to the subject registration rights agreement.⁷ The issuer never filed a registration statement and rejected the stockholder’s requests to remove the restrictive legend from its shares so it could sell under Rule 144.

The First Department ruled:

Plaintiff stated a cause of action for breach of contract by alleging that defendant failed, among other things, to file a registration statement with the [SEC], despite plaintiff’s written demands that it do so under the terms of the parties’ contract.

Rejection of the vagueness argument

The defendant had argued the demand registration covenant in the subject registration rights agreement was too vague to be enforceable because it required “best efforts [to register the securities] as expeditiously as possible”. The New York Supreme Court rejected this argument and concluded the contractual language objectively provided “sufficient guidance” because it gave the issuer the right to delay the demand registration for up to thirty days.⁸

The First Department agreed, but expounded on the reasoning, pointing not only to the language requiring the filing of the registration statement with the SEC, but the obligation to keep it effective until the plaintiff’s shares were sold. The court held:

Under the terms of the contract, once plaintiff submitted a demand for registration, defendant was required to use its ‘best efforts’ to prepare and file a registration statement with the SEC ‘as expeditiously as possible,’ to cause the registration statement to become effective, and to keep it effective until defendant sold its securities. The contract’s definitions, in turn, expressly refer to the filing of registration statements, amendments, and supplements in compliance with the Securities Act and SEC regulations, therefore incorporating the [Securities] Act and the regulations into the contract’s terms and providing objective standards for judging the adequacy of defendant’s efforts.⁹

Legend removal and the implied covenant

The New York Supreme Court also determined the issuer’s failure to honor a request to have a restrictive legend removed was a breach of the implied covenant of good faith and fair dealing. Significantly, the New York Supreme Court found an implied duty on the issuer arose “in connection to the performance of its duties under the Registration Rights Agreement.”¹⁰ The court noted that although legend removal was not an express covenant in the subject registration rights agreement, a resale under Rule 144 was “a means available to achieve the legend-removal objective that the plaintiff alleges [the issuer] has not taken.” The trial court ruled this was sufficient to state a cause of action for breach of the covenant of good faith and fair dealing.

The First Department affirmed, rejecting the defendant’s discretion argument and disagreeing with the defendant’s position on SEC guidance with respect to legend removal:

We reject defendant’s contention that it possessed the sole discretion to decide whether to remove a restrictive legend on the securities, as the contract stated the defendant ‘shall’ take action to enable the plaintiff to sell its shares under the Securities Act.¹¹ Nor is plaintiff’s action foreclosed by the SEC’s comment that ‘the removal of a legend is a matter solely in the discretion of the issuer of the securities’ under Rule 144,¹² codified at 17 CFR 230.144 and 230.145. On the contrary, the SEC also recognizes that ‘[d]isputes about the removal of legends are governed by state law or contractual agreements’,¹³ and the parties’ contract requires defendant to remove any obstacles to plaintiff’s selling of its shares on the market, including by removing restrictive legends.

Removal of a restrictive legend is a frequent bone of contention between an issuer and a selling stockholder. The decision of the Supreme Court and the First Department on this issue suggest that where an issuer has agreed in a registration rights agreement to take actions to enable resales under Rule 144, the refusal to remove a restrictive legend triggers a claim for breach of the implied duty of good faith and fair dealing, at least under New York law. In fact, given the breadth of the First Department’s reasoning on this issue (“the parties’ contract requires defendant to remove any obstacles to plaintiff’s selling of shares in the market”), there would appear to be an argument that any rejection of a request to remove a restrictive legend when there is a registration rights agreement in place is a violation of the implied covenant of good faith and fair dealing.  In fact, given the breadth of the First Department’s reasoning on this issue (“the parties’ contract requires defendant to remove any obstacles to plaintiff’s selling of shares in the market”), there would appear to be an argument that any rejection of a request to remove a restrictive legend when there is a registration rights agreement in place is a violation of the implied covenant of good faith and fair dealing.

Takeaways

The time-period governing the issuer’s ability to delay the filing of a registration statement in response to a demand and the incorporation of SEC regulations governing registration were enough to defeat the defendant’s novel argument that the demand covenant was too vague to enforce. Together, these provisions led both the Supreme Court and the Appellate Division to rule there was “sufficient objective criteria by which to measure the [issuer’s] performance of its obligation.”

As stated above, an issuer party to a registration rights agreement has potential liability for breach of the implied covenant of good faith and fair dealing if it refuses to remove a restrictive legend from the subject stockholder’s shares.

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This post is for general informational purposes only and does not constitute legal advice. No one should rely on the information in this blog post without seeking appropriate legal, accounting, tax or other appropriate advice from an attorney, accountant or other professional properly licensed in the applicable jurisdiction(s).

1 Restricted securities include shares acquired in a transaction not registered under the 1933 Act. See 17 CFR § 230.144(a)(3)(i).

2 See 17 CFR § 230.144(d).

3  A restrictive legend is one step taken by issuers to qualify for the exemption under Section 4(a)(2) of the 1933 Act (transactions by an issuer not involving any public offering). A restrictive legend is an express requirement for the Rule 506 safe harbor. See 17 CFR § 230.502(d)(3).

4 See 17 CFR § 230.144(e) & (h). The Form 144 filing requirement does not apply if the resale is for 5,000 shares or less and the aggregate sales price is $50,000 or less.  

5 Among other things, sales under Rule 144 require there be adequate current public information about the issuer. See 17 CFR § 230.144(c).

6 2025 Slip Op 06901 Case No. 2024-05167 (1st Dept. December 11, 2025).

7 Demand registration rights give the subject stockholder the right to demand the issuer register its shares for resale. Piggyback registration rights, not at issue in Greenland, give the stockholder the right to have its shares included another registration statement filed by the issuer.

8 An issuer’s right to delay a demand registration for a specified period (and under certain circumstances) is customary.

9 Citing Wilder v. World of Boxing LLC, 310 F Supp 3d 426, 441 (SDNY 2018); aff’d 777 Appx 531 (2d Cir. 2019).

10 The Rule 144 covenant in the subject registration rights agreement provides, in pertinent part, “Rule 144. The Company covenants that it shall . . . take such further action as the holders of the Registrable Securities may reasonably request, all to the extent required from the time to time to enable such holders to sell Registrable Securities without registration under the Securities Act within the exemptions provided under Rule 144 under the Securities Act.”

11 On discretion, the court also held “even an explicitly discretionary contract right may not be exercised in bad faith so as to frustrate the other party’s right to the benefit under the agreement.” Citing Legend Autorama, Ltd. v. Audi of Am., Inc., 100 AD 3d 714, 716 (2d Dept. 2012) quoting Richbell Info. Servs. v. Jupiter Partners, Inc., 309 AD 2d 288, 302 (1st Dept. 2003).

12 Citing 72 Federal Register 71546, 71550 n. 65 (2007).

13 Id.