Terminate Punitive Termination Fees!

An unfortunate, growing practice within the stock transfer industry in recent years has been the assessment by transfer agents of excessive termination fees, when a corporate client chooses to leave one transfer agent and utilize the services of another.   We have seen these termination charges add up to…

  • All fees remaining in the contract — as in, two years’  worth if the relationship is terminated by a client one year into a three-year contract
  • 12 months of fees if the contract is terminated before one year, 9 months if between one and two years, and 6 months if after two years
  • The same as the previous bullet only, instead of number of months times fees, number of months times fees plus expenses charged by the agent in that time frame

And that’s not all!   Major transfer agents have embraced the assessment of hefty additional charges euphemistically called “deconversion” expenses.   These are allegedly the cost to unwind the conversion of records from a prior agent.   However, while a records conversion can be a tedious process, because the new transfer agent has to be sure it captures all the shareholder details maintained by the prior agent, a “deconversion” is not.   The terminated agent simply has to…

  • Double check that the stock transfer records on its books are “in balance” — and agents can not take on their extra title “Registrar” if they aren’t already in balance and the company’s stock is not “over-issued”
  • Transmit them in an industry-standard medium to the new agent
  • Ship cancelled stock and other hard-copy records to the new agent, or to the client, which it should again have kept tidy and handy already
  • Forward transfers and shareholder communications that inadvertently come in, after the agent change, to the new agent

And none of these straight-forward tasks require extra staff, or overtime expense, at the old agent.   So again, a deconversion is not the mirror image of a conversion, warranting sizable extra fees.

What would be an appropriate charge when you terminate your stock transfer agent?   Let’s start answering that by asking what you would pay your insurance provider if you dropped them.   Or your bank.   Or your tax firm.   Or your payroll company.   Maybe a little something?   Maybe nothing – except what you owed them through termination date??   Our point is:  large termination fees are not standard practice in corporate America.   They are an aberration that has been allowed to grow in the stock transfer industry.   We feel that an optimal stock transfer contract would contain no termination fee.   That said, to the extent records do need to be transferred to a new agent, boxes shipped, some residual calls/letters answered – maybe a few thousand dollars could be justified as an expense.   We think a smaller stock transfer client (less than 3,000 registered shareholders) could perhaps pay a terminated transfer agent $2,500 as an all-in fee and expense charge; and a larger client (over 10,000 registered shareholders) maybe $7,500 – with appropriate gradations in between.   And that’s it!

A stock transfer client feeling a need to change agents in the current environment should not have to go through the angst of a switch and cough up large fees, which are designed to either dissuade the switch in the first place (i.e., be “punitive”) or allow the terminated agent to “recoup foregone revenue.”   On the contrary:  the agent’s responsibility is to please the client sufficiently so that the client never contemplates leaving the agent.   If, however, a departure becomes necessary, our opinion is the agent should be smart enough to let the client go without a “financial boot” on its backside, and establish goodwill in the marketplace by the ease with which it allows this occasional transition to happen.