The term security has many applications. No application, however,is more important than when an interest owned or traded is determined to be within the legal definition of security. Security is defined by statutes and applied by many courts for the purposes of federal securities laws and for state blue sky laws. When interpreting the term security for federal securities laws, courts have emphasized the underlying congressional purpose of protecting investors. State courts also have interpreted the term liberally in an effort to protect the public under blue sky laws.'
The definition of security in the Uniform Commercial Code(U.C.C.), however, has no such purpose. The U.C.C. chapter on securities is intended to establish a system of rules for those entities or persons dealing in securities. As a result, the definition of security is one of function, rather than formality. This definition is the foundation to approaching a multitude of U.C.C. issues, including transfers of security interests.' While the definition of security appears to be simple and straightforward, applying the definition to stock in a closely held corporation (close corporation) has caused problems for a significant number of courts. Divergent results have created an anomalous situation among the jurisdictions having the same statutory language.
A uniform definition of a close corporation does not exist." In some cases, the term is used to distinguish corporations with only a few shareholders from publicly held corporations. In other cases, close corporations are defined as those corporations whose shares are not traded regularly on a recognized securities market. Another frequently used definition provides that a close corporation is one "in which the stock is held in a few hands, or by a few families, and wherein it is not at all, or only rarely, dealt in by buying or selling." Many other definitions also exist. Consequently, the emergence of a uniform definition of a close corporation is improbable.
Tracy A. Powell,
Stock in a Closely Held Corporation:Is It a Security for Uniform Commercial Code Purposes?,
42 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol42/iss2/6