Since this is 2 part questions, answers comes in 2 parts as well.
Can I just format my hard drive and install System Builder?
Quick answer is Yes. Nothing preventing you from doing that physically.
Is it Legal?
I can't comment on Microsoft Licensing as I'm neither a lawyer, or versed in lawyer-speak, so this is what I can find on System Builder License from Microsoft and hopefully it will make more sense to you.
http://oem.microsoft.com/public/worldwide/licensing/OEM_System_Builder_Licensing_Guide.pdf
One part that may be of interest to you:
Who are OEM System Builders?
A System Builder is an original equipment manufacturer (OEM), assembler, refurbisher, or a software preinstaller who builds
and sells a customer system to an end user or third party. The definition is broad to cover the various types of System Builders who make up this channel.
So if you believe you are a System Builder as per the above description, then yes it is legal for you to purchase that.