As a millennial and digital native who has entered the world of registrars and equity management in unlisted UK companies, I have often been surprised by the lack of digitisation. Share certificates are on the top of my list.
I find it difficult to see the value of share certificates, and I am puzzled by the level of confidence modern businesses and investors have in them. To me, share certificates bring memories of the final scene in Die Hard, where thousands of papers are flying in the air after a vault heist where the bad guys used a bunch of C4s to blow up the safety deposit. Share certificates are costly, inefficient and inconvenient documents that are sent by post, can get lost, stolen or blown up by C4s. In this blog post, I reflect on what a share certificate is and why it exists, and I propose a better solution for modern businesses.
What is a share certificate?
A share certificate is a written document signed on behalf of a corporation and serves as proof of ownership of the number of shares indicated. It also contains information about the class of shares, as well as the amount paid (or treated as paid) on those shares. There can be more information. But, the mentioned is standard. In the US, the share certificate is the legal proof of ownership whereas in the UK it’s of symbolic character.
In both jurisdictions, the share certificate evidence an investor's relative voting rights at a general meeting of shareholders, thus indicating how much power individual shareholders have in corporate decisions. In corporate events such as a dividend payout, share buy-backs, sale of the company or new equity issuances. The share certificate serves as evidence to the amount an investor is entitled to.
The original reason for the certificate was avoiding ownership disputes. Before the internet, it was smart to have share certificates that could be used as decentralised proof of the shareholder’s ownership and rights. A company would (and still has a legal obligation to) maintain a shareholder register (register of members). Shareholders have the right to a copy on request. But, since the register is stored centrally at the company and just has to be a list on a piece of paper, shareholders had little guarantee that a company would not make changes to or falsify the document. By using share certificates an investor had legal-tender to compare to the shareholder register. If any questions arise towards ownership they could simply bring forward the share certificate as evidence to prove their ownership.
Why use share certificates today?
The share certificate is the product of an analogue world. It made sense that companies and shareholders both held a proof of ownership. However, with the internet, these instruments have lost their value. The guarantee paper share certificates once represented have long gone. It’s a document that can easily be forged - think photoshop or photocopier. It’s expensive and insecure to send them by post. Admittedly, some innovation has happened, and not all share certificates are paper-based today. In fact, many registrars and companies have to some degree digitised share certificates by issuing them as digital documents and making them available online through various services. That solves some of the issues, i.e. postal.
However, even in digital form, the shareholder certificate has lost the power to be determinative evidence of ownership or class rights. In the UK, contrary evidence provided by the company’s register of members would be considered. The Companies House even maintains a database (beta.companieshouse.gov.uk), where every UK company’s register of members can be accessed by anyone interested in inspecting the list of shareholders. While the Companies House database is a step in the right direction (towards a smart digital solution to the “ownership evidence challenge”), it has several limitations. One limitation is that companies are only required to update the register on an annual basis (when filing annual return). That is not frequently enough for investors to feel secure, so many still require share certificates.
A better solution
If the raison d’etre of share certificates was to provide shareholders with proof-of-ownership to compare against the company’s records - the shareholder register. Then the solution must be creating a shareholder register that can be trusted by both parties. A shareholder register where all stakeholders can see and track changes. With full transparency and unlimited access for shareholders.
At Capdesk we have built such a shareholder register. Any company can open a Capdesk account and start their fully digital register. As shareholders are added to the register, they receive an invitation to access the shareholder register. They can create a private profile and track changes to their shareholdings. Any changes - and potential inconsistencies - will be visible in the company’s ledger. Further, by being stored online, it is always accessible.
By digitising ownership and eliminating share certificates, we can make processes such as share issuances, transfers and buy-backs much easier and cheaper than today. No more call-backs of share certificates and new issuances. Simple digital processes are safer for shareholders, and at the same time saving both time and money.
Reach out and hear how we can help digitising your company's shareholding.
1. This blog post is commenting on the use of share certificates in the United Kingdom.
2. Companies House is the authority responsible for incorporating and dissolving companies in the United Kingdom.