Basics of Share Certificates and Uncertified Securities

April 14, 2015

document reviewOwnership of shares has been traditionally manifested by the issuance of a piece of paper called a share certificate, which is tangible evidence of the holder’s pro rata share of the total shares of the corporation. Share certificates have traditionally played a role in securities law and in the perfection of security interests in shares. Also share certificates provide a vehicle for giving notice of restrictions on transfer. Many states permit issuance of shares without certificates whereby the ownership of shares is evidenced by an electronic or other indirect system of recording. See §§ 37:64 et seq.. Some states continue to require the issuance of share certificates.

All states regulate the content and form of certificates representing shares. See § 37:65. In addition to the specific items listed by statute, the share certificates typically include the date of incorporation; the date of issuance; and the share certificate number. Shares certificates should also contain any legends required by securities laws, including public sale restrictions and intrastate sales restrictions.

A corporation may use a generic form of certificate for all its shares, regardless of class, (see Specialty Form at § 37:128) or may have separate certificates for common shares (see Specialty Form at § 37:129) and preferred shares. See Specialty Form at § 37:130. The text of a common share certificate may be slightly different if the corporation has both common and preferred shares, (see Specialty Form at § 37:131) and special language should also be used on preferred stock certificates if the corporation has more than one class of preferred shares. See Specialty Form at § 37:132.  Consideration must also be given to making sure that certificates include all of the restrictive legends that may be required under the corporation’s bylaws, agreements with and among stockholders and applicable securities and corporate laws. See Specialty Form at § 37:130.50.

When the corporation has more than one class of shares (e.g., common shares and preferred shares), it is useful to use certificates with different colors, designs and text for each class.

Documentation will still be required even in situations where a corporation elects to use uncertificated securities, including a notice of issuance of uncertificated stock (see Specialty Form at § 37:137), an initial transaction statement (see Specialty Form at § 37:138), transfer instructions (see Specialty Form at § 37:139), notice of transfer (see Specialty Form at § 37:140), and security agreements (see Specialty Form at § 37:141). Authorization of uncertificated securities should be formally memorialized in resolutions approved by the corporation’s board of directors. See Specialty Form at § 37:122.