Electronic Stock Certificates

As companies move towards a new digital future, electronic stock certificates present yet another opportunity to ditch the hassle and negative environmental impact of using paper. At its core, a stock certificate is a document that evidences ownership rights to shares of stock in a corporation. Historically, companies have had two options with respect to certificating stock ownership: 1) issue certificated shares with paper certificates; or 2) forgo stock certificates altogether and issue uncertificated shares for which transactions and ownership are logged on a register. In the 21st century, however, we have a third option at our disposal: electronic stock certificates. These are just about as simple as they sound: like paper certificates, but in PDF (or some other digital) format. There are, however, some considerations that startups and other companies considering issuing electronic stock certificates should take into account.

First, companies should review their certificate of incorporation, bylaws, stockholders’ agreements, and any other relevant corporate governance documents which may have been adopted to ensure that electronic stock certificates are permissible and that paper certificates are not required. In many circumstances, an attorney can modify these documents in order to accommodate electronic certification. Furthermore, the decision to go electronic may require the consent of the company’s board of directors and/or its stockholders. In this instance as well, an attorney can be of assistance in drafting the appropriate documents for presentation and ratification.

So, what does an electronic stock certificate contain? Much like a paper stock certificate, an electronic stock certificate will include the name of the stockholder, the name of the corporation, the number of shares represented by the certificate, any applicable restrictions on transfer or other legends, voting trust arrangements, and a summary of powers, preferences, rights and restrictions.

For companies transitioning from paper to electronic stock certificates, all stockholders should be notified and offered the opportunity to exchange previously issued paper certificates for electronic ones. Companies, particularly startups, should bear in mind that this exchange process can be lengthy, expensive, and a distraction from day-to-day business operations. There are various electronic services which may be able to make this process simpler and easier for companies to undertake. Avoiding the problem altogether, new startups and other companies should discuss the use of electronic stock certificates with their counsel at time of entity formation / drafting of core corporate governance documents, particularly if they are interested in simplicity of process and corporate sustainability initiatives such as going paperless.