Stock certificate

Last updated

Certificate for a share in Kennet and Avon Canal Navigation, Great Britain, 1808 Kennet and Avon Canal Navigation 1808.jpg
Certificate for a share in Kennet and Avon Canal Navigation, Great Britain, 1808

In corporate law, a stock certificate (also known as certificate of stock or share certificate) is a legal document that certifies the legal interest (a bundle of several legal rights) of ownership of a specific number of shares (or, under Article 8 of the Uniform Commercial Code in the United States, a securities entitlement or pro rata share of a fungible bulk) or stock in a corporation.

Contents

History

A stock certificate is a legal document that certifies the legal interest (a bundle of several legal rights) of ownership of a specific number of shares (or, under Article 8 of the Uniform Commercial Code, a securities entitlement or pro rata share of a fungible bulk) or stock in a corporation. [1] The first such instruments were used in the Netherlands by 1606, and in the United States by the year 1800. [2] [1] Historically, certificates may have been required to evidence entitlement to dividends, with a receipt for the payment being endorsed on the back; and the original certificate may have been required to be provided to effect the transfer of the shareholding.

In the United States (to a limited extent) and other countries, electronic registration is supplanting the stock certificate for beneficial owners (though depositories holding for them may themselves hold certificates), with companies at times no longer being required to issue paper certificates. [3] In the United States over 420 of the 7,000-plus publicly traded securities, 6%, do not issue paper certificates to beneficial owners. [4] [5] Volumes of share transfer on the New York Stock Exchange, for example, increased over time; in 1938 daily volume was 1 million shares, and in 1954 it reached 2 million shares. [6] The United States' central securities depository, DTC, in 2011 held 1.6 million paper stock certificates, and has promoted efforts to eliminate paper stock certificates, a process called dematerialization—which has been a goal in the industry since at least the 1960s. [6] [7] [8] [9] In 2012, water from Hurricane Sandy flooded a vault at the DTC, damaging over $1 billion in stock and bond certificates. [7] Countries around the world have adopted similar initiatives, with some countries setting deadlines for statutory dematerialization. [10]

Brokers may charge up to $500 for issuing a paper certificate, though some charge zero (e.g., The Walt Disney Company) or only a modest fee, and this fee can be avoided by either holding shares in street name (in the United States street name securities are securities held, usually in paper certificate form, by a partnership of a financial institution (such as a broker or bank or central securities depository), where the beneficial owner only receives a statement, similar to a bank account statement) or registering shares directly with the stock transfer agent and having them issue the certificate. [7] [4] [11]

Another alternative to both paper and electronic registration is the use of paper-equivalent electronic stock certificates. Forty-seven states have enacted legislation equivalent to the Uniform Electronic Transactions Act, which formalizes equivalency for electronic signatures "in writing" requirements. This, together with the enactment of legislation permitting the use of "facsimile" signatures on certificates (such as in §158 of the Delaware General Corporation Law), has given rise to software as a service technology [12] for private companies to create, issue and manage paper-equivalent electronic stock certificates.

In Sweden, starting in 1990 share certificates have been largely abolished for shares traded on the stock exchange, people using electronic shares instead (which are either registered in the share owner's name or in the share owner's broker's name). Share certificates may exist in Sweden, but only if the shares are not listed on any stock exchange in Sweden.

Sometimes a shareholder with a stock certificate can give a proxy to another person to allow them to vote the shares in question. Similarly, a shareholder without a share certificate may often give a proxy to another person to allow them to vote the shares in question. Voting rights are defined by the corporation's charter and corporate law.

Stock certificates are generally divided into two forms: registered stock certificates and bearer stock certificates. A registered stock certificate is normally only evidence of title, and a record of the true holders of the shares will appear in the stockholder's register of the corporation.

A bearer stock certificate, as its name implies is a bearer instrument, and physical possession of the certificate entitles the holder to exercise all legal rights associated with the stock. [13] Bearer stock certificates are becoming uncommon: they were popular in offshore jurisdictions for their perceived confidentiality, [13] and as a useful way to transfer beneficial title to assets (held by the corporation) without payment of stamp duty, post-issuance. [14] International initiatives have curbed the use of bearer stock certificates in offshore jurisdictions, and tend to be available only in onshore financial centres, although they are rarely seen in practice.

A stock certificate represents a legal proprietary interest in the common stock (in the sense of the general fund) or assets of the issuer corporation. The certificate evidences a chose in action against the issuer to collect dividends and usually to influence the issuer through voting pursuant to the issuer's charter and bylaws, which are often implied or incorporated by reference as terms on the face of the certificate.

Stockholder rights are subject to the solvency requirements of issuer's general creditors and to any terms and conditions validly placed upon the face of the stock certificate which are part of the total agreement between the particular stockholder and the issuer.

Stock certificates are transferred as negotiable or quasi-negotiable instruments by indorsement and delivery, and issuer charters typically require that transfers must be registered with the issuer (usually via the issuer's transfer agent) in order for the transferee to join as a member of the corporation. Registration of transfer is a type of novation. [15]

See also

Related Research Articles

<span class="mw-page-title-main">Security (finance)</span> Tradable financial asset

A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form of financial instrument, even though the underlying legal and regulatory regime may not have such a broad definition. In some jurisdictions the term specifically excludes financial instruments other than equities and fixed income instruments. In some jurisdictions it includes some instruments that are close to equities and fixed income, e.g., equity warrants.

A shareholder of corporate stock refers to an individual or legal entity that is registered by the corporation as the legal owner of shares of the share capital of a public or private corporation. Shareholders may be referred to as members of a corporation. A person or legal entity becomes a shareholder in a corporation when their name and other details are entered in the corporation's register of shareholders or members, and unless required by law the corporation is not required or permitted to enquire as to the beneficial ownership of the shares. A corporation generally cannot own shares of itself.

<span class="mw-page-title-main">Share (finance)</span> Unit of equity ownership in the capital stock of a corporation

In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an enterprise. The owner of shares in a company is a shareholder of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

The Depository Trust & Clearing Corporation (DTCC) is an American post-trade financial services company providing clearing and settlement services to the financial markets. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.

CREST is a UK-based central securities depository that holds UK equities and UK gilts, as well as Irish equities and other international securities.

<span class="mw-page-title-main">Securities market</span> Component of the wider financial market

Security market is a component of the wider financial market where securities can be bought and sold between subjects of the economy, on the basis of demand and supply. Security markets encompasses stock markets, bond markets and derivatives markets where prices can be determined and participants both professional and non professional can meet.

The phrase street name securities or "nominee name securities" is used in the United States to refer to securities of companies which are held electronically in the account of a stockbroker or bank or custodian, similar to a bank account. The entity whose name is recorded as the legal owner of the securities is known as the "nominee owner," and that entity has ownership rights in the security. The nominee owner holds those ownership rights on behalf of the true economic owner who is referred to as the beneficial owner.

The indirect holding system is a system of securities clearance, settlement and ownership system where ownership information is held electronically as a book entry. It consists of one or more tiers of intermediaries between issuer and investor. It is an evolution from the "direct holding system" in which owners of securities had a direct relationship with the issuer.

Direct Holding System e.g. The Direct Registration System (DRS)

<span class="mw-page-title-main">Settlement (finance)</span> Physical exchange of securities or payment

Settlement is the "final step in the transfer of ownership involving the physical exchange of securities or payment". After settlement, the obligations of all the parties have been discharged and the transaction is considered complete.

A bearer instrument is a document that entitles the holder of the document to rights of ownership or title to the underlying property. In the case of shares or bonds, they are called bearer certificates. Unlike normal registered instruments, no record is kept of who owns bearer instruments or of transactions involving transfer of ownership, enabling the owner, as well as a purchaser, to deal with the property anonymously. Whoever physically holds the bearer document is assumed to be the owner of the property, and the rights arising therefrom, such as dividends.

A central securities depository (CSD) is a specialized financial organization holding securities like shares, either in certificated or uncertificated (dematerialized) form, allowing ownership to be easily transferred through a book entry rather than by a transfer of physical certificates. This allows brokers and financial companies to hold their securities at one location where they can be available for clearing and settlement. This is usually done electronically, making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed.

Depository Trust Company (DTC), founded in 1973, is a New York corporation that performs the functions of a central securities depository as part of the US National Market System. DTC annually settles transactions worth hundreds of trillions of dollars, processes hundreds of millions of book-entry deliveries, and custodies millions of securities issues worth tens of trillions of dollars issued in the United States and over 100 other countries. Since 1999 it has been a subsidiary of the Depository Trust & Clearing Corporation, a securities holding company.

A stock transfer agent, transfer agent, share registry or transfer agency is an entity, usually a third-party firm unrelated to security transactions, that manages the change in ownership of company stock or investment fund shares, maintains a register of ownership and acts as paying agent for the payment of dividends and other distributions to investors. The name derives from the impartial intermediary role a transfer agent plays in validating and registering the purchase of new ownership shares and, in the case of a transfer of ownership, cancelling the name and certificate of shareholders who sell shares and substituting the new owner's name on the official master shareholder register.

<span class="mw-page-title-main">Stock</span> Shares into which ownership of the corporation is divided

Stocks consist of all the shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the shareholder (stockholder) to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued, for example, without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

The Unidroit convention on substantive rules for intermediated securities, also known as the Geneva Securities Convention, was adopted on 9 October 2009. It has been signed by only one of the 40 negotiating States (Bangladesh), but not entered into force. The official commentary was published in 2012.

Investment Securities are securities that have been purchased as an investment. This is in contrast to securities that are purchased by a broker-dealer or other financial intermediary for resale or short term speculation.

Cede and Company, shorthand for "certificate depository", is a specialist United States financial institution that processes transfers of stock certificates on behalf of Depository Trust Company, the central securities depository used by the United States National Market System, which includes the New York Stock Exchange, and Nasdaq.

In finance and financial law, dematerialization refers to the substitution of paper-form securities by book-entry securities. This is a form of indirect holding system in which an intermediary, such as a broker or central securities depository, or the issuer holds a record of the ownership of shares usually in electronic format. The dematerialization of securities such as stocks has been a major trend since the late 1960s, with the result that by 2010 the majority of global securities were held in dematerialized form electronically.

<span class="mw-page-title-main">Securities market participants (United States)</span>

Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.

References

  1. 1 2 Study of the Securities Industry: Hearings, Ninety-second Congress, First [and Second] Session[s]. U.S. Government Printing Office. 1971.
  2. ↑ Shelton, John P. (1965). "The First Printed Share Certificate: An Important Link in Financial History". Business History Review. 39 (3): 391–402. doi:10.2307/3112147. JSTOR   3112147. S2CID   155627649 . Retrieved 29 July 2022.
  3. ↑ Miller, Todd (25 September 2015). "Why Private Companies Don't Need To Issue Stock Certificates" . Retrieved 3 February 2013.
  4. 1 2 Business Organizations for Paralegal. Wolters Kluwer Law & Business. 31 January 2022. ISBN   9781543826913.
  5. ↑ Krantz, Matt (25 May 2010). "Electronic records are replacing paper stock certificates". USA Today. Retrieved 7 September 2010.
  6. 1 2 Hearings, Reports and Prints of the House Committee on Interstate and Foreign Commerce. U.S. Government Printing Office. 1971.
  7. 1 2 3 Records and Information Management. American Library Association. 30 April 2013. ISBN   9781555709105.
  8. ↑ "Electronic records are replacing paper stock certificates". USA Today. Retrieved 29 July 2022.
  9. ↑ "DTCC Proposes Steps to Move Ahead on Full Dematerialization of Physical Securities". 12 March 2013. Retrieved 3 February 2015.
  10. ↑ "Note on Statutory Dematerialisation Across the European Union" . Retrieved 3 February 2015.
  11. ↑ Krantz, Matt (10 June 2010). "Free paper stock certificates? It's possible but does take work". USA Today. Retrieved 7 September 2010.
  12. ↑ Loizos, Connie (6 March 2013). "Cofounded by Manu Kumar, eShares Aims to (Finally) Digitize Stock and Options Certificates". PeHUB. Retrieved 13 June 2013.
  13. 1 2 "Panama Papers reveal billions hidden in anonymous paper shares". CBC News . Retrieved 29 July 2022.
  14. ↑ "STSM041110 – Exemptions and reliefs: exemptions: sales of Bearer securities – general – HMRC internal manual". Gov.uk. Retrieved 29 July 2022.
  15. ↑ Ehrle, Clarence G. (January 1921). "The Uniform Stock Transfer Act". Marquette Law Review. 5 (2): 91.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.