By: Ron Diaz  [10/21/22]

A stock certificate is a paper document that evidences an ownership stake in a corporation. Under Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code) (“DGCL”), “Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of, the corporation by any 2 authorized officers of the corporation representing the number of shares registered in certificate form.” (8 Del. Code § 158). The necessary signatures may be facsimile signatures. Relying on physical paper certificates does present practical challenges. For example, if an investor in a startup were to lose their stock certificate or destroy a stock certificate, the investor would need to contact the corporation to report the lost certificate and request a replacement certificate. For a corporation of greater size, or with a larger number of shareholders, an investor would need to contact the corporation’s stock transfer agent. This process can be burdensome for all parties involved in having to establish and navigate the issue of replacement paper stock certificates.

The physical nature of a paper certificate can create other issues, such as delaying settlement of corporate transactions due to the need to sign over and physically deliver this type of certificated stock. Certificated stock, (also known as, “certificated shares”), is also susceptible to theft, counterfeiting, or fraudulent transfer, e.g., a sale from a purported shareholder to an unsuspecting third party. Under federal securities law and state law, certificated stock must bear restrictive legends that state that the shares cannot be transferred absent an exemption under the Securities Act of 1933, as well as any transfer restrictions imposed by the certificate of incorporation, bylaws, or shareholder agreement.

Certificated Shares in Electronic Form

Fortunately, there are alternatives to implementing Certificated Shares. The DGCL allows for the corporation’s board of directors unless prohibited by the certificate of incorporation, bylaws, or any other contractual provision, to issue certificates in electronic form such as a PDF or other digital or electronic document. Electronic certificates still have the inherent weakness of issues related to fraud, loss, destruction, and the logistical need to deliver these electronic certificates. Some of these issues can be mitigated through the use of countermeasures such as digital watermarking or other methods of digital or electronic security measures. While electronic certificates may not completely remove the risk or inconvenience caused by human error, it reduces the impact.

Uncertificated Shares; DGCL and Blockchain

Employing a system of uncertificated shares addresses many of the problems inherent with physical or electronic certificated shares. A growing number of corporations and investors are accepting the use of uncertificated shares. This book entry method for tracking shares and the share ownership uses a spreadsheet or other electronic or digital records storage method to satisfy the ledger and records requirements of the DGCL. 

In 2005, the provision in the DGCL that required corporations to use uncertificated shares to provide a shareholder with a certificate upon request was removed. This was an early indicator that of Delaware’s openness to the implementation of technology for the maintenance of corporate books and records. Effective, August 1, 2017, the DGCL authorized Delaware corporations to maintain cap tables, record equity transactions, determine record dates for stockholders, maintain stock ledgers, and communicate with equity holders utilizing blockchain technology tools or platforms. This change expressly authorized a modern, secure alternative that looks beyond the use of word processing documents, spreadsheets, or traditional databases to maintain corporate stock ledgers and records. In addition to using as a digital ledger, a blockchain platform solution can enforce transfer restrictions and can be as a platform to handle voting for stockholder consent. Since blockchain is a distributed, decentralized digital ledger of transactions, digital security experts believe that the underlying technology is either impossible or extremely difficult to hack or alter which solves many of the problems of physical stock certificate systems, or pre-blockchain uncertificated share systems.

Aside from romanticism or a refusal to change with the times, corporate management, and shareholders, should consider exploring the use of either certificated shares in electronic form, uncertificated shares using the book entry method for maintaining a ledger and recording keeping, or an uncertificated share system that implements the use of a blockchain technology-based platform.

The needs of start-ups and emerging companies can vary dramatically, from major to minor. Our firm handles the whole range of start-up representation with efficiency and competence. To learn about how Dunlap Bennett & Ludwig can assist you with your legal needs, contact us by calling 800-747-9354 or by emailing

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Posted in: Business Law, Corporate Transactions

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