Delaware Takes the Certificates Out of Stocks

Delaware corporations will join a paperless revolution after a recent change to Delaware’s Corporate laws.

Delaware is home to many of the Fortune 500 corporations, and is a favorite place for many businesses to incorporate. The Delaware Legislature recently presented a House Bill before Delaware’s Governor which made a number of changes to the way Delaware’s corporations can function.

Governor Minner signed the Bill on May 17th, and it becomes effective on the first day of August. One of the changes that will happen involves the issuance of paper stock certificates.

A board of directors for a corporation can have stocks issued without having stock certificates printed for those shares. That isn’t something that has changed.

The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation.

But, if an owner of those uncertificated shares wanted physical certificates, they could make a request, and could receive signed certificates:

Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairperson or vice-chairperson of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form.

That sentence in section 158, of Delaware Code Title 8 (Corporations), is being replaced by this one:

Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of the corporation by the chairperson or vice-chairperson of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form.

If you read those passages quickly, you might not notice that the new sentence no longer includes language about uncertificated shares. It’s not easy to tell what intention the omission was intended to fulfull from that sentence. Fortunately, the synopsis to the Bill tells us that:

Section 2. The amendment to Section 158 eliminates the requirement that a corporation with uncertificated shares issue a certificate for such shares upon the request of the holder of such shares. Notwithstanding this amendment, a corporation with uncertificated shares still is permitted to issue a certificate upon the request of a holder, but the corporation is not obligated to do so

So what? Big Deal?

Could be. There’s the potential for this change to mean millions of dollars in savings by making the registration, storage, and transfer of uncertificated stocks an electronic process. The Depository Trust & Clearing Corporation issued a press release today on the potential impact of this change:

Electronic ownership of securities is not only more economical, Considine noted, but much safer. Well over a million paper securities are reported lost, stolen or counterfeit each year, according to the Securities Information Center, which helps investors replace missing stock certificates. On 9/11, some $16 billion worth of certificates disappeared in the collapse of the World Trade Center towers, and it took many months of record-checking and millions of dollars to replace them. Electronic shares, in contrast, were not affected at all.

Most states have already made this change to remove the requirement of paper stock certificates. What makes this significant is that so many businesses, including some very large ones, are incorporated in Delaware.

I will be guest blogging for a few days for Russell. I promise that I won’t throw too much more legislative language your way over that time. I couldn’t resist writing about this change because I love it when such a seemingly small change has the potential to make such a big difference. Like many other business decisions, paying attention to the small details can have bigger impacts than we might ever expect.

Can removing some of the paper in your business processes create savings for your efforts?

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