The art of transferring share certificates: Tips for a smooth process
The world of share transfers harbours pitfalls, especially when it comes to share certificates. Mistakes in this process can not only lead to losses for the stock corporation, but can also result in liability for board members and lengthy legal disputes. Here are some important points that board members should bear in mind to ensure a smooth process.
Share certificates in focus
The requirement for the lawful transfer of shares depends on whether they are securitised as certificates or not. Share certificates must contain certain information such as the designation as a share, the company, a name, the nominal value, a number, the amount paid up in the case of partly paid shares and the signature of a director. Careful scrutiny is crucial, as cancelled certificates must be withdrawn by the Board of Directors.
Endorsement of share certificates
If share certificates are used, the transfer of shares requires a valid purchase stock corporationreement, power of disposal on the part of the transferor and the handover of the endorsed share certificates. The endorsement, a note on the back of the share certificate, serves to transfer ownership of the share and contains both the acquirer and the signature of the seller. Blank endorsements are also permitted, where only the signature is given and the acquirer is left blank. It is important to note that the mere handover of certificates without an endorsement is not sufficient for the transfer of registered shares. Without an endorsement, ownership of registered shares remains with the previous owner.
The careful buyer analyses in advance whether the seller is actually the owner of the shares. In many cases, the transfer of registered shares also requires the consent of the stock corporation, which must be granted by an authorisation resolution of the Board of Directors (so-called registered shares with restricted transferability).
Keep an eye on directories
A well-maintained share register and a list of beneficial owners are mandatory. Shares with owners and beneficial owners are recorded here. Violations of this obligation can be penalised with fines. However, this requires notification by the selling and/or acquiring party and, in particular, compliance with the legal requirements. This is often not the case in practice.
Consequences of defects
Defects in share transfers generally result in them being invalid. As a result, the right to dividends, voting rights and all other shareholder rights are not transferred to the acquirer. If a general meeting is held with the participation of non-shareholders, their resolutions may be contestable or null and void. If the company is sold as a whole, the buyer verifies the legitimacy of the ownership of the persons entered in the share register. If the chain of ownership is not complete due to the endorsements on the back of the share certificates and/or does not correspond exactly with the share register, the prospective buyer will refrain from making a purchase. In addition, in the event of an increase in value, previous, legitimate owners of the share would have the option of claiming that all subsequent transfers are null and void and would themselves be entitled to the higher sales proceeds.
The Board of Directors therefore has a responsibility to create a clear understanding of who the company's shareholders are. In the event of breaches of duty by the Board of Directors, such as the payment of a dividend to a person who is not actually a shareholder due to an incorrect transfer of shares, the Board of Directors can be held liable.
Recommendations for a smooth process
To avoid potential problems, directors should check the validity of share certificates, obtain endorsement for certificates and assignment for uncertificated shares, obtain board approval for transfers involving registered shares and maintain accurate registers.
Share certificates vs. dematerialised shares
The transfer of share certificates is not only difficult from a formal legal point of view, but can often not be controlled by the Board of Directors because the shares are transferred without its knowledge. The seller and acquirer are often unaware of the legal requirements and problems and transfer the shares incorrectly. Quite apart from the legal challenges for a legally compliant transfer of shares, public limited companies are often confronted with the problem of share certificates being lost or damaged. This adds another factor that makes it difficult to determine the actual rightful shareholder. For this reason, the abandonment of share certificates and the introduction of dematerialised shares, e.g. in the form of uncertificated securities, is an obvious solution.
Konsento tracks shares in all forms and will be happy to advise you on converting share certificates into uncertificated securities. Book a free consultation now!!
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