Share Certificates, Acknowledgements and Notices: Certificated and Uncertificated Shares in BC Companies
Every British Columbia company issues shares that represent the ownership stake of their shareholders. Once issued, the question becomes how to evidence those shares. This may seem a mundane matter but there are a few options available to companies under the Business Corporations Act (British Columbia) (the “Act”). These can be confusing, and determining which route to take will depend on each company’s particular needs. This article therefore aims to clarify the difference between certificated and uncertificated shares and when each may be appropriate.
The Right to Receive a Share Certificate
Section 107 of the Act allows for “shares that are represented by a certificate” and “uncertificated shares”.
In all cases where a share is not designated as an “uncertificated share”, the Act states that a shareholder has a right to receive a share certificate in respect of the share.
This means that when the share is issued, the company must either issue (a) a share certificate representing the share, or (b) a “non-transferrable written acknowledgement of issuance” under s. 107(3)(b) of the Act. Traditionally, share certificates are most commonly issued, but are held within the company’s corporate record book for safekeeping. An acknowledgement of issuance includes essentially all of the same information as a share certificate, but unlike a share certificate, is not a negotiable instrument. At any time, a shareholder who receives an acknowledgement of issuance has the right to request a share certificate from the company. In our practice, acknowledgements of issuance are often issued for reasons of convenience in situations where share certificates are not required.
Uncertificated Shares
An acknowledgement of issuance issued under s. 107(3)(b) of the Act is not the same thing as a notice of uncertificated share (issued under s. 107(6)), though they are often confused. However, these two types of instruments are issued in different circumstances. If a share is uncertificated, the shareholder does not have the right to request a share certificate in respect of that share, only a written notice under s. 107(6) of the Act. It is this document that is properly referred to as a “notice of uncertificated share”.
Because of this very important but subtle distinction, shares that are represented by an acknowledgement of issuance should not be referred to as “uncertificated shares”. Shares for which acknowledgements of issuance are issued still carry the right to receive a share certificate, whereas uncertificated shares do not.
How do you know if a share is uncertificated? By checking in one of two places: (a) the rights and restrictions attached to that class of shares in the Articles of the company, or (b) the directors’ resolutions issuing those shares. A share is not “uncertificated” unless either the Articles or the resolutions approving the issuance of those shares specifically say so.
Share Pledges
The distinction between certificated and uncertificated shares becomes especially critical in the case of a share pledge (for example, the pledge of shares to a financial institution as part of the security package in connection with a loan), as it has implications for perfection of the secured party’s interest in the shares. Normally a share pledge is perfected by way of physical delivery of the share certificate to the secured party, but obviously where a share certificate hasn’t been issued, this isn’t possible.
Where the shares are not uncertificated, but an acknowledgement of issuance has been issued, it is a simple enough matter for the secured party to request that the acknowledgement of issuance be replaced by a share certificate. This is preferred by many lenders due to the nature of a share certificate as a negotiable instrument, possession of which is prima facie evidence of the right to deal in those shares. A secured party will have no use for an acknowledgement of issuance, which it can’t deal with in the same manner.
Where shares are designated as uncertificated, the situation is a little different. Under the Personal Property Security Act (the “PPSA”), a secured party is considered to have control of an uncertificated security if either the uncertificated security has been “delivered” to the security holder, or the company has agreed that it will comply with instructions of the secured party with respect to those securities without the further consent of the registered owner of the securities.
The first question here is how an uncertificated security may be “delivered” to a secured party, given that no share certificate exists. This can be achieved by the company registering the secured party as the owner of those shares, or by another person becoming the registered owner on behalf of the secured party.
Alternatively, control of an uncertificated security may occur by way of a control agreement under which the company agrees to follow the instructions of the secured party despite the secured party not being the registered owner of the shares. This is more common since where uncertificated shares have been pledged, the owner of those shares typically does not wish to have their name removed from the register of shareholders (unless, of course, the security holder exercises its rights under the pledge).
In Conclusion
The Act allows for the issuance both of shares represented by a share certificate, and uncertificated shares. A shareholder always has the right to receive a share certificate representing shares owned by them unless the shares are specifically designated as “uncertificated”. However, in these situations, the company must still issue a notice of issuance in respect of those shares, containing much of the same information that would normally be included on a share certificate. Be cautious in share pledge situations that control of uncertificated shares is appropriately conveyed to the secured party, which may require a standalone control agreement to perfect the secured party’s interest.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation. If you wish more information or assistance regarding corporate structuring or the issuance or pledge of shares, please contact Jennifer MacGregor-Greer or any member of our Business Law Group.
Business Law