Well, its the 4th of July here in the States and I am thinking of our old motherland. In light of Brexit, I am a little sad the UK hasn’t reached out to the US to rekindle an old relationship! Every month, we hear from private companies in the UK that want to issue dematerialised shares. There are a lot of terms for dematerialised stock including:
- Uncertificated stock / shares
- Electronic stock / shares
- Book-entry stock / shares
- Non-paper stock / shares
Issuing shares electronically is a new concept. So many UK companies wonder if it’s legal. They often ask questions like these:
- Are uncertificated shares legal in the UK?
- Does the UK support book-entry shares?
- What is the difference between dematerialised shares and uncertificated shares?
So, I decided to do some of my own research. It is always a good idea to consult a lawyer if you have more detailed questions.
History of Dematerialised Shares in the UK
The UK was an early leader in the dematerialisation of stock. The UK first tried to eliminate paper stock certificates for public companies in the 1980s. That effort failed. A few years later, the UK launched CREST. CREST is a centralised security depository for UK and Irish securities.
Centralised security depositories (CSDs) track and / or hold many securities in one location. Often a CSD will hold a very large percentage of all publicly traded securities for a given country. Because CSDs hold all of the securities, they can easily facilitate transfer transactions electronically.
Once you “check in” your securities to CREST you can transfer them electronically. CREST holds nearly all UK-listed public company securities. So it can easily create an electronic master list of share owners.
When parties buy or sell shares, CREST simply updates its electronic ownership list. It doesn’t need to actually ship out paper stock certificates.
CREST and UK Private Companies
So why wouldn’t private companies just use CREST? Actually, they can. The problem is that CREST is too costly for private companies. Moving your securities into CREST is complicated and expensive. We won’t go into all the details here. At a minimum, you would have to go through these steps:
- Set up a meeting with a CREST representative
- Become a client of a CREST settlment agent or become a settlement agent (lengthy processes)
- Enter into a contract with a settlement for each currency in which you want to transact
- Finally enter into a CREST contract
Using a CSD for publicly traded companies makes a lot of sense. Publicly traded companies have very high trading volumes.
Most private companies have very low trading volumes. So for most private companies enrolling in CREST doesn’t make sense.
Dematerialised Shares for UK Private Companies
Can private companies in the UK issue uncertificated stock? In the US, LLCs have issued uncertificated shares for years. An LLC is one way you can legally structure your company in the US.
The UK doesn’t have an LLC equivalent. It’s closest legal structure is a Private Company Limited by guarantee. These companies do not need to issue shares. However, most of these companies are non-profits.
Most for-profit private companies in the UK are structured as a Private Company Limited by share capital. Do these companies need to issue shares?
Most UK private companies that are limited by share capital have historically issued stock certificates. A Lexis Nexis article points out: “Shares issued by private companies and unlisted public companies are usually held in certificated form, while shares in listed companies and AIM companies are usually held in uncertificated form.”
But is it necessary to issue shares? Let’s look at the governing laws:
According to the Companies Act 2006 Section 769(1):
A company must, within two months after the allotment of any of its shares, debentures or debenture stock, complete and have ready for delivery—
(a)the certificates of the shares allotted
So from this, you would think that all private companies would have to issue stock certificates. However, Section 769(2) states:
(2)Subsection (1) does not apply—
(a)if the conditions of issue of the shares, debentures or debenture stock provide otherwise
From this, it seems you would not need to issue stock certificates as long as the conditions of the issuance specify otherwise. Capshare isn’t the first to interpret the law this way.
So UK private companies should be able to issue digital stock without paper certificates.
It isn’t totally clear how to handle transfers of non-paper shares in the UK. So this would be an area where you should consult an attorney.
Electronic (Non-Paper) Solutions for Private UK Companies
Capshare offers a solution for UK companies looking to eliminate paper stock certificates. Companies on the Capshare system can either issue electronically signed PDF stock certificates or uncertificated shares.
Capshare’s system allows private companies to manage all of their equity in one place. It offers a low-cost alternative to registering on a system like CREST.