Should your company issue stock certificates?

In the past, a stock certificate, demonstrating an owned financial interest in a company,was generally required by law to be an actual piece of paper. Traditional stock certificates bore a date of issuance, the number of shares, the name of the recipient, a serial number, plus a corporate seal and the signatures of corporate authorities. Many were printed quite handsomely on parchment-like paper, with richly decorative engravings and borders. While a few companies still issue such traditional certificates, and some states encourage doing so, most stocks these days are represented digitally.

When to issue stock certificates?

To prove that a shareholder is entitled to dividends, or that a portion of stock has been transferred to a shareholder, it was formerly necessary to produce the certificate. Once shareholders began to be registered as such, partly for tax purposes, this requirement began to change. Today, corporate records being largely electronic, there’s less need for paper stock certificates. Many businesses issue holding statements instead.

Most states permit corporations to opt out of issuingpaper stock certificates. In Delaware, for example, a company choosing not to issue stock certificates must include such language in its articles of incorporation, along with specific bylaws for electronic record keeping. In the absence of such bylaws, Delaware requires the issuance of paper stock certificates.

In some cases, a company may be wise to issue these. A handsomely printed certificate impresses with its appearance, and some shareholders find it a more tangible representation of their stake in a corporation. So the issuance of stock certificates can help attract investors. Stock certificates can alsoclearly define the holder’s voting rights, transfer rights, plus other rights and exclusions, avoiding misunderstandings.

Restricted stock

Some stocks may be issued with certain restrictions on transfer or voting rights. If so, the certificate should plainly articulate these limitations, demonstrating that the stockholder or transferee has been soinformed. Unless a stock certificate denotes its restrictions, or in the absence of any printed certificate, it may become more difficult to enforce transfer or other limitations.

Though the issuance of stock certificates might not now be required by states, it may still be in a company’s best interests. Printed stock certificates help ensure the company remains in compliance with state and federal law, may attract more investors, and provide clear declaration of enforceable rights and restrictions.