Since it's so much easier to issue, track, maintain and report on electronic shares, it's not surprising that startups are using electronic shares exclusively. Even private companies that issued paper certificates previously are converting to electronic shares. It's up to the company if it wants to recall the paper certificates and replace them with uncertificated shares or let the paper certificates stay as issued an issue all stock as uncertificated shares in the future.
Before you can issue uncertificated shares, however, there are a few things you need to check and a few actions you might have to take. First, you need to make sure you have a software system in place to support your equity program. Whether it's installed on a computer or accessed over the Internet, it's a critical requirement to properly administer your equity program. If you've already issued certificated shares, make sure you select a system that supports both certificated and uncertificated shares together.
Next, you need to get permission from the board to issue uncertificated shares. If you've already created your company, you need to check your bylaws and Articles of Incorporation to determine if they need to be amended. If you haven't created your company yet, don't include anything that prohibits issuing uncertificated shares.
You will need help from your legal counsel for this step and to ensure that the right legal documents are in place to support uncertificated shares before you issue them. There might be additional state requirements that we haven't included here that you must consider before you issue stock.
BOARD RESOLUTION OR WRITTEN ACTION
Whether you are issuing shares for the first time or you have already issued certificated shares in the past, you must get formal approval from the board of directors to issue uncertificated shares. The easiest way to do this is either through a resolution that's adopted during a board meeting or a unanimous written consent decree.
The resolution or written consent needs to state two things:
If you've never issued paper certificates:
Some or all classes or series of the company's stock will be issued as uncertificated shares, except when executives, in consultation with legal counsel, believe it's in the best interest of the company to issue certificated shares.
If you've already issued paper certificates:
Some or all classes or series of the company's stock will be issued as either certificated shares or uncertificated shares.
In both cases:
After any uncertificated shares are issued or transferred, the company will send the registered owner any written documents required by law in a reasonable amount of time.
If you want to draft something yourself for your attorney to review and modify, you can take excerpts from a library such as Orrick's Startup Forms Library to create a preliminary first draft:
- Top half of Action #5 (leave it unnumbered unless you include other actions)
ARTICLES OF INCORPORATION AND BYLAWS
Get out your company records book and locate two documents: Articles of Incorporation and the company's bylaws. Read them or have your attorney read them and look for a clause that specifically prohibits the company from issuing electronic or uncertificated shares. If there's no such clause, no further changes are required. Otherwise, you must amend either or both documents if they contain such a prohibition. Because amendments can be tricky, it's best to work directly with your legal counsel to create and file the amendments.
IF YOU'VE ALREADY ISSUED CERTIFICATED SHARES
If you've previously issued certificated shares when you decide to transition to uncertificated shares, the good news is that the two can coexist peacefully. If you've only issued a couple of certificates and you know where they are, you might want to ask the shareholders to return them so you can cancel them and reissue them as uncertificated shares. But you don't have to do that if it's more than just a couple of certificates. Over time, you can convert certificated shares to uncertificated shares as the certificates are surrendered as part of a sale. It's not that unusual to have a shareholder who, for one reason or another, demands a stock certificate. In some states, you might be required to comply with that request. In other states, such as Delaware, you're not required to issue paper certificates to anyone.