Advantages of uncertificated shares

The Quebec business corporation regime, as well as other provincial regimes (includingOntario and British Columbia), expressly permits the issuance of uncertificated shares in its Act. This is also the case for almost all incorporation regimes in the various American states. Although relatively little used by private companies in Quebec, uncertificated shares are gaining in popularity. Here's an overview of the advantages of issuing uncertificated shares.

Dematerialised share transactions

As explained in another post, "certificated" shares are represented by a paper certificate. The share certificate should not be confused with the shares themselves, which can exist independently of the certificate. However, when it comes to share transactions, be it a sale, gift or mortgage, the certificate will be essential to effect any transfer of the shares. The transfer of shares represented by a certificate effectively requires the endorsement of the certificate (signature on the back or on a separate document) and the delivery of the certificate to the purchaser, much in the same way as a cheque or other negotiable instrument.

In contrast, uncertificated shares are not represented by a document, the existence of such shares being evidenced by the registration of the shares in the company's share register. The transfer of any uncertificated share does not require the exchange of any paper, the closing of the transaction requiring only instructions to the company to register the transfer.

Simplification of formalities

Share certificates can be difficult to manage when shares are sold or redeemed. Each transfer or redemption of shares will generally require the cancellation of a certificate and the issue of a new certificate, while following the established numbering of the certificates. The uncertificated share plan only requires a shareholding notice to inform and provide evidence to any shareholder of the number and class of shares they hold.

Few benefits of issuing certificates

The idea behind share certificates is to be able to physically represent the shares of a corporation in order to facilitate their transfer by endorsement and delivery of the certificate. However, private companies in Canada often have restrictions on transfer contained in the articles of incorporation of the company, so that any transfer of shares must be authorised by resolution of the board of directors beforehand. In addition, share certificates are usually kept in the corporate book under the "Certificates" tab, acting as a sort of second share register.

In short, except possibly for the sense of security that a share certificate may provide as evidence of share ownership (absent evidence to the contrary), it appears that the certificated share regime is of little benefit compared to the flexible and simplified uncertificated share regime. It is interesting to note that in many corporate laws around the world, including New Zealand and the Cayman Islands, "by default" shares are uncertificated, requiring only an instrument of transfer, as with any other property.