26th Mar 2019

A Brief Guide to Corporate Stock Certificates

Remember the story of Tony Marohn? The man who bought a stock certificate for a couple of bucks, only to later learn that it gave him a 1.8 million share stake in Coca-Cola?

Well, in the end, it amounted to about $15,000. But, if you think about it, this is quite a substantial return on investment if you consider what he spent to acquire that valuable piece of paper.

Corporate stock certificates are physical pieces of paper issued to shareholders as evidence that they own a stake in the issuing company. It specifies the number of shares issued or transferred to the certificate holder.

This article demystifies the world of stock certificates. Read on to gain valuable insight into what they contain as well as what they mean for your company.

Components of Corporate Stock Certificates

A stock certificate displays a lot of vital information to dispel any ambiguity in the shareholding process. Below is a list of the main components to help you understand how to read stock certificates.

1. Certificate Number and Share Number

This identifies the certificate number as well as the number of shares issued to the shareholder. If this is a first-time share issue, the certificate number should begin with the digit 1 or 0001.

2. Joint Ownership

When the certificate is issued to more than one person/business entity, then the initial paragraph on the certificate should indicate the type of joint ownership it is. There are 3 main types of joint ownership for stocks:

  • Joint Tenancy

In this case, all parties own equal interests in the property. Each tenant has a right of survivorship as well.

  • Tenancy in Common

All parties own full interest in the property. However, these interests do not necessarily have to be in equal shares. The tenants in common also forfeit their rights to survivorship.

  • Community Property

Here, ownership occurs when spouses acquire stock in the course of their marriage while living in a community property state.

3. Serial Number

This is a unique pre-printed number assigned to each certificate.

4. Registrar

This is the trust company or bank that keeps a record of the owners of the securities belonging to a particular corporation.

5. Class of Shares

These could either be common stock or preferred stock. They serve to differentiate the voting rights as well as the dividend rights of various stakeholders.

6. Vignette

A vignette is an illustration with a unique and complicated design that appears on the certificate. It makes it hard to counterfeit.

7. Company Name

This refers to the name of the corporate entity issuing the stock.

8. Shareholder’s Name

This denotes the name of the person or entity who owns the stock.

9. State of Incorporation

This is the state in which the company issuing the stocks was incorporated.

10. Transfer Agents

These are entities hired by companies to maintain shareholder information on their behalf. The process revolves around activities like issuing new virtual/paper certificates when needed, distributing proxies, dividends and annual reports to stakeholders, as well as, forwarding correspondence.

11. Par Value

Par value is the nominal/face value of the stock. It forms the basis for determining the value of the shares at a later date.

Most companies state this value at $0.01 or $0.001 per share. The value of the shares increases as the company continues to grow.

12. Assessable Stock

Assessing stock involves evaluating and estimating the value of the stock currently held by stakeholders. This is often done to source for additional funds for investment.

13. Date Issued

It specifies when the certificate was issued to the shareholder.

14. Signatures of Authorized Corporate Executives

These are the handwritten signatures of the corporation’s representatives. They act as witnesses to the transfer to avoid any disputes down the line. That way a company may never claim that it failed to receive (adequate) notice of the transfer.

15. Corporate Seal

This is the official company seal that displays the name of the company, state, and date of incorporation. It is either printed or embossed.

16. Printer’s Name

This is the name of the company that printed the certificate.

17. Ornate Border and Design

This contains elaborate designs and engravings to prevent fraudulent replication of the certificate.

18. Cancellation Markings and Date

When a shareholder redeems their certificate, the representative of the company cancels it using a stamp or a pen. They could also punch it with holes. The pin holes usually display the cancellation date.

19. Stock Transfer Information

This is usually pre-printed on the back of the certificate. The transfer of securities is tightly regulated by state and federal governments. The information displayed ensures that the shareholder conforms with all the applicable company agreements and laws before they can sell/transfer the shares.

In the event that the company had existing agreements between them and the shareholders that restrict the transfer of shares, the certificate will reference this agreement. Common agreements include:

  • Bylaws
  • Articles of incorporation
  • Shareholder agreements

Conversely, even if the company did not have such restricting agreements, the certificate will still indicate some general language that binds the shareholder to any such agreements that may come into effect in the future. This protects the company so that the shareholder cannot sell their shares without giving prior notice to the company.

This section is only filled in when the shareholders sell/transfer the stock to new owners. Critical information that must be included in this section includes:

  • Name of shareholders transferring their shares
  • Total number of shares being transferred
  • Name of the recipients of said shares

20. Restrictive Legends

These are the capitalized legends that appear at the end of the certificate. They represent required notices that inform the shareholders that they are bound by company agreements which restrict the sale, transfer or pledge of the shares. In addition to this, they also have to comply with all applicable state and federal security laws.

When Should a Company Issue Stock Certificates

In the past, before a shareholder could receive dividends, producing a stock certificateused to be an essential part of the process. It was the only way they could prove that the shareholder was entitled to the dividends or that a portion of the stock had been transferred to them.

However, this requirement changed when shareholders began to be registered and when record keeping evolved to electronic databases. This diminished the need for them with certain state laws allowing corporations to opt out of issuing stock certificates.

Nonetheless, the benefits of issuing stock certificates cannot be overlooked. Most shareholders feel comfortable having a legal document that signifies their ownership in a corporation. As such, companies that issue stock certificates attract more investors.

Moreover, the company can clearly stipulate the shareholder’s voting and transfer rights as well as any other exclusions, the shareholder is entitled to. This way, it becomes much easier to enforce them.

Restricted Stock

Certain stocks come with restrictions attached. These usually apply to vote and transfer rights. The stock certificate that accompanies the issue of restricted stock must include a written statement that clearly and articulately outlines the restrictions placed on the stock.

This is necessary to prove that the person to whom the shares are being transferred, is aware of all the restrictions placed on it. Without a stock certificate, it becomes difficult to enforce these restrictions more so if they claim they were not aware of them in the first place.

As much as the law no longer compels companies to issue stock certificates, it is actually in their best interest to do so. The value of stock certificates lies in allowing the company to:

  • Ensure compliance with the state and federal laws
  • Have enforceable rights and restrictions in its stock and more importantly,
  • Assist the company to attract more investors.

Pros and Cons of Owning Stock Certificates

1. Pro – Shareholders Have a Stake in the Company’s Assets

This, however, is only relevant when the company faces liquidation. Even then, shareholders can only claim what is left after all the creditors are paid and all liabilities settled.

2. Con – No Liquidation Preference

Usually, when a company liquidates, creditors are always paid before the equity holders. More often than not, no assets will be left once the process is complete.

3. Pro – The Power to Vote

If shareholders feel that the company is being mismanaged, they have the power to vote for new management or negotiate changes in the business strategy.

4. Con – Irrelevant Power to Vote

As much as retail investors have “voting rights” in executive board meetings, the reality is they have very limited influence or power. This typically lies with the majority shareholder.

Closing Thoughts

The law no longer mandates companies to issue corporate stock certificates. However, it is in the best interest of any corporation to ensure that they do. It'll not only attract more investment but it'll save on a ton of disputes down the road.

For downloadable stock certificates, we highly recommend getting one that you can print and customize. You can check it out here.