Certificated or book-entry shares: what to choose when incorporating a joint-stock company

When a joint-stock company is being incorporated, the form of the shares is often chosen in passing, following whichever model articles happened to be at hand. Yet the Commercial Code allows a share to be issued as a certificated or as a book-entry security (Section 155(2)), and almost everything the company later does with its shares follows from that choice: how they come into existence, how they are transferred, who maintains the shareholder records and how they are pledged in favour of a bank. Both regimes rest on the central securities depository, but each in a different way.

When the choice is not yours

A bearer share may only be issued in book-entry form (Section 156(2) of the Commercial Code). Certificated shares are therefore only an option as registered shares. For a simple joint-stock company, the Act leaves no room at all:

The company’s shares may only be in book-entry form and may only be registered shares.

— Section 220i(1) of Act No. 513/1991 Zb. (unofficial English translation)

Anyone considering a simple joint-stock company, for example with investors in mind, should expect registration of the issue at the central securities depository from the outset.

How the shares come into existence

A certificated share is a document. In addition to the general particulars, such as the company’s business name, the nominal value and details of the shareholder, it contains a serial number and the signature of the member or members of the board of directors authorised to act for the company (Section 155(3) and (4)). After issuing certificated registered shares, the company must enter into an agreement with the central securities depository to maintain the shareholder list without delay (Section 107(9) of the Securities Act).

A book-entry share is an entry in records. First an ISIN is allocated at the issuer’s request (Section 13(3)), then the issue is registered and the shares are credited to shareholders’ accounts. The Act fixes the decisive moment as follows:

A security is issued at the moment when it has all the particulars laid down by this Act or by special legislation and when, in the manner laid down by law, it becomes the property of the first holder or, in the case of a book-entry security, when it is credited to a holder account, client account or nominee account, including where it becomes the property of the issuer or, in the case of a book-entry security, where it is credited to the issuer’s account.

— Section 13(1) of Act No. 566/2001 Coll. (unofficial English translation)

Every shareholder therefore needs a holder account before the shares are credited. The registration procedure is described in detail in registration of a share issue and ISIN.

Transfer and shareholder records

A certificated registered share is transferred by endorsement and delivery (Section 156(4)). As against the company, however, the transfer takes effect only upon entry of the change in the shareholder list, which the company arranges through the depository (Section 156(7)). A transfer therefore has two steps in two places: the document passes from hand to hand and the list is amended on the company’s instruction.

A book-entry share is transferred under the Securities Act (Section 156(3) of the Commercial Code). The obligation to transfer it is discharged by registration of the transfer on the basis of an instruction (Section 22(1) of the Securities Act) and the depository’s records replace the shareholder list (Section 107(8)). The company plays no part in registration of the transfer, unless its articles of association make the transfer of registered shares subject to its consent (Section 156(9) of the Commercial Code), and if it needs to know who the shareholders are, it requests a list of holders. Who maintains the records under which regime is summarised in who maintains the shareholder list.

The difference is also noticeable when taking security. With certificated shares, the depository marks the document with an endorsement ‘for pledge’ when registering the pledge (Section 45(3)) and, for shares transferable by endorsement, a pledge endorsement is also required (Section 45(4)). This is examined in detail in the article pledges over certificated shares.

Changing the form is possible, but lengthy

The form of the shares may be changed later, but always for the entire issue (Section 15(3) of the Securities Act). When moving from certificated to book-entry shares, the issuer must publish its decision, notify holders of registered shares in writing and set a period for handing in the documents, which may be no shorter than two months and no longer than six months from publication of the decision; only after it has expired, or earlier if all documents have been handed in, is the change of form carried out at the depository (Section 16(1) to (4)). The opposite direction has its own procedure, and pledges registered over the shares survive its effects (Section 17(5)).

How to decide

Certificated registered shares may suit a closely held company with a small number of shareholders, where shares are rarely transferred and the shareholders do not want holder accounts. Book-entry shares are more suitable where investors, more frequent transfers, security over shares for a bank or a later market listing are envisaged, and for bearer shares they are the only option. In both cases the company pays fees under the central securities depository’s fee schedule, only for different actions; an overview is given in what CDCP charges fees for.

For book-entry shares, we prepare and handle the registration of the issue up to the crediting of the shares to shareholders’ accounts. For certificated registered shares, we arrange and maintain the shareholder list so that each transfer takes effect against the company in good time.