Everyone loses things, and shareholders will sometimes lose their share certificates. By lose, we mean anything ranging from damaging or misplacing share certificates right through to having them stolen. In this article we look at what both a shareholder and company should do when a certificate is misplaced, and we include a template indemnity that a company might ask a shareholder to complete for a lost share certificate.
A lost share certificate is not often an issue for the company. It often only becomes a problem for the shareholder when they (or their estate) want to sell or transfer their holding since, while their name is on the register of shareholders, they will still be able to vote and receive dividends without needing to produce their certificate(s).
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How a company responds to a request from a shareholder for a replacement share certificate will vary from company to company and largely depends on the relationship the company has with its shareholders. Also, if the value of the shares represented by the lost share certificate is fairly modest the company may take a different approach than if the certificate represents a sizeable holding. That said, the Company ought to be consistent in dealing with all its shareholders and the below steps set out a practical process for a company to follow.
1 Verify the request for a replacement share certificate
The company will wish to satisfy itself that the request for a replacement certificate is bona fide and comes from the correct shareholder(s).
Complications can arise if someone has moved house – often the cause of the loss – and not advised the company of the new address. Some companies will issue new certificates to shareholders with their new address when they receive a notification of a change of address whereas some companies simply endorse the old certificate with the new address. Either way, the company should have updated the register of shareholders with the new address.
Before proceeding, the company will often ask the shareholder to make a further careful search for the lost share certificate. However, it should still record that the original certificate has been reported missing.
2 Seek an indemnity from the shareholder
The company will usually seek an indemnity – a signed statement – from the shareholder who has lost the certificate. The purpose of an indemnity is to protect the company from any loss arising from the use or misuse of the original certificate if it is recovered. We’ve created a template form of indemnity for a lost share certificate that you can adapt and use.
Often the loss will only have come to light because the owner wants to transfer/sell the share. Here the Company should decide whether its practice is to issue a replacement certificate to the registered holder and then process the transfer using the replacement certificate or simply accept the stock transfer form accompanied by an indemnity.
3 Consider seeking a third party indemnity guarantee
If the value of the lost share certificate is significant (or may become material if the share price rises a lot), the company may feel that the existing shareholder on their own lacks the means to provide an adequate indemnity. The same may the true if the circumstances of the loss are suspicious.
Where this is the case the company may require the shareholder to have a bank or insurance company join in – be a co-signatory – to the indemnity. For this the bank or insurance company will charge and the level of their fee will be broadly proportional to their potential financial exposure.
4 Record the replacement share certificate
It’s good practice to minute in a directors’ meeting both the loss of the old certificate and approval of the issue of a replacement certificate.
Any record of the lost share certificate should be cancelled – for example, in any list the company keeps of valid share certificates. A company secretarial solution like Inform Direct can help a company more easily manage its active share certificates.
5 Issue the share certificate
In another article, we look at what should be included on a share certificate.
When issuing a new certificate remember to give it a new (unique) number. This is because it is a replacement for the lost certificate, not a duplicate of it. If the replacement certificate had the same number as the original it would be hard to tell the difference if the lost certificate later reappears.
To make this easier, Inform Direct will automatically generate a unique number when used to create a replacement certificate.
At the same time as sending the duly signed new certificate to the shareholder, it’s worth the company reminding them to destroy or return the lost share certificate if it’s subsequently found.