Should My Corporation Provide Stock Certificates to Shareholders?

Let’s assume that you are one of the founders of a new corporation. Should the corporation provide stock certificates to shareholders when their shares are issued?

The answer is “yes” – and not merely because the founders will feel good having tangible evidence of their ownership interests.

Although California Corporations Code Section 416(b) allows the issuance of shares without certificates under certain circumstances, as a practical matter certificates usually are necessary for a closely held corporation (one that is owned by a small number of shareholders).

Corporations Code Section 418 specifies a variety of circumstances under which share certificates must include written statements providing notice of the existence of those circumstances. These include, for example, restrictions on share transfers or voting rights – both of which are common in multi-founder corporations.

Furthermore, that section states that if a required statement is not included on the certificate, the corresponding restriction will not be enforceable against a transferee who is unaware of the restriction!

This brings us to the major reason why stock certificates should be provided: So that, with the proper statements included, shareholder buy-sell, voting rights, and other agreements can be enforced as the parties intended.

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Dana H. Shultz, Attorney at Law? +1 510 547-0545? dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.


  1. Sam says:

    Wouldn’t it be better to provide no physical certificates and require the Company approval for any transfers? This way the transferee can be required to acknowledge transfer restrictions in writing and to be bound by them. Stamping a legend on a certificate seems a less desirable means of accomplishing this end.

    • Dana says:

      You obviously have not read the code sections referenced in this post. If you do read them, you will see that – absent electronic registration of shares, which is not feasible for a closely-held corporation – certificates and certain types of legends are required by applicable law.