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Memorandum of association: what it is, when it is useful and what to watch out for
Do you want to transfer a share in your company more easily than through a notary? Share certificates may be the right solution. In this article you will find out what exactly a share certificate is, how it differs from a regular share, how to transfer it and how to cancel it if necessary.
What you will learn in the article:
- What is a share certificate and how does it differ from a regular share?
- What are the advantages and disadvantages of a share certificate?
- For which companies and projects are share certificates suitable?
- What does it cost to issue a tribal charter?
- What is the process for transferring a tribal share?
- How do I cancel (or exchange) tribal certificates?
- Are you starting a company and considering tribal letters? We can help you!
What is a share certificate and how is it different from a common share?
A share certificate is a certificated security in series that embodies a shareholder's interest in an LLC. You can only issue it if you expressly allow it in the memorandum of association and only in respect of a share whose transferability is not restricted or conditional in any way.
What is a certificated security in series? It is a physical document that represents a right - for example, ownership of a share - and that can be transferred to another person by delivery of a deed. Put simply: when you sign the document and then pass it on, the new holder gets all the rights attached to it.
However, according to the Companies Act (CA), a share certificate cannot be book-entry or offered or traded on a regulated or other public market.
How is a common share different from a regular share in a company?
| Ordinary share | A share associated with a common share |
|---|---|
| Transferred by written agreement with notarized signatures. | It is transferred by endorsement, agreement of the parties and delivery of the instrument. |
| It shall take effect upon delivery of the effective agreement to the company. | Effective against the company upon notification of a change of shareholder and presentation of the certificate of incorporation. |
| The transfer is more formal and slower. | Transfer is faster and administratively simpler. |
| The transfer can be limited or conditional (e.g., by approval of the general meeting or pre-emption right). | Transferability cannot be limited - the share must be freely transferable. |
Consequently, transfers via a share certificate are usually quicker and administratively easier, especially if you are transferring the share outside the circle of existing shareholders.
The rubric in practice is simply an entry on the back of the share certificate stating who is transferring the deed to whom.
What are the advantages and disadvantages of a trunk deed?
The CCC also sets out a number of restrictions and rules designed to prevent misuse or confusion when dealing with share certificates - for example, it imposes an obligation to keep track of the company's owners and to ensure that it is always clear who is exercising a shareholder's rights.
It is therefore not always possible to issue or transfer share certificates without further conditions. On the other hand, however, there are a number of advantages to ordinary certificates.
| Advantages of share certificates | Disadvantages of share certificates |
|---|---|
| Speed and simplicity of transfer (signature + delivery + notification to the company) | Less control over the circulation of the shares - when they are freely transferable, the company has less control over who appears at the AGM (this is addressed by the design of the types of shares and by only issuing ordinary certificates in respect of part of the shares) |
| Fewer formal requirements than a normal share transfer (no need to verify signatures on the transfer agreement as a necessary condition of effectiveness) | Necessity to keep track of the deed - it is a physical document; in case of loss, there is a procedure for declaration of nullity, etc. |
| Flexibility for investor entry - easy circulation of smaller shares (typically angel investors) | No public funding - a share certificate is not a ticket to the stock exchange |
| Possibility of a collective share certificate - convenience of managing multiple shares with one shareholder | Higher recordkeeping and deed management requirements - need to keep a careful list of shareholders and ensure that physical deeds match actual holdings |
For which companies and projects are share certificates suitable?
Trust deeds are not suitable for every company - their use depends on the type of business and your objectives. For some companies they will greatly simplify share transfers, while for others they would bring unnecessary complications.
Thus, the following companies in particular will benefit from the use of share certificates:
- Startups and innovative companies that count on more frequent investor input or internal transfers of smaller shares.
- Joint-venture projects with multiple smaller stakes where simple transferability is advantageous.
Common shares, on the other hand, often do not find application in family-owned companies. In a family business, if you want to keep an eye on who can transfer or inherit a share and want the consent of the other partners or company bodies to be necessary for the transfer, then share certificates are not suitable.
What is involved in issuing share certificates?
In order to issue share certificates, you need to look at the following areas:
1/ Modification of the articles of association
The memorandum of association must allow for the issue of share certificates and provide for the free transferability of the shares in respect of which the certificates are issued, otherwise you cannot issue share certificates. As this is an amendment to the memorandum of association, a notarial deed is always required. However, the subsequent transfer of the share certificates no longer requires a notary - a reverse signature and delivery of the deed is sufficient.
Tip: How to set up the articles of association correctly (e.g. types of shares, transferability) is summarised in our article Articles of association: everything you need to know.
2/ Required elements of the certificate of incorporation
The CCC clearly lists what each certificate of incorporation must contain:
- the designation "share certificate"
- a clear identification of the company
- the amount of the contribution per share
- identification of the shareholder
- the name of the type of share (if the company has more than one type) and the designation of the share
- the number of the share certificate and the signature(s) of the managing director(s); the signature may be replaced by an imprint if the share certificate has protective features.
If you issue a collective share certificate, be sure to include the number of shares being replaced and the designation of the shares to which it relates.
3/ Issue of the share certificate itself
The issuer is the company and the share certificate is deemed to be issued on the date it meets the statutory requirements (set out above) and becomes the property of the first transferee.
The managing director of the company physically hands over the certificates and records their existence in the register of members (note + certificate number). In practice, this information is subsequently entered in the commercial register.
Tip: We have prepared a sample of a memorandum of association for a limited liability company with tribal sheets (click to download - you can then edit the .docx file as required).
How is the transfer of the certificate of incorporation done?
From a legal perspective, it is a transfer of a security to the ranks - let's see what this means in practice:
- 1
Drawing up the parties' agreement - although it does not legally have to be in writing, practice recommends a written purchase agreement for evidence.
- 2
Issuance of a blank indorsement - on the stock certificate, you will provide unambiguous identification of the purchaser (typically name, surname, date of birth and residence; for a legal entity, name, registration number and registered office); a blank indorsement is not allowed by law.
- 3
Handing over of the certificate to the purchaser - at this moment the ownership right is transferred.
- 4
Notification of the company + submission of the share certificate - the transfer is effective against the company only when the transferee or transferor notifies the change of shareholder in writing (usually by e-mail or letter to the company's registered office address) and at the same time submits the original share certificate. The managing director then updates the list of shareholders.
By comparison, in the case of an ordinary share, the transfer must always be effected by a written share transfer agreement with certified signatures. The effects against the company only take place after the delivery of this agreement to the company.
Tip: Are you setting up a company and thinking about share certificates? Check out our guide How to set up an LLC? A beginner's guide. Or contact us, forming an LLC. We'll tailor-make your incorporation for you.
How do I cancel (or exchange) the certificates of incorporation?
Have you decided to cancel your ordinary shares and revert to ordinary, so-called unincorporated shares? Then proceed as follows:
- 1
Amend the Memorandum of Association - delete the option to issue share certificates from the Memorandum of Association, or specify that the shares will not be represented by a share certificate again. The amendment to the articles of association must be decided by the general meeting and the amendment must be in the form of a notarial deed.
- 2
Withdrawal of the certificates from circulation and call for surrender - the managing director will call on the shareholders to surrender the certificates for exchange/revocation/destruction; you can declare the un-surrendered certificates invalid and issue new certificates or make an exchange according to the legal scenario.
- 3
Update the list of partners - if there are changes, you must always enter them in the Register of Members.
Note: When a partner ceases to be a partner, he/she is obliged to surrender the share certificate without delay. If he or she fails to do so, you must invoke the procedures for invalidating the certificate.
Are you setting up a company and thinking about share certificates? We can help you!
We can help you with the incorporation of your company and the changes required to issue the certificates of incorporation.
Contact us using the form below - we'll suggest a legally compliant solution and arrange everything from amending the memorandum of association to registering the change with the Registrar of Companies.
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