February 20, 2007

By-Law Changes II: Allowing for Uncertificated Shares

Apparently, my blog on Friday about the Direct Registration System – as it relates to amending by-laws to ensure companies are DRS-eligible – hit a nerve as I received quite a few emails in response. There appears to be a debate regarding whether – and under what circumstances – companies need to amend their bylaws to permit uncertificated shares.

Section 158 of the Delaware General Corporation Law permits shares of stock to be either certificated or uncertificated, in the discretion of a company’s board – the 2005 amendments to Section 158 went further, removing the statutory entitlement for holders of uncertificated shares to request an executed certificate for their shares. Many other states – including both Georgia and New York – followed Delaware’s lead and now permit the issuance of uncertificated shares (Section 14-2-626 of Georgia Business Corporation Code and Section 508 of the New York General Business Law).

The Debate Under Delaware Law

Section 158 permits companies to issue uncertificated shares if authorized by board resolution. However, many companies have by-laws that expressly provide that “all stockholders shall be entitled to receive certificates,” or, in even stronger language, that “all shares shall be represented by certificates.” Based on a common-sense reading of such bylaw provisions, one could view them as stand-alone requirements that are not overridden by Section 158. In comparison, by-laws that merely provide that “shareholders are entitled
to certificates” are less likely to be viewed as a stand-alone requirement.

What’s Happening in Practice (So Far)

It appears that there are different views among (and even within) Delaware law firms as to whether – and under which circumstances – one can interpret Section 158 as authorizing companies to issue uncertificated shares under the various permutations of certificate requirements that exist in the bylaws that exist today. This division is reflected in practice out there so far. For example, Paul Blumenstein of DLA Piper notes that he looked up the bylaws of a dozen or so “name brand” companies included in the list of DRS-eligible companies set forth in the SIA Dematerialization Guide – and in only two of them was he able to find language permitting the board to authorize uncertificated shares.

In describing Watts Water Technologies Form 8-K with their amended bylaws, I stated that they “needed” to amend there bylaws to provide for noncertificated shares to become DRS eligible. I retract that thought in the wake of receiving member input.

For example, Eric Handler of Dewey Ballantine notes that Watts Water’s by-laws, prior to being amended, neither prohibited the issuance of noncertificated shares nor required the issuance of certificated shares only. Rather, they simply stated that the holders of stock shall be entitled to a certificate (which language was left in the bylaw even after the amendment). Eric notes that other large company’s such as McDonalds and Staples have DRS issues (according to Appendix 4.1 of the SIA Dematerialization Guide) and yet their by-laws contain no language expressly authorizing the issuance of noncertificated shares – in fact, the bylaws of those two companies contain the same “shall be entitled to a certificate” language as that found in Watts Water Technologies.

The Upshot

As Brink Dickerson and Curry Woods of Troutman Sanders have shared with me: Although there’s seems some ground to stand on that companies can rely on Section 158 without having to amend their by-laws, the safe thing to do would be to amend the bylaws – for those companies with by-laws that did not anticipate uncertificated share issuances – to provide clarity and transparent compliance with the new SRO rules. This just seems like the smart thing to do even though I understand that some companies prefer not to trigger an 8-K event if it can be avoided. At the end of the day, I don’t think companies should feel ashamed to file this type of an 8-K as I don’t think it reflects poorly on them.

Courtesy of Brink and Curry, we have posted a red-lined by-law provision that would comply with the new SRO rules in our “Direct Registration” Practice Area.

SEC’s Filing Fees Finally Adjusted

After a longer delay than usual (as I blogged about recently), President Bush signed a continuing resolution on Thursday that allows the federal government to operate for the remainder of fiscal year ’07 (instead of the regular appropriations bill that Congress normally passes; Congress can’t get their act together this go around) – which triggered the filing fees cuts determined by the SEC last year (but which doesn’t go into effect until Congress acts).

These are significant cuts as SEC Chairman Cox notes in this press release. Starting today, registration fees are down to $30.70 per million, a 71% drop from the prior filing fee rate of $107.00 per million! The extended delay cost companies some real change this time around…

Help Desk Hijinks

Here is a “cute funny” bit from YouTube about “Introducing the Book.”