Digital is much broader than blockchain; with that in mind the recently published UK Jurisdiction Taskforce (UKJT) legal statement provided a helpful reference in addressing critical questions of whether equity, debt or other securities can be validly issued and transferred under the laws of England and Wales using blockchain systems.
Whilst the UKJT statement focused on blockchain, the essential thoughts are equally applicable to establishing digital securities using classical CSD or registry infrastructure. It has been a long held dream of UK and Irish Issuers of shares that a nirvana of paperless securities could be achieved. Instead an ongoing huge paper trail has built up, frustrating many holders, who whilst rightly entitled to, and desiring their name to appear on the shareholder register with legal title, are left aghast at the volumes of mail hitting their doorstep. Juxtapose this with a world that has increasingly digitised, the current experience is increasingly out of place.
Previous solutions put up as an alternate to holding shares in one’s own name either create a chain of intermediation (via nominees) or have proven unsuccessful because of the costs imposed by administrators to operate possible pathways, such as CREST personal membership. As a result, physical share certificates have stuck, complete with a significant administrative burden. Everything from communications to reports follow in volumes of paper that largely end up in waste – an affront to, laudable, net zero type goals.
UK issuers of shares have worked with the presumption that they are obliged to provide holders with paper share certificates, should they demand. As the UKJT paper makes clear, “The statutory requirement for the issue of share certificates can be dispensed with by the company’s articles of association…”. In other words, amend the articles accordingly and the path is open for a digital registry.
But what about a holder who wishes to retain their paper certificate? This worn historical argument for inclusion has been used to block progress, but in a time when travellers of all backgrounds are content with digital rail or airline tickets, inertia here is wearing thin. Nevertheless, accepting the diminishing numbers that may want a certificated holding should not be an absolute barrier to some holdings being in book entry on register form too. Luckily a parallel experience helps; Ireland, a common law jurisdiction close to the UK, has made huge progress by implementing article 3 of CSDR, permitting book entry holdings of securities. This experience has compelled investment in technology by registrars and allow us, at Avenir, to showcase our answer.
We focussed on being demand led with a solution that can cater for a register maintaining concurrent holdings in certificate form, register book entry and CSD (CREST) – and there is much more that benefits both issuers and holders post digitisation of records, too. For example, the communication chain can be shortened providing online access and electronic proxy submissions can be readily supported, delivering a multitude of benefits as a result. Furthermore, at Avenir we use QR codes to support the handling of any residual paper certificates and their ongoing management, invalidating lost certificates remotely and allowing third parties to check the validity of these same certificates with nothing more than the camera of a smartphone. It is clear that these digital solutions may allow holders of share certificates to able to overcome the numerous challenges they face holding paper certificates, such as obtaining costly indemnities, when a share certificate is misplaced.
For issuers interested in grasping the future and bringing down shareholder administration costs, digitisation of registers ought to be compelling matter for consideration. In conjunction with your legal counsel, by addressing matters through revised articles of association, issuers can be confident that providers such as Avenir already have the technology to support the transition to digitisation – without loss of choice for all concerned.
An amended version of this article originally appeared in the March 2023 version of AIM Journal. You can download a printable version here.