Stock Issuance and Record Keeping
Best Practice Summary

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Before a corporation may issue stock it must have a sufficient number of shares authorized in its charter currently on file with the domestic secretary of state. If the company does not have enough remaining shares of authorized stock for issuance, an amendment to the charter must be filed increasing the amount of shares of authorized stock.

Best Practice Tip: Amending authorized stock may be very costly in some states. Your service company may not opt to front a filing fee of several thousands of dollars. Therefore, checking the filing fee ahead of time may be a timesaving measure.

Following Incorporation

A certain amount of authorized stock must be issued as soon as practicable following incorporation in order to provide statutory minimum paid-in capital or commence business as provided by state laws. All of the authorized stock may or may not be issued so long as the total authorized stock is always equal to or greater than the amount of issued stock.

Resolution of Directors

New stock issuances always requires authorization of the board of directors and is issued in exchange for some consideration that may be cash, property, services or debt. Stock issuance may also be conditional upon the stockholder entering a stockholders' agreement, stock subscription agreement, a stock transfer restriction agreement or some form thereof.

Directors must also observe any existing stockholder rights, such as rights of first refusal, rights of first offer or preemptive rights, that may prohibit the issuance of stock to a new stockholder without first offering the stock to current stockholders. Once stock is issued pursuant to the conditions listed above, it is referred to as being "issued and outstanding" stock. The stockholder then owns "authorized, issued and outstanding stock" and is a "holder of record".

Stock Certificates

Depending upon the bylaws, stock may be represented by a stock certificate or it may be uncertificated. Uncertificated stock simply means that stock ownership is recorded in the stock ledger but shares are not represented by a stock certificate.

Form of Stock Certificate
The form of stock certificates representing each class and/or series of capital stock is adopted by a resolution of directors. The adopted form of stock certificate must be used for all issuances unless or until a new form is adopted by a resolution of directors. A specimen of the stock certificate adopted by the directors should be attached to the consent or minutes and placed in the minute book. If a specimen stock certificate is for some reason unavailable, a new stock certificate should be adopted by the directors and used for future issuances.

Best Practice Tip: If only a black and white copy of a certificate is located, you may order the exact certificate by using the GOES number in the bottom left hand corner of the certificate. Every certificate has a GOES number at the bottom left hand corner, such as GOES 352. This is basically the inventory control number so that ordering the certificates using this number will get you the exact certificate required.

Form of Stock Common Certificate
Form of Stock Preferred Certificate

Contents of a Stock Certificate
Provisions for the contents of a stock certificate and signature requirements may be found in the bylaws. Stock certificates may be computer-generated or pre-printed forms depending upon the specimen adopted by the board of directors. Generally, a stock certificate will contain:

• Name of the company;
• State of incorporation;
• Class, series and par value of stock represented by the certificate;
• Exact name of the stockholder;
• Number of shares issued to the stockholder;
• Any restrictions on transfer; and
• Signature of two officers.

Restrictions on Transfer
Stock may be restricted by law, the charter, the bylaws or by a stockholders agreement, stock restriction agreement or some other agreement providing for preemptive rights, rights of first refusal, rights of first offer or other preferences. In addition to optional restrictions that may apply as a result of a stockholders' agreement, the bylaws and/or charter, other restrictions may also be imposed by law such as:

• S corporation status, Section 1361 of the Internal Revenue Code (IRC) provides certain restrictions in order to maintain S corporation status.
  
  
• Section 1244 of the Internal Revenue Code may also apply to and therefore restrict the stock of a company.
  
  
• Stock is generally restricted under federal securities laws from sale to the general public without registration under the Securities Act of 1933.
  
  
• Stock ownership of professional corporations is often restricted by state laws to only licensed professionals.

The most common restriction noted on the reverse side of stock certificates is the statement that the stock is not registered under the Securities Act of 1933 which must appear all on certificates representing unregistered stock. The 1933 Act and state securities laws, known as blue sky laws generally govern the public sale of securities and are designed to protect the public by assuring that the company makes full disclosure of all relevant information to any potential investor so that investors may make sound investment decisions.

Restrictive Legends
Any restrictions on the stock must be noted on the reverse side of stock certificate pursuant to Article 8 of the Uniform Commercial Code (UCC) which states that "A restriction on transfer of a security imposed by the issuer, even if otherwise lawful, is ineffective against a person without knowledge of the restriction unless:

(1) the security is certificated and the restriction is noted conspicuously on the security certificate; or

(2) the security is uncertificated and the registered owner has been notified of the restriction."

Restrictions on the back of stock certificates are known as "legends"

Legends (searchable collection)

Stock Receipts
A company may maintain the original stock certificate or a stockholder may choose to possess the stock certificate. If the stockholder opts for possession, a copy should be made of both sides of the certificate and kept with the stock records of the company together with a receipt evidencing the stockholder has received the stock certificate. The receipt may be the stub of the certificate or a separate receipt.

Sample Receipt

Stock Ledgers
Stock ledgers may be Microsoft Excel spreadsheet or Word table; or it may be contained in an electronic software program such as Corporate Focus. It is used to maintain the history of issuance and transfer of stock, verifying current ownership. Carefully tracking ownership, issuance and transfer is vital in order to assure all holders of record vote.

If stockholders prefer to hold original of stock certificates, copies of each certificate should be kept in the stock record book together with a receipt evidencing that the stockholder receipt. All stock certificates or copies are kept sequentially in the stock records of the company.

The chosen method of maintaining a stock ledger may depend upon the size of the company and whether or not it plans to "go public". If a company is on an IPO track, a stock ledger must be very carefully maintained in such a manner that it may easily imported into a Form S-1, Initial Registration Statement to be filed with the SEC. If the company is a closely-held corporation with rare stock transfers a manual hand-writtten stock ledger would likely suffice.

Sample Stock Ledger

Transfer Agents
Transfer agents are companies, normally banks, financial institutions and in some cases, may be the law firm, hired by companies to manage and maintain stock records particularly when the company is public or plans to go public; or when the company has several stockholders. The transfer agent maintains the stock ledger, tracks holders of record, issues new stock certificates, removes legends when appropriate, stock transfers and any other record maintenance.

Best Practice Tip: "Holders of record" are those stockholders on the books as of the record date set for an upcoming annual or special meeting. Only the stockholders on the books as to the record date are eligible to vote at the meeting.

Stock Transfers
Once stock is issued, a stockholder may choose to sell, transfer, or give away the stock at any time. Absent any restrictions prohibiting such transfer, as previously discussed, the stockholder may request the transfer by presenting to the company, the stock certificate together with a transfer power stating the person to whom the stock should be transferred. The stock certificate presented will be canceled and a new stock certificate issued to the new stockholder. If the transferor has any balance of stock, the balance will be issued on a new certificate. The stock transfer power and cancel certificate is placed in the stock records book and a notation referencing the transfer is inserted on the stock ledger. New stock certificates are sent to the stockholders. If restrictions apply, the transfer may be prohibited or restrictions need to be complied with. (Also see Rule 144.)

Sample Transfer Power

Best Practice Tip: If there is an error in preparing a stock certificate, for instance, the stockholder's name was incorrectly spelled, that stock certificate should be voided rather than canceled. This is similar to the difference between voiding or canceling a check. A personal check is voided when a mistake is made. But it is canceled when the money has been paid.

Lost Certificates and Replacement Certificates
If the stock certificate has been lost, the stockholder may request a replacement certificate by providing an affidavit of loss indemnifying the company from any loss and stating that the certificate has been lost and not otherwise transferred. Further, it states that it is found, it will be forwarded to the company. The affidavit must be notarized.

Sample Affidavit of Loss

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