Ownership interests in a for-profit corporation must be evidenced by a share certificate, unless otherwise provided by the governing documents of the corporation or by resolution of the board of directors. Sec. 3.021(b) (“The ownership interests in a for-profit corporation, real estate investment trust, or professional corporation must be certificated, except to the extent a governing document of the entity or a resolution adopted by the governing authority of the entity provides that some or all of the classes or series of the ownership interests are uncertificated or that some or all of the ownership interests in any class or series of the ownership interests are uncertificated.”). The share certificate has long been held not to be the share of stock itself, but is “the visible representation of it.” Strange v. Houston & T.C.R. Co., 53 Tex. 162, 169 (1880) (“Although the certificate was not the share of stock itself, it was what the company constituted the visible representation of it; and as between the shareholder and his assignee, the equitable, if not the legal title to the stock, would pass by a transfer of the certificate, and this without it being recorded on the books of the company.”).
It is important to note that “owning stock” does not mean possessing a stock certificate. Texas law has long held that the certificate is not the “stock.” Yeaman, 167 S.W. at 720 (“In a corporation the certificate of stock is not the stock itself”). The certificate is merely evidence of the ownership of the stock. Id. (stating that the share certificate “is but a muniment of title, an evidence of the ownership of the stock.”); Greenspun v. Greenspun, 194 S.W.2d 134, 137 (Tex. Civ. App.—Fort Worth 1946), aff’d, 198 S.W.2d 82 (Tex. 1946) (“In this latter connection it is to be remembered that the certificates of stock are not in themselves property, but are only evidence of the interest of the stockholder in the corporation.”); A. B. Frank Co. v. Latham, 190 S.W.2d 739, 741 (Tex. Civ. App.—Austin 1945), aff’d, 193 S.W.2d 671 (Tex. 1946) (“Nor does mere cancellation of the stock certificates effect a reduction of the capital. They are but evidences in the hands of the holder of his aliquot part of the legal capital of the corporation.”). See also Dewing, 96 U.S. at 196 (“The stock of such corporations may be held by a valid title without a certificate. The certificate is only one of the indicia of title. The right to the stock is in the nature of a non-negotiable chose in action.”).
A stockholder owns the stock whether or not he possesses the certificate and regardless of whether a certificate was ever even issued. Yeaman, 167 S.W. at 720 (Possession of a stock certificate “is not necessary to a subscriber’s complete ownership of the stock.”); Greenspun, 194 S.W.2d at 137 (“It is possible under some circumstances for one to own stock in a corporation though no certificate has been issued to him or endorsed or delivered to him, and likewise it is possible under some circumstances for title to the stock to pass without delivery of the certificate of stock or without written assignment of it.”); Estate of Bridges v. Mosebrook, 662 S.W.2d 161, 121 (Tex. App.—Fort Worth 1983, writ denied); Estate of Crawford, 795 S.W.2d 835, 838 (Tex. App.—Amarillo 1990, no writ) (“Complete ownership of certificated stock may exist without the issuance of a certificate or its delivery.”). “The certificate is simply the evidence in the hand of the subscriber on which he may be able to base an assertion of interest in the common fund. However, the title to the certificate may not carry with it title to the stock.” Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. 831, 832 (Tex. Comm'n App. 1919, jmt adopted).
Form and Validity of Certificates
A share certificate must state on the front of the certificate (1) that it represents shares in a Texas corporation, (2) the name of the person to whom the shares were issued, (3) the number and class of shares and series designation, if any, and (4) the par value of each share or a statement that the shares are without par value. Sec. 3.202(c) The certificate may contain an impression of the corporate seal, if any, or a facsimile of the seal may be printed or lithographed on the certificate. Sec. 3.202(a). A share certificate may not be issued in bearer form. Sec. 3.202(f) The certificate must be signed by an officer of the corporation, Sec. 3.203(a); however, a preprinted certificate signed with a facsimile image of a former officer no longer with the corporation at the time the certificate is issued is still valid. Sec. 3.203(b).
Additionally, differences in classes or series, transfer restrictions, and shareholder agreements, if in place, are required to be conspicuously stated on the share certificate, meaning that the matters required to be disclosed must be placed in a manner or displayed using a font that provides or should provide notice to a reasonable person affected by the information—e.g., if the information is capitalized, boldfaced, italicized, or underlined or is larger or of a different color than the remainder of the document. Sec. 1.005.
Disclosure of classes or series
If the corporation is authorized to issue more than one class or series of shares, then each certificate must conspicuously state on the front or back: (1) the designations, preferences, limitations, and relative rights of each class or series of shares to the extent they have been determined and the authority of the board of directors to make those determinations as to subsequent classes or series; or (2) that this information is stated in the corporation’s governing documents and that a free copy will be provided to the shareholder on written request to the corporation’s principal place of business or registered office. Sec. 3.202(b).
Disclosure of transfer restrictions
A share certificate that is subject to a restriction on the transfer or registration of a transfer must either (1) conspicuously state or provide a summary of the restriction on the front of the certificate; or (2) state the restriction on the back of the certificate and conspicuously refer to that statement on the front of the certificate; or (3) conspicuously state on the front or back of the certificate that a restriction exists pursuant to a specified document and: (A) that the corporation, on written request to the corporation’s principal place of business, will provide a free copy of the document to the shareholder of record; or (B) if the document has been filed in accordance with the Code, that the document is on file with the secretary of state and contains a complete statement of the restriction. Sec. 3.202(d). A corporation that fails to provide to the shareholder the governing documents containing the restriction within a reasonable time a document may not enforce the transfer restrictions. Sec. 3.202(e).
Disclosure of shareholders’ agreements
If the shareholders have entered into a shareholders’ agreement that alters or affects the management of the company, the distribution of dividends, the voting of the shareholders, or certain other matters, See Sec. 21.101, then the existence of that agreement must be noted conspicuously on the front or back of each share certificate. Sec. 21.103(a) The disclosure must include the sentence, “These shares are subject to the provisions of a shareholders’ agreement that may provide for management of the corporation in a manner different than in other corporations and may subject a shareholder to certain obligations or liabilities not otherwise imposed on shareholders in other corporations.” Sec 21.103(b). If shares are outstanding at the time that the shareholders’ agreement is made, then all certificates must be re-issued. Sec. 21.103(c). However, failure to comply with the disclosure requirement does not affect the validity of the shareholders’ agreement. 21.103(d).
The corporation is required to deliver a share certificate representing the ownership interest to which the shareholder is entitled. Sec. 3.204. However, the “certificate is not the stock, but is only evidence in the hands of the shareholder that the corporation recognizes him as owning an interest therein. The certificate is not necessary to the existence of the stock, nor to the transfer of it by the shareholder.” Turner v. Cattleman's Trust Co. of Ft. Worth, 215 S.W. 831, 833 (Tex. Comm'n App. 1919, jmt adopted).
Election of uncertificated shares
A corporation may elect to have outstanding shares that are wholly or partly uncertificated or to have any class or series of shares be uncertificated; and may have both certificated and uncertificated shares or classes or series of shares. Sec. 3.021(b). However, if the corporation changes from certificated to uncertificated shares, those share certificates already issued become uncertificated only after surrender to the corporation. Sec. 3.021(b).
The rights and obligations of the owner of uncertificated shares are exactly the same as those holding share certificates. Sec. 3.205(b).
After issuing or transferring an uncertificated ownership interest, the corporation is required notify the shareholder in writing of any information required to be stated on a share certificate, Sec. 3.205(a), except that a corporation may satisfy this duty by providing the shareholder with a copy of the corporation’s governing documents which contain the matters requiring disclosure. Sec. 3.205(c).