Shareholders Don’t Need Stock Certificates

In business litigation, it’s often necessary to determine whether the litigants are shareholders in a corporation. To bring a lawsuit against an officer or director of a corporation for breaching a fiduciary duty owed to the corporation, for example, the plaintiff must be a shareholder and bring the suit derivatively on behalf of the corporation. (See Va. Code. § 13.1-672.1). In small, closely held corporations, it can be unclear who the shareholders actually are. If an entire corporation is owned and managed by only two or three people, those people may not run the corporation with the same level of formality as a larger company. Board “meetings” may happen in line at Starbucks or not at all. Stock ledgers acquired during the formation of the business may not actually get used. Small corporations often aren’t good about documentation and record-keeping, so when the time comes to issue shares to their stockholders, they may not get around to actually issuing formal stock certificates. Sometimes the only evidence of stock ownership is in the form of a text message or email. This can be a problem when litigation arises because the parties may not agree on how many shares each shareholder owns or who the shareholders even are.

What’s important to note here is that while it’s always preferable to follow corporate formalities and maintain accurate records, shareholders don’t actually need to produce paper stock certificates to prove their status as the owner of corporate stock. Stock is intangible property: it represents ownership in a corporation but does not have a physical form. Stock certificates have physical form but stock certificates are not stock; they are merely evidence of stock ownership. In many cases, stock ownership can be proven without the existence of a stock certificate. Courts look to the totality of the circumstances.

Let’s look at a recent example from the Western District of Virginia: Renee Mason v. Brian Mazzei. This case involved the two owners of Abingdon Foot and Ankle Clinic, PC, Brian Mazzei and his estranged wife, Renee Mason. Mason claimed (among other things) that Mazzei breached his fiduciary duties and she brought a claim against him on behalf of the corporation. Mazzei sought summary judgment, arguing that Mason lacked standing to sue derivatively because she was not in fact a shareholder. Mason had to convince the court that she was, even though she lacked a stock certificate to show for it. She succeeded.

In denying Mazzei’s motion for summary judgment, the court relied on the following facts it found were established by the record. The clinic’s articles of incorporation named Massei and Mason as the initial directors. At the first board meeting, the two of them named themselves as officers of the corporation. Minutes from that meeting indicated that Mason “had received 127 shares of stock in the corporation.” The two of them, acting as directors, instructed the officers (themselves) to execute and issue stock certificates reflecting those shares as well as the 123 shares issued to Mazzei. The clinic’s share register, however, was blank. Still, Mason hadstock_certificate-300x225 testified that she believed she had paid for the stock (though she couldn’t prove it), and both she and Mazzei were treated as shareholders for tax purposes.

At trial, the court made the following additional findings of fact: (1) No stock certificates were ever issued. (2) Mason submitted a Letter of Intent indicating that she would purchase certain shares of stock but never actually paid any money for her shares. (3) Mason and Mazzei consistently held themselves out to the public as the corporation’s sole shareholders, with Mason owning 50.2% and Mazzei owning 49.8%. (4) Corporate formalities were not followed. Corporate credit cards were used to pay personal expenses.

All things considered, the court found sufficient evidence to conclude that Mason was, in fact, a shareholder.

The Code of Virginia defines a shareholder as “the person in whose name shares are registered in the records of the corporation.” (See Va. Code § 13.1-603). However, case law has established that while possession of stock certificates and registration of the certificates in the records of a corporation are strong evidence of shareholder status, neither is actually required. (See, e.g., Barber v. VistaRMS, Inc., 634 S.E.2d 706, 711-12 (Va. 2006); Rountree Motors, Inc. v. Commonwealth Dealers Life Ins. Co., No. 3:13cv47, 2013 WL 4102161, at *4 (E.D. Va. Aug. 13, 2013) (finding that other relevant factors include evidence of payment for shares and the corporation’s payment of dividends)). Acknowledgments of shareholder status may also be considered. References to an individual as a shareholder in corporate minutes, for example, could be deemed sufficient evidence of share ownership. Courts may also look at the parties’ conduct, corporate and personal tax returns, financial statements, and witness statements.

In this case, Mason was not even able to prove that she paid anything for her shares. Still, she participated in corporate meetings, signed minutes as a shareholder, was treated as a shareholder on tax returns, and had received distributions from the corporation. It was undisputed that she was a director of the corporation, and the bylaws required that directors be stockholders. It appeared from the parties’ testimony that the failure to issue actual stock certificates was inadvertent. Upon consideration of these factors, the court found that Mason was indeed a shareholder and had standing to pursue her claim for breach of fiduciary duty.

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