The End of Indemnities – The Digitisation of Shareholdings

In today’s digital age, with a drive towards paperless solutions across all industries, one would assume that hard copy files would now mainly be a relic of the past. While government bodies, such as the Land Registry and Companies House, have made inroads into going completely online, it is surprising that elements of the corporate world remain behind. For example, relying on physical paper records as the only proof of ownership of shares may be considered an antiquated practice which needs updating to a more efficient and up to date approach.

The Digitisation Taskforce was established in 2022 to help modernise the traditional system in favour of digital shareholdings. Publishing an interim report in July 2023, the Taskforce set out seven recommendations, including implementing legislation to stop the issuance of new paper share certificates for traded companies and mandating the digitisation of existing paper share certificates to address issues such as untraceable shareholding documentation. When combined with the rise of electronic equity management platforms, such proposals represent a real opportunity to depart from the somewhat outdated paper-based systems to a more efficient method of managing share ownership digitally online.

The Dawn of Digitisation

As well as reducing cumbersome administrative burdens, creating a centralised shareholdings hub would eradicate the need for any deeds of indemnities for lost share certificates in respect of any new share certificates issued going forward. Another primary advantage of digitising shareholdings is the real-time accessibility to information, allowing both companies and shareholders to track share allotments, transfers, and any changes in ownership status immediately from any place at any time and to manage their certificates online. Streamlining such operational processes not only fosters a more interactive and transparent relationship between companies and their investors but could also lead to significant cost savings and allow companies to concentrate more on the business’s strategic goals. As well as minimising the likelihood of human error, automation can assist with financial compliance by creating an auditable footprint of digital transactions to help companies adhere to the necessary legal and regulatory frameworks more effectively. Security features such as encryption and authentication also reduce the risk of fraud and unauthorised access to confidential company information.

Potential Pitfalls

As with any new wave of change, there will of course be novel challenges to navigate and overcome. Although being cited as one of the principal benefits to digitisation, cyber security implemented incorrectly, can also be the biggest downfall to companies dealing with sensitive shareholder information. As such, it is important to have robust cybersecurity measures in place to protect electronic share certificates from potential threats. However, such systems can be expensive to instal and are not completely infallible, with malware potentially corrupting and destroying files to the same devastating effect that a fire could pose to paper files. It may mean that increasingly more complex security features, such as secure digital signatures, will be required to eliminate any future problems, and this additional complexity will need to be factored in to the time and costs associated with educating company shareholders and employees in respect of the same.

Moving Forward

Irrespective of the potential demands which the new technology may pose, overall companies and investors stand to gain substantially from embracing the digitisation of shareholdings. We therefore look forward to the publication of the Digitisation Taskforce’s final report in March 2024, which is likely to require legislative and regulatory changes to stop the issuance of new paper certificates at an implementation date "in the near term". Although the current proposals mainly relate to traded companies, we could see this being extended to newly formed private companies and as an optional route for existing UK private companies, potentially reshaping the landscape of corporate governance and investor relations for good.