Dealing with Lost Share Certificates

If a shareholder loses his share certificate or his certificate is destroyed, he is entitled to receive a new certificate from the company in which he held those shares – often on payment of a small nominal fee.

However, before a company cancels an existing share certificate and issues a new share certificate to the shareholder, it should ensure that it receives either (i) the old share certificate (in damaged form or otherwise) or (ii) an indemnity from the shareholder. Under the indemnity, the shareholder will agree to indemnify/compensate both the company and its directors in the event that a third party later sues any of them in connection with the issue of the new share certificate. A third party might sue the company, for example, if it carelessly issues a new share certificate to a shareholder who has pledged the shares he holds in the company as security for a debt or obligation and, thereafter, purports to sell his shares to an innocent third party who believes the shareholder has full title to his shares. In such a case, the innocent purchaser who has not acquired title despite paying for the shares may try and sue the company.

An indemnity is a little like a guarantee to pay. So, if the company is held liable, it can call on the indemnity of the shareholder to ensure that it is adequately compensated by the shareholder for any loss that it incurs as a result of issuing the duplicate certificate. It should, however, be remembered that the strength of the indemnity is only as strong as the shareholder’s ability to make payment to the company to compensate it for its loss. If the shareholder is bankrupt or otherwise has little funds, the indemnity has little real value as there would be little point in the company suing a shareholder for funds he does not have. That said, the mere fact that the company went to the effort of procuring the indemnity and undertaking from the shareholder will go a long way towards showing that it didn’t act negligently or fraudulently in issuing the duplicate certificate to the shareholder which, in turn, would give it additional protection against any legal action taken by the secured parties.

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