Are Numbered Shares Necessary?

Our daily business is cap tables and share registers. One topic we regularly see divide the minds in Switzerland: Is it necessary to number the shares? Let’s try to bring some light into this darkness.

How do companies do it?

The state of affairs is that there isn’t any common practice. Some do number their shares, some don’t, and some don’t even keep a traditional share register (the document in which changed entries are crossed out and their updated values are written in a new line below, in contrast to a cap table which just keeps the current numbers).

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The legal framework governing share registers in Switzerland is quite loosely formulated. It just requires the company to keep track of the owners and beneficiaries of the shares with their names and addresses. Numbering the shares is not required explicitly, but is more of a historical legacy from the time where a share was a real piece of paper. Of course, the people who worked like this all their life will be very convinced that this is the way it has to be done—because we always did it like that. Elena Walder-Schiavone, who is an expert lawyer in this field, confirms that legally the numbering of shares is not necessary, but it did take some time for her to change habits and feel comfortable with how Ledgy does it.

Historically numbering shares was a means to avoid errors. It allowed double-checking and understanding the changes that happened, which were oftentimes only implicitly clear. For example, the fact that a transfer from person A to person B took place was only clear by seeing that the share numbers of the former now belong to the latter. Also, this system allowed to both see the past transactions and the current distribution on the same sheet--- a task that Ledgy can do easily without needing the compromise of numbering the shares.

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Why don’t we need numbering of the shares in Ledgy?

After all, it served a good purpose before, right? However, the mission of Ledgy is precisely to make cap tables simpler and avoid these errors in the first place by introducing transparency. Ledgy makes it impossible to "forget" some shares, to assign the same share to multiple shareholders or for example in the event that anti-dilution provisions are triggered. It takes all the past transactions (capital increases and transfers) and applies them one after one— without ever being wrong on the calculations, which is testified by the trust of dozens of companies. It takes out the human error factor as much as possible and works just like a bank account. The coins in the bank are also not numbered— but we still trust that the balance is correct. Using share numbers would re-introduce a source of error. The transactions might be valid, but the administrator maybe just mistyped the share numbers— an unnecessary headache for everyone.

In the case of share numbers being used to distinguish shares with different properties and rights— this can easily be done by using a separate share class for each type of share. On Ledgy these classes will always be kept consistent, meaning that the total number of shares per class stays the same and transfers are only possible within the same class. However, if needed, share classes can be converted between each other explicitly.

Ledgy does support the use of share numbers, so if you or your lawyer really wants to use them—  no problem. They’re automatically checked for consistency and correctness to help you save time and confusion. But we do not encourage using them, let’s make our lives simpler and at the same time safer. What do you think? We’re curious to hear your opinions in the comments below.