UK: CREST

The Uncertificated Securities Regulations 1995 have been completely replaced by a new set of Regulations, the Uncertificated Securities Regulations 2001. These Regulations set out the legal basis for the operation of the CREST system, which is the means by which shares in listed companies are held electronically.

The key effect of the new Regulations is to create a system for the electronic transfer of title.

Previously, when CREST members sent instructions to CRESTCo for the transfer of uncertificated shares, and that instruction settled, CRESTCo sent a Register Update Request (RUR) to the Company’s Registrar. The Company’s Registrar then updated the share register. CRESTCo in the meantime reflected the transfer of the shares in the CREST member accounts of the buyer and the seller, which operate as the equivalent of a share certificate.

Under the new Regulations, CRESTCo itself is the holder of the register of the uncertificated shares in the company. The Company’s Registrar will continue to hold the register of the certificated shares but will only have a copy record, obtained from CRESTCo, of the uncertificated shares. This means that when a buy and sell instruction settles in CREST, the transfer of title will happen electronically and simultaneously with settlement. CRESTCo will notify the Registrar of the transfer by way of an RUR instruction, but this will be for the purpose of updating the company’s record of the register.

This is obviously a key change, not just in terms of CREST, but also for company law purposes. Instead of making specific amendments to the Companies Act 1985, the Regulations (in Schedule 4) simply deem the relevant Companies Act provisions relating to registers to be amended in a specified way in relation to uncertificated shares. This means that, when looking at any point on share registers in relation to a company whose shares are admitted to CREST, both the Companies Act and the new Regulations will need to be checked.

The Regulations mean that company registers are now technically split in two. The register kept by the company is known as the "issuer register of members". This includes a complete list of members, but the details about the number of shares held is only given in relation to the certificated shares. CRESTCo maintains a register known as the "Operator register of members" showing the number of shares held by those members who hold uncertificated shares. The company maintains a record of the Operator register of uncertificated shares, which it must "regularly" reconcile with the Operator register of members. In practice the company’s registrars will continue to keep a complete register of the details of uncertificated shares even though part of this will technically be a "record" rather than the real register.

References in any statute to a company’s "register of members" for all companies in CREST are construed as referring to both the issuer register of members and the Operator register of members "unless the context otherwise requires". However, to the extent that any particulars entered in the issuer register of members are inconsistent with the Operator register of members, the Operator register of members will prevail.

In order to protect the company in circumstances in which its record of the register of uncertificated shares is different from the register held by CRESTCo, the Regulations provide that the issuer will not be liable, in the absence of its own default, in relation to its obligations to maintain a register. The Regulations also specifically provide that a company will not be liable in respect of any act done in reliance on the assumption that the record of the register is the same as the Operator register, provided it regularly reconciles the two. This provision is specifically referred to in relation to the ability of a company to set a record date for those persons entitled to receive notices and for those entitled to attend and vote at a meeting - in other words it can safely rely on its copy register for this purpose.

In practice, we understand from CRESTCo that the reconciliation between the CRESTCo register of members of uncertificated shares and the registrar’s record of that register, will occur on a rolling basis whilst the CREST system is live, such that the registrar’s record of uncertificated shares will be updated within around 15 - 30 minutes of a transfer taking place and being entered on the CRESTCo register.

Although a company now only has a record of the register of uncertificated shares, it is still the issuer’s register that is available for inspection. There will be no right to inspect the CRESTCo register of members.

The new arrangements also affect the arrangements for a company when issuing new shares. Case law states that a share is not "issued" until the holder’s name is entered on the register of members ( National Westminster Bank v. Inland Revenue [1994] 3 AER). Under the new arrangements, this suggests that uncertificated shares will not be treated as issued until such time as they are entered on the register held by CRESTCo. In relation to a new listing of shares, it will mean that, although the allotment of shares will have happened at the point in time of listing (which accords with what is required under the Listing Rules), the shares will not be issued until the shares are, immediately after that admission to listing, enabled in CREST. If any concern arises on a particular transaction as to the timing of issue of shares, CRESTCo should be consulted at an early stage.

Articles of Association do not have to change as a result of the new Regulations. The Regulations automatically disapply any inconsistent provisions in the Articles of Association for those companies that are already in CREST. However, if the Articles are to be changed anyway (for example to allow electronic communications with shareholders) then the wording relating to CREST should be reviewed and updated - so that the 2001 Regulations are referred to.

Companies in CREST should also consider putting a new provision in their Articles in relation to restrictions on transfer following a breach of a 212 Notice and compulsory transfer provisions. This is to allow the company to require CRESTCo to convert the relevant shares into certificated shares with a view to imposing the restrictions - this is now permitted under the 2001 Regulations but was not allowed under the 1995 Regulations.

The mechanism for payment in CREST has also changed as part of the recent enhancements of the CREST system. CREST has introduced a system of simultaneous payment on settlement of the transfer of securities in CREST, which eliminates the intra-day exposure to the insolvency of a settlement bank.

Previously, on settlement of a transfer of securities within CREST the payment obligation owed by the transferee to the transferor was simultaneously replaced by a payment obligation due from the transferee’s settlement bank to the transferor’s settlement bank, referred to as an "assured payment obligation", which was to be settled by way of an "end-of-day (net) settlement" procedure, whereby the net obligations owed by each of the settlement banks to each of the others were calculated and settled across the accounts of the banks at the Bank of England.

In November 2001 this was replaced for payments in euro and sterling with a system of "real-time gross settlement" payments. Now, on settlement of a transfer of securities within CREST the payment obligation owed by the transferee to the transferor is simultaneously replaced by a payment obligation due from the transferor’s settlement bank to the transferee’s settlement bank; simultaneously the settlement bank’s payment obligation is extinguished by means of an irrevocable undertaking by the Bank of England to credit the transferor settlement bank’s account at the Bank of England and to debit the transferee settlement bank’s account at the Bank of England. The irrevocable nature of the Bank of England’s undertaking is sufficient to complete payment between the settlement banks even though it precedesactual debit/credit to the settlement bank accounts.

For US dollars, CREST settlement continues to operate on an assured payment mechanism and so CREST supports two payment mechanisms depending upon the designated currency involved.

The CREST Manual refers to "CREST payments" when referring to both types of payment: being "real time gross settlement" in respect of sterling and euro, and "end-of-day (net) settlement" in respect of US dollars.

The recent changes to CREST, including the coming into force of the Uncertificated Securities Regulations 2001, the enhancement of the CREST payment arrangements and new procedures for dealing with takeovers through CREST, mean that the wording relating CREST in public documentation (circulars, prospectuses and takeover documents) and company documentation needs to change.

• All references to the Uncertificated Securities Regulations 1995 should now be to the Uncertificated Securities Regulations 2001.
• In place of the reference to Article 35 of the 1995 Regulations, the footnote to AGM/EGM notices should now refer to the right under Article 41 of the 2001 Regulations to fix a time before the meeting at which a person must be on the register in order to attend and vote.
• Although we now have the complicated register of member arrangements, under the 2001 Regulations, in the light of the definition of "register of members" in the Regulations (that is, it can be either or both of the Operator register and issuer register) it is better simply to refer to the "register of members" in the notes to a notice of meeting and similar documents, rather than including references to the separate Operator/issuer registers.
• Board minutes relating to the allotment of shares in uncertificated form should refer to an instruction to the Registrar to require CRESTCo to update its Operator register of members as well as crediting the CREST member accounts.
• The new CREST payment arrangements (see above) mean that references in documents to the CREST assured payment mechanism should be replaced by a reference to a "CREST payment".
• CREST members can now accept takeover offers electronically. Whereas in the past they would have input a transfer to escrow instruction but still completed a form of acceptance, under the new electronic acceptance arrangements the transfer to escrow instruction itself can constitute an acceptance of the offer. CRESTCo has model form wording available on its website to describe electronic acceptance process in take-over documents.
• Since the BT rights issue in September 2001, there have been other rights issues made using CREST (that is where the CREST members receive a credit of the nil paid rights to their CREST accounts rather than receiving a provisional allotment letter) and it is effectively becoming the norm.

"© Herbert Smith 2002

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