Dematerialisation: The Future of Share Ownership and What It Means for Issuers

If you hold shares in a UK company via a physical share certificate, the way you own those shares is about to change fundamentally. Dematerialisation - the move away from paper-based share ownership to a fully digital, intermediated system - is coming, and companies should start preparing now.

Last week I attended a session on this topic on day two of the Chartered Governance Institute’s annual conference, and it's clear the changes ahead are significant. I thought it would be useful to write this summary of where things stand and what issuers should be thinking about.

What is dematerialisation, and why is it happening?

At its simplest, dematerialisation means going paperless. Physical share certificates will be phased out entirely by the end of 2027. This is already common in many markets globally, and the UK is catching up.

But the UK's ambitions go further than just eliminating paper. The longer-term goal is a fully intermediated market, meaning all shareholders would hold their shares through an intermediary (such as a broker or an investment platform - names you might recognise like Hargreaves Lansdown, AJ Bell and Interactive Investor are the better known examples of these) rather than being registered directly on a company's share register. This is the more groundbreaking element, and the one that requires the most careful planning.

The three phases to understand

Dematerialisation is effectively happening in steps. A Companies Act 2006 consultation is expected, with legislation anticipated to go to Parliament in late 2026 or early 2027.

Step 1 - Remove physical share certificates by the end of 2027. This is the most immediate change. Companies should also be encouraging shareholders to move to ecomms and digital payments now, ahead of this becoming the default.

Step 2 - Default to ecomms and digital payments. Shareholders who haven't already signed up will be moved to digital communications and bank transfers to receive dividends, with cheques being a thing of the past. Getting ahead of this now will reduce friction later.

Step 3 - Full intermediation. This is the most complex stage. Essentially shareholders will all be required to move to an intermediary, and it’s anticipated that certain corporate events will initially act as a trigger for this, for example a dividend reinvestment plan (DRIP) or a rights issue, would mean shareholders couldn't participate until they had moved to an intermediary. A sunset clause deadline will make this mandatory, though the timing is still to be confirmed.

Key issues still to be resolved

The largest UK registrars have been involved in a working group on this, and there are several practical questions still being worked through:

• Dormant and hard-to-reach shareholders. What happens to shareholders who can't, or won't, find an intermediary? Or those who simply can't be contacted? Tracing programmes and a review of forfeiture timeframes are likely to be considered. There is also discussion of a government-established central repository, though nothing concrete has been decided at this stage.
• Cost and accessibility. Using an intermediary has a cost, and not all shareholders will find it straightforward to navigate. Education will be critical.
• Jurisdictional complexities. Shareholders based overseas add another layer of complexity to the transition.
• Impact on share plans. Employee share plans will need to be reviewed carefully in light of these changes.
• Articles of association. While the Companies Act changes would override existing articles, companies may want to review and update their articles to streamline them with the new legislation.

Preserving shareholders' core rights: to vote, receive information, and participate in meetings through the intermediary chain will be a vital safeguard, and SRD II currently sets the baseline service level expected from intermediaries. A recent SRD II consultation has now closed, with results expected by the end of this year.

What should companies be doing now?

There are several practical steps issuers can take ahead of the legislative changes:

1. Review your share register. Identify dormant shareholders and consider undertaking a tracing programme sooner rather than later.

2. Think about your shareholder communications. When communicating with shareholders in the coming months, it may be worth signposting the longer-term direction of travel on dematerialisation and not just the immediate changes. The goal is to avoid confusion and unnecessary shareholder queries to the company secretary or registrar, and to prevent shareholders from selling their shares simply because they don't understand what's required.

3. Encourage digital sign-up. Start encouraging shareholders to move to ecomms and digital payments now, before it becomes mandatory.

4. Review your articles. Consider whether they need updating in light of the expected legislative changes.

5. Consider your share plans. Factor the dematerialisation timeline into your share plan administration.

A note on tokenisation and settlement

While not strictly part of dematerialisation, two related developments are worth keeping an eye on.

• Tokenisation (which is essentially holding a digital share on a blockchain) has been approved by the SEC in the US and is currently under review by the FCA in the UK. It would not replace shares but would offer an additional way to hold them. Given the timing, it would make sense for tokenisation to be considered alongside the dematerialisation changes.
• Settlement timelines are also shifting. UK share trades currently settle on a T+2 basis, moving to T+1 from 11 October 2027. Tokenised shares, by contrast, would settle instantaneously (known as atomic settlement). The US is also considering a move to T+0 - one to watch.

In summary

Dematerialisation represents a significant shift in the UK's share ownership landscape and while some of the detail is still being worked through, the direction of travel is clear. Companies that start thinking about the implications now, particularly around shareholder communications and share register housekeeping will be better placed when the changes come into effect.

Georgina Gearing Bell is a Senior Manager in the Company Secretarial team at Law Debenture, specialising in listed investment trusts and financial services clients.