Wednesday, December 8, 2010

How Does the Law Treat Lost Share Certificates in Water Companies?

The following article was published in the Water & The Law newsletter, which our firm publishes on a quarterly basis. If you would like to receive an email version of the newsletter, please click here to join our mailing list.

When the pioneers settled Utah in the 1800s, they often banded together to construct common water diversion, storage, and distribution facilities. Over time, these associations of water users were incorporated into nonprofit mutual water corporations. In these companies, the water rights are held in the name of the corporation for the benefit of its members. Shares of stock were issued to signify how much water each individual is entitled to receive. In most cases, to transfer the shares of stock, the shareholder would need to endorse the certificate to a new owner. Thus, the certificate was critical to establish and transfer ownership of the shares and the attendant right to water delivery.

This system works well in most cases, but it presents a challenge whenever a certificate is lost, destroyed, or stolen. Under the Uniform Commercial Code, a portion of which is applicable to transfers of shares of stock in a water corporation, the corporation cannot simply re-issue the share with impunity. If the lost or stolen certificate is later discovered, the corporation would usually need to honor both the replacement certificate and the original. Because shares of a water corporation represent a right to delivery of a proportionate share of the corporation's water rights, dilution of the shares in this manner is especially unpalatable to the other shareholders. To account for these risks, many water corporations have a series of requirements before they will issue a replacement certificate. For example, many corporations require the person requesting a new certificate to post or obtain a perpetual bond to protect the corporation in the event the original certificate surfaced. Recently, however, it has become more and more difficult to secure such a bond.

To address this difficulty, the Utah Executive Water Task Force has recently approved a draft bill in an attempt to streamline this process. The bill is expected to be presented to the 2011 Utah State Legislature for consideration. The present draft of the bill continues to give the corporation the ability to establish its own requirements for issuing a new certificate in its Articles of Incorporation or Bylaws. Without such requirements, however, the new law would provide some options for the water corporation to both protect itself and allow a new share to be issued. For example, the proposed bill would give the water corporation the option to, at the expense of the person requesting the new certificate, publish and mail notice of the request to issue a replacement certificate. The bill then outlines a process that the corporation can use to resolve share ownership disputes. There will undoubtedly be further revisions of the bill before it is passed, but it is a step toward solving this challenge that often faces water corporations and shareholders.

(Update: Click here to read about the bill introduced in the 2011 Utah Legislature.)

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