What are Bearer Shares?

Bearer shares are unregistered securities in a company, which are wholly owned by the holder of the physical share certificate, the bearer, hence the term ‘bearer shares’. Although these types of shares have certain advantages, their use is declining worldwide because of the potential for misuse and are in fact only still recognised by a few countries.

This guide to bearer shares helps businesses understand the historic use of bearer shares, their associated advantages and disadvantages, and why they are now in decline.

 

What is a bearer share?

 

Similar to an ordinary share in many respects, a bearer share is a form of share issued by a company in bearer form to its shareholders. However, unlike registered shares, bearer shares are unregistered shares, legal ownership of which simply lies with the holder of the physical share certificate, the bearer. The name of the owner is not recorded on the company register or any public register, nor on the share certificate itself. The certificate merely provides that the holder of the certificate is the owner of the shares and does not require any proof of ownership apart from physical possession of the certificate.

 

How do bearer shares work?

 

In addition to the ownership of the shares, the bearer is entitled to assert all of the rights invested in those shares as well as the benefits of owning them; this includes the right to receive the dividends declared on them. To receive the dividend payments, the bearer must present the physical share certificate to the company when a dividend is declared.

Buying and selling bearer shares is also quite simple as ownership is not recorded, therefore the physical share certificate can be bought and sold or gifted like other physical assets. The owner can transfer all their rights in the shares to the new owner by simply handing over the certificate. This means the company has no administrative requirements on a change of ownership, thus making a transfer very easy to carry out. The company neither records nor tracks ownership. As a result, bearer shares lack the regulation of registered shares, but also the control.

 

What is the difference between registered shares and bearer shares?

 

Both bearer shares and registered shares are types of shares in a company which have been issued by that company. The difference is that the ownership of registered shares is recorded – the name and details of the shareholder is found on both the share certificate and on the company register stored at the company’s registered office – and tracked, making them the preferred option for most companies, eliminating any chance of a hostile takeover. The ownership of bearer shares is not recorded or tracked and therefore cannot be traced back to the owner. The person in possession of the share certificate is deemed the owner of the shares and entitled to the dividends payable on them. Transfer of bearer shares is effected by a mere handing over of the certificate to another person. No changes to the certificate need to be made. However, in practice, the name of the original owner will often be recorded in the share register at the company’s registered office, albeit confidentially.

As far as registered shares are concerned, a transfer has to be carried out in accordance with Companies House requirements and correctly annotated and recorded. This includes the shareholder signing a share transfer form, which should be deposited at the company’s registered office with the share certificate. A share sale agreement might also be put in place to demonstrate the necessary evidence of intention to transfer ownership.

 

Benefits of bearer shares

 

Privacy

Given that the ownership of bearer shares cannot be established or tracked, they offer an unrivalled level of privacy. Even where the initial owner was recorded, it is impossible to track the chain of ownership to the current owner, therefore allowing them complete anonymity. As such, bearer shares serve as excellent asset protection vehicles, and are useful tools to hide assets from being seized during court proceedings such as divorce or bankruptcy. This is especially the case where they are held in a foreign jurisdiction with extra layers of asset protection. In addition, banks can purchase bearer shares or receive dividend payments on behalf of the shareholder again ensuring their privacy remains intact.

 

Ease of transfer

The ease with which bearer shares can be transferred to a new owner without restrictions or administrative requirements or indeed transfer costs ensures their convenience and confidentiality.

Increased liquidity: Bearer shares enhance the opportunity to leverage liquidity in capital markets.

 

Risks of bearer shares

 

Difficulty in proof of ownership

The fact that ownership of bearer shares cannot be traced can also be a disadvantage as occasionally proof of ownership will be required, for example where a company wants to open a subsidiary in a foreign jurisdiction. A share certificate for a bearer shareholding will not be accepted as a valid proof of ownership, as there are no details of the shareholder registered on the certificate.

 

Theft or loss

Bearer shares are highly susceptible to theft as ownership is not recorded and cannot be proved. Similarly, if the share certificate is lost or damaged or destroyed in some way, then the owner has little recourse to proving the ownership of his shareholding.

 

Bad reputation

Bearer shares have been known to enable tax evasion and money laundering through the anonymity they offer. Governments have been cracking down on this in recent years, but as a result bearer shares have a notoriously bad reputation, and any holder of bearer shares will be subjected to extra scrutiny.

 

Tax issues

Tax complications may arise due to the unique nature of bearer shares and the difficulty in proving ownership; therefore, complying with tax requirements might be more onerous than usual and may require specialist advice at extra cost.

 

Administrative problems

Practical issues may arise such as opening company bank accounts, as banks are reluctant to accept companies with bearer shares given the risk in tracing ownership, which therefore potentially exposes the bank to unknown risks. Other communication issues may arise too such as advising shareholders of annual general meetings.

 

What is the current status of bearer shares in the UK and overseas?

 

Although historically, the use of bearer shares was common in Europe and South America and other offshore jurisdictions, governments are now heavily cracking down on them because they are often misused as a means of enabling money laundering, tax evasion and funding terrorist and other criminal activities. Companies are therefore resorting more and more to the use of registered shares as being a safer and more legitimate option for share ownership.

Some jurisdictions do however still allow bearer shares; this includes Panama, albeit with the imposition of a strict 20% withholding tax liability on dividend distributions, which acts as a deterrent to using them. Most of these countries will only allow the use of ‘immobilised’ bearer shares, which are overseen – and the physical certificate held – by a bank or fiduciary (for a fee), which records and tracks the ownership of those shares, helping to eliminate any risk, albeit at the cost of the privacy for which they are known. The Panama Papers scandal involved the use of bearer shares to hide their true ownership and led to the exposure of over 200,000 tax havens from 200 nations. As a result, banks became reluctant to take on the risk of associations with bearer shares and today, the choice of financial institutions and jurisdictions that will deal with bearer shares has greatly reduced. The Marshall Islands was the only country in the world which still allowed the use of bearer shares without restriction until 2015 when the Organisation for Economic Co-Operation and Development (OECD) initiated the process to shut the use of ‘mobile’ bearer shares down for good.

In 2015, the UK abolished the use of bearer shares under the provisions of the Small Business, Enterprise and Employment Act 2015 (see below). Other countries, such as Switzerland, have followed suit. Some US states, including Delaware, have also banned their use, and increasing numbers of large corporations such as German-based Bayer AG have transitioned to the use of registered shares only.

 

The abolition of bearer shares in the UK

 

The Small Business, Enterprise and Employment Act 2015, which came into force on 26th May 2015, banned UK companies from issuing any further bearer shares and stipulated that within a period of nine months from that date, all existing bearer shares should be surrendered and converted to registered shares. The company had to then register the shareholder on the register of members and issue them with a share certificate. If the bearer shares were not surrendered within seven months of 26th May 2015, all share rights in relation to those bearer shares were suspended. This means that the shareholder could not transfer the shares, receive dividend payments, or take up voting rights. The company had to pay all dividends into a separate bank account which could be paid (together with the interest accrued) to the shareholder provided they surrendered the shares by the end of the nine-month period.

If the shares were not surrendered within the nine months, the company had to apply to court within three months to obtain a cancellation order to cancel the bearer shareholding. The court had to grant such order if satisfied that the bearer shareholder had sufficient notice of the intended cancellation order. If it was not so satisfied, it had to make a suspended cancellation order to allow for that notice to be given within five working days, after which the bearer shareholder would be given a two-month grace period within which to surrender the shares. If not surrendered, the holding would be cancelled at the end of the grace period.

When a bearer shareholding was cancelled, the company had to note the cancellation date in its register of members and send to Companies House a copy of the order and a statement of capital, demonstrating the company’s capital after the share cancellation. A PLC would need to re-register as a private company if the effect of the cancellation was to bring the company’s issued share capital below the required amount.

Within 14 days of a cancellation order or suspended cancellation order, the company had to pay into court the nominal value of the holding in addition to any premium paid on it, as well as any dividends and interest accrued. The bearer shareholder could claim that amount within the period of six months to three years after the cancellation date, provided that the holder had valid reason not to have surrendered the shares prior to that.

Any company’s Articles of Association which authorise the issue of bearer shares should be amended to remove these provisions and sent to Companies House for registration.

Although bearer shares have been useful in the past for offshore financial planning, bringing the advantages of privacy and convenience with them, their misuse has led to their decline. However, there are plenty of other effective and legitimate ways of ensuring financial privacy, asset protection and tax efficiency when considering financial planning strategy.