Only a few decades ago, bearer shares were the normal way to establish ownership rights in a company. When you incorporated a company, you received share certificates with no one’s name recorded on it. Whoever possessed the certificate controlled ownership.
A company that issues bearer shares has no shareholder list or register for those shares. The identity of the shareholders is impossible to determine. You can change ownership simply by handing the certificate over to someone else.
Today, only a very few offshore jurisdictions (e.g., Panama) still offer bearer shares, and all have placed severe restrictions on them. The reason is that the opportunity for anonymous ownership via a bearer share company is too much for tax authorities and other busybodies to (pardon the pun) “bear.” As a result, an alphabet soup of international agencies, starting with the Financial Action Task Force, have demanded an end to all bearer share companies. And they’ve largely succeeded in eliminating them.
However, some online incorporators still tout bearer share corporations. These promoters claim that bearer shares offer anonymity, bulletproof asset protection, and even a way to avoid tax claims. These claims have little if any credence. Bearer shares have many traps, and if you’re subject to U.S. income, gift, estate or capital gains taxes, or U.S. securities laws, you should generally avoid them.
Advocates of bearer shares claim that by conveying your shares to a trusted friend or relative, you can state under oath that you don’t own them. However, if discovered by the IRS, the gratuitous transfer of bearer shares may trigger a gift tax of up to 35% (2010 rates) on their fair market value. Gift tax is again triggered when the friend or relative later returns the shares.
To avoid the tax, you might argue that the transfer to another party was merely for safekeeping. However, by making this argument you’ve admitted you own the shares. This defeats any asset protection purpose for which you transferred them in the first place.
In addition, if you make this transfer after litigation begins or you suffer a judgment, your creditors may (rightly) believe that it constitutes a “fraudulent transfer.” A court can invalidate a fraudulent transfer and order you to retrieve the property and turn it over to your creditors.
In addition, if you use a bearer share company to evade taxes, prosecutors can argue that you’re using “sophisticated means” to defraud the government. This can elevate a routine tax evasion prosecution into a money laundering case, with much harsher penalties.
The IRS isn’t the only three-letter agency you need to worry about, either. You may also violate securities laws if you transfer bearer shares to another person. If you haven’t registered the company with the SEC, or issued the shares under an SEC exception to registration, they’re not freely transferable. Selling unregistered shares to a U.S. buyer could result in possible civil or even criminal securities law violations.
There are also safety issues to consider with bearer shares. What if you lose your bearer shares, someone finds them, and then tries the vote the shares in your place? Lost shares can be replaced (assuming you know about the loss), but the process can be time-consuming and expensive.
Finally, bearer shares are mostly obsolete. In 2007, Wyoming and Nevada abolished bearer shares, ending their status as the last two U.S. states to permit their use. Most Internet based promoters offering bearer share companies incorporate them in these two states, blissfully unaware that they’re illegal. Most offshore jurisdictions have banned them as well. Those that still permit their issuance allow them to be used only if held by a licensed custodian.
For instance, the British Virgin Islands (BVI), the world’s most popular jurisdiction for offshore companies, recently announced that bearer shares would be “disabled” unless deposited into the possession of an authorized custodian. Disabled shares carry no entitlement to voting, distributions, or proceeds upon sale. On the plus side, if you lose disabled shares, or they’re stolen, the threat of financial loss would be much lower.
Are there any circumstances under which bearer shares still make sense? If you’re not a U.S. citizen and you live in a jurisdiction that doesn’t impose a gift tax, they can be useful in certain situations. For instance, you could use them to hold a specific asset, e.g., real estate. When you sell the real estate, rather than changing the title on the property, you simply transfer the shares to the purchaser. This preserves confidentiality and reduces transfer costs.
For anyone else, though, bearer shares aren’t a viable option. Just grin and “bear” it!
Abolition of bearer shares
Summary
The provisions for the abolition of bearer shares in sec84 of the Small Business, Enterprise and Employment Act 2015 came into effect on 26 May 2015. In summary, they prohibit UK companies from issuing any further bearer shares and, within 9 months of that date, all existing bearer shares must be surrendered, becoming registered shares. After that time, the company must apply to the court for an order for the shares to be cancelled, paying into court the issue price of the shares plus any accrued dividends up to cancellation.
A company that has bearer shares in issue must publish various notices to the holders of such shares by the means specified in their terms of issue, by a notice on the company’s website and in the Gazette.
Not many UK companies have bearer shares but they are not unknown. They are being abolished as part of the process of trying to make company ownership more transparent. These rules are quite harsh in their operation and, unless bearer shareholders comply with the requirements to surrender them in a timely manner, will also involve the companies concerned in some cost.
No new bearer shares
By sec84 of the 2015 Act, a new sec779(4) is added to CA 2006 providing that no share warrant may be issued by a company (irrespective of whether its articles purport to authorise it to do so) on or after 26th. May 2015.
By sec85 a company having provisions in its articles authorising the issue of bearer shares may remove such provisions without passing a special resolution, even if those provisions are entrenched in the articles. The amended articles must be sent to Companies House for registration.
The section does not say who can make such a decision, and so it will be one that can be made by the directors, though a company may choose to put the matter for resolution by the members.
Existing bearer shares
Schedule 4 sets out the arrangements for existing bearer shares.
Right of surrender during surrender period
During the period of 9 months from the commencement date (the “surrender period”) the bearer of the share warrant has a right to surrender the bearer shares, entitling him to have his name entered as a member in the register of members. Every company that has bearer shares in issue must notify its bearer share holders of this right and other matters (see below).
The company must, as soon as is reasonably practicable and in any event before the end of the period of 2 months of the share warrant being surrendered, supply share certificate(s) for the surrendered shares.
Share rights are suspended after first 7 months
If the bearer shares are not surrendered with 7 months after 26th. May 2015:
any transfer of, or agreement to transfer, the shares after seven months is void; and all rights on the shares are suspended (including any voting rights and any right to receive a dividend or other distribution).
The company must pay into a separate interest bearing bank any dividend or other distribution payable on the bearer shares.
If the share warrant is subsequently surrendered before the end of the full 9 months period the suspension ceases to have effect, and the amount of any dividends paid on the shares, and any interest accrued on the bank account must then be paid to the owner of the shares.
Expiry of right to surrender and applications for cancellation of outstanding bearer shares
If the bearer shares are not surrendered by the end of the full 9 months surrender period, the company must, as soon as reasonably practicable and in any event within 3 months, apply to the court for a cancellation order, cancelling with effect from the date of the order the share warrant, and the shares specified in it.
Cancellation orders and suspended cancellation orders
The court must make a cancellation order in respect of a share warrant if it is satisfied that the company has given the appropriate notices to the bearer shareholder or that the bearer had actual notice by other means.
If the court is not so satisfied, it must instead make a suspended cancellation order requiring the company to give the missing notice to the bearer shareholder within 5 working days. The bearer of the share warrant has a right of surrender during the next 2 months (“the grace period”), and if the share warrant is not so surrendered, it is cancelled from the end of the grace period.
Where a share warrant is cancelled the company must, as soon as reasonably practicable, enter the cancellation date in its register of members, and must, within 15 days, send to Companies House a copy of the cancellation order and a statement of capital, showing the company’s capital after the cancellation of the bearer shares. If the company is a PLC and the effect of the cancellation of the shares is that the company’s issued share capital falls below the minimum for a PLC, it must re-register as a private company (subject to any court order to the contrary).The expedited procedure for re-registration in CA 2006, sec651may be used.
Effect of cancellation
Where a share warrant is cancelled by a cancellation order or a suspended cancellation order, the company must within 14 days pay into court the nominal value of the shares plus any premium paid on them, plus any dividends and/or interest accrued during the suspension period. The owner of the bearer shares may claim that amount, but only during the period of six months to three years after the cancellation date, and only if the court is satisfied that there are exceptional circumstances justifying his failure to surrender the shares.
Company notices
Notification of right of surrender
The company must, as soon as reasonably practicable and in any event within one month of the commencement date, give notice to the bearer of a share warrant of—
(a) his right of surrender;
(b) the consequences of not exercising that right within 7 months from the commencement date;
(c) the fact that the right will cease to be exercisable at the end of the surrender period, and
(d) the consequences of not exercising the right before the end of that period.
The notice must be given in the manner specified for notices in the terms of issue of the shares, on the company’s website (if it has one) and in the Gazette.
Second notice of right to surrender
Before the end of the period of eight months beginning with the commencement date, the company must give a further notice to the bearer share holder of the same information.
Notice of application for a cancellation order
The company must give notice to the bearer share holder that an application for a cancellation order has been made within 14 days of the date of the application.
Company with bearer shares in issue cannot apply for voluntary striking off
An application for voluntary striking off under CA 2006, sec1003 may not be made at a time when there is a share warrant issued by the company
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