Bearer shares (also bearer instruments) are physical shares which are owned by whomever has them (bears them). This is unlike registered shares, which although they may be physical, are registered to a person (legal or natural) in a registry. The exact maintenance procedure around the share registry varies between company legal forms and jurisdictions.
Bearer shares can be traded very quickly and easily, by simply handing over the shares to the new share holder. This means companies with bearer shares can change owners several times without anyone finding out.
Risks
There are two perspectives to this. The first is the risk imposed by bearer shares to the share holder.
If you form a company that issued its entire (or even just a majority) of its shares as bearer shares, if you lose the shares you are no longer the owner of the company. The process of restoring a company that has lost its bearer shares is typically a long and difficult process – if it’s even possible at all.
Similarly, if someone steals your bearer shares, they are the new legal owner of the company until such time it can be proven that the shares were stolen, which may require just a police report in some cases or a court sentence in other cases. During that time, the new (illegitimate) share holder can make enormous damage to the company.
The other side of the coin is the risk bearer shares pose to banks. Under international standards on compliance, banks are required to be aware of the UBO (ultimate beneficial owner) of each account. A UBO is normally a person who has a controlling interest in a company and/or owns at least 20% of a company’s shares. A company that has issued bearer shares can change UBO several times in a single day, without the bank finding out.
This causes a huge concern for money laundering and other criminal activity through bearer shares companies.
These days, it’s virtually impossible for a new bearer shares company to open a bank account. It’s getting harder and harder even for existing companies, with banks putting increased pressure due diligence, or themselves being put under pressure.
Jurisdictions that issue bearer shares have been subject to enormous criticism from the international community. The problems arising from bearer shares go beyond just tax evasion.
Response to Criticism
The response to the criticism has been either to abolish bearer shares and instead require companies to switch to registered shares, or do what’s called immobilization of bearer shares.
Most jurisdictions that issued mobile bearer shares have since switched to registered shares. A handful, such as the infamous Czech Republic, have opted for recommending that companies switch to registered shares but permitting immobilized bearer shares.
Immobilized bearer shares are still technically bearer shares, but they must be with a registered custodian. While the shares are physically with the custodian, the custodian is not and cannot be a share holder. Instead, the custodian acts as a trustee and keeps the bearer shares safe. The true owner is registered by the custodian, which in a way makes them registered shares.
When opening a bank account for a company with immobilized shares, the bank can either rely on the custodian to perform due diligence and keep updated records of the shareholder and/or require authorization to inquire with the custodian about the current owner(s) of the company.
Bearer Shares Jurisdictions
Take this list with a grain of salt. It’s possible that laws have changed or are currently undergoing change. The world is moving towards complete immobilization of bearer shares, if allowed at all.
[table] Jurisdiction;MobileAnguilla;No
Antigua and Barbuda;No
Belize;No
British Virgin Islands (BVI);No
Cayman Islands;No
Cook Islands;No
Czech Republic;No
Dominica;No
Gambia;No
Gibraltar;No
Israel;Yes
Lebanon;Yes
Liberia;No
Liechtenstein;No
Luxembourg;No
Marshall Islands;Yes
Panama;No
Ras al-Khaimah (RAK);No
Saint Kitts and Nevis;No
Saint Vincent and The Grenadines;No
Seychelles;No
Switzerland;Yes, but must be disclosed
United Kingdom;Yes
Uruguay;No
[/table]
Note that just because, for example, Switzerland permits (mobile) bearer shares, its banks are not automatically open to offshore bearer shares companies.
Are Bearer Shares Registrars strictly national entities, and government-owned? What’s to prevent an owner of Bearer Shares forming a legal entity, the express purpose of which is to act as their personal Bearer Shares Registrar, which would hold their “mobilized” shares? In that way, you fulfill a legal requirement gain control on what is to be revealed.
As Streber has mentioned, Bearer Shares come with their own set of security concerns. Forming one’s own personal Registrar might allay some of those concerns.
There are no registrars for bearer shares. That’s what separates them from registered shares. It is also what makes it so difficult to find banks willing to open bank accounts for companies with bearer shares, since the bank can never be certain who owns a company at any given moment.
Although lot of registered agents demand to know of any change of ownership, this is practically unenforceable.
Bearer shares cannot be hold by an intangible person. If you form Merliot Bearer Shares LLC and try to claim to a court that it’s that company and not you which is holding the shares, you’re in for an interesting court battle but most likely the court would rule that whichever natural person is in possession of the shares owns them.
I was referring to a “registered custodian”, which could also be called a “registrar”. Yes? Same question. The owner of bearer shares could form an entity that applies for Registered Custodian status. Could you envision any value to that set-up?
I see what you mean. A custodian doesn’t own the shares, though. A custodian holds them on behalf of someone else. If you deposit bearer shares into a custodian, you still effectively control them. Being the custodian wouldn’t help you.
Can the “true owner” of (immobilized) bearer shares be a holding company?
Only physical persons can be holders of bearer shares, whether that be as a shareholder or as a custodian.
A holding company is a legal person but not a physical person.
Bearer shares are physical instruments and even if you were to, in an attempt to distance yourself from the shares, draft an agreement saying that you (the physical natural person) merely hold bearer shares on behalf of Merliot Bearer Holdings Ltd, the owner of the bearer shares company becomes you because you physically hold the shares. Maybe under some jurisdictions or oddball interpretation of laws, the UBO of Merliot Bearer Holdings Ltd would be deemed the shareholder.
Whatever the case, in the end, the owner of a bearer share is always a natural, physical person.
Things like these don’t have a ton of legal precedent to fall back on, though.
So if a Holding Company formed in the U.K. decides to form a company in the Marshall Islands (a Bearer Shares jurisdiction), in its name (the U.K. holding co. is the owner of the co. in the M.I.), would not the UBO/True Owner be the U.K. holding company?
Or does the legal issue of KYC and UBO/True Owner only arise when banking services come into the picture?
The UK holding company cannot hold the bearer shares. The owner of the Marshallese company is the natural person who physically holds or has effective control over the bearer shares, or who deposited the bearer shares with a custodian.
A company can never be a UBO. A UBO is always a natural person. There can be multiple UBOs, though, and you can dilute the UBO with complex structures where no one holds more than x% of ownership but there are mechanisms in place to identify or appoint a UBO even then (by effective ownership, management, beneficiaries, and so on).
Are your comments specific to the legal system of the English-speaking world, or countries which follow English Law? The reason why I ask is that in Latin America, they have a corporate form called S.A. de C.V. (Anonymous Society of Variable Capital is the translation from Spanish). [I’m in Latin America, by the way.] I’m not versed in the nuances of Spanish law – or how Spanish law changed in the “New World”, but I wonder if UBO and True Owner are concepts of as equally an urgent nature in the Third World (Africa/Asia/Latin America), as they appear to be in First World jurisdictions.
P.S. I notice that there are ten comments in this post on Streber Weekly, but in your new Forum page, this post shows no comments. It directs readers to the Streber Weekly page. Is there a way to migrate them to the new Forum page to simplify things for the reader?
I’m probably just missing something but I don’t quite understand how S.A. de C.V. relates to bearer shares. Do you mean that you could leverage the variable capital somehow to make (better) use of bearer shares?
This should be fixed now. New blog post comments will from now on show up on the forum as well, unless they are replies to old blog post comments like this particular comment is.
The homepage of MultiBank in Panama has an Announcement on it in regards to Bearer Share Companies.
https://www.multibank.com.pa/en/announcements/banner_web.htm
Here comes the run on the MI companies… The MI’s partner who handles their registry is going to have a busy week thanks to this article, I dare say. I imagine there are going to be some unhappy buyers not being aware of all the steps involved – such as the issues requisite to buying a shelf MI company with a corporate secretary which that partner company assigns and trying to use it for banking.
Additionally, my experience to date has been that those banks which will open an account for a bearer share corporation (all Caribbean thus far) will want the shares immobilized by a custodian (as one bank said to me recently from a DD perspective/opening the account decision making point of view “the more reputable the better”), given to the bank itself, or at one bank, an undertaking that bearer shares won’t be moved without advising them of the change of the UBO – the issue of course, with those who attempt to get around this, is that should the bank find out that there has been a change in the UBO without them being advised, kiss your funds goodbye!
Streber, have you dealt with any banks outside the Caribbean still prepared to take on bearer share clients?
One note worth expanding upon – Swiss bearer shares, whilst available, are only available on an AG structure (capital deposit being 5 times more than a GmbH structure).
Thanks for sharing! That also brings up a good point I forgot to address in the post, namely that banks which do accept bearer shares companies do so in exchange for the bearer shares being deposited with a custodian (effectively immobilized).
Yes, but they wouldn’t accept the average recently formed IBC approaching them with no previous relationship with the bank. You can find these banks in places like Israel, Lebanon, GCC region, and Panama to name a few.
However, in the vast majority when I work with a bearer shares company it ends up being far easier to either convert the shares into registered shares or set up a structure where a non-bearer shares company opens the bank account. This company can’t be owned by the bearer shares company because that wouldn’t eliminate the problem. Instead, we usually draft some sort of agreement between the two entities which allows the new company to act as a collections/cash-pooling company on behalf of the bearer shares company, or something along those lines.
Marshall Islands bearer shares are mobile too, at least was few weeks ago
I can’t find anything that points to Marshall Islands having demobilized bearer shares. Table updated.
yeah, it is correct, i was just checking our last formations for MI companies… also, there is still possibility to use bearer shares till summer of 2015 in Panama. After that they should be immobilized as well.