The ban on bearer shares comes into force this month meaning holders of those shares need to hand them back for conversion into registered shares or risk losing the rights attached to those shares. And companies need to encourage bearer shareholders to surrender their shares to avoid having to make costly payments into court.
What are bearer shares?
Most shares in a company are registered shares, meaning the name of the shareholder appears both in the company’s register of members and also on the relevant share certificate. However, UK companies can also issue ‘bearer shares’ where no name appears in the company’s records in respect of those shares or on the legal document certifying their existence. The bearer shares are simply owned by whoever holds (or ‘bears’) the certificate for them at any time.
What’s the problem?
Because it is impossible to know who actually owns bearer shares at any time, they can be used to hide the true ownership of a company. This has led to concerns that bearer shares were being used to shield the identity of those using companies for criminal activities.
As from 26 May 2015 there will be a ban on any company issuing new bearer shares, even if this is permitted under the company’s articles. Companies will also be able to amend their articles to remove reference to bearer shares without having to pass a special resolution.
What about existing bearer shares?
Holders of existing bearer shares will have a period of nine months in which to surrender those shares to the company for conversion into registered shares. And the sooner they do that the better: from 26 December all rights attached to bearer shares will be automatically suspended. So, even if they are the majority shareholder, the holder of any bearer shares will be unable to vote or receive any dividends or capital (other than on a liquidation) in respect of those shares.
The company is required to notify its bearer shareholders of their right to surrender those shares and the consequences of failing to do so. Where any bearer shares are not surrendered during the nine month period, the company will have to apply to court for an order to cancel those shares. When that order is made, the company must pay into court an amount equal to the nominal value and any premium paid on the shares. That amount can be paid out to any holder of bearer shares who applies to court for a payment within three years but only if they can show the court that there were exceptional circumstances which prevented them from surrendering their shares during the nine month period. There’s no guidance yet on what ‘exceptional circumstances’ might be for this purpose but we’re guessing that ‘my dog ate the share instrument’ isn’t going to cut it.
Obviously, from the company’s perspective it would be preferable to avoid the costs of obtaining a court order and having to make the payment into court.
So if your company has bearer shares in issue, start planning now for how you will contact the holders of those shares so they can be converted into registered shares.
And, even if your company doesn’t have bearer shares, check your articles of association to see if they need updating to remove any power to issue such shares which is now redundant.