bearer shares vs. registered shares
Flexibility and privacy at its best
Bearer shares are a type of freely
transferable securities, which only by ownership demonstrate
participation in a company. In registered or conventional
shares, the name of the owner is included and will also be
entered in the shareholder’s register of the company. If a
change in ownership is to be made, the share endorsement and
change in the registry will be required. Sometimes, a legal
proceeding to validate the transaction may be necessary.
By contrast, as no name is included in the bearer shares, any person who has them in their possession is recognized as the owner. If you wish to transfer these shares to a third party, it will suffice to just hand over the certificates. There will be no need for any paperwork or changes to the registry of the company (except for anti money laundering control in certain jurisdictions) because only the amount of bearer shares that were issued to create the company and their numeration are shown, without making any reference to their owners. It is similar to the operation of a cashier’s check, whereby any person presenting it can collect the amount contained therein.
Advantages of the bearer shares
Simplicity and rapid transmission. It is extremely easy to convey a company incorporated with bearer shares. Just by delivering the securities to the purchaser there will be a change of ownership, without further formalities.
Cost savings. There is no need for any legal processing to change the ownership of the shares. It is not necessary to go to any notary or registration. It is also possible to avoid the transfer tax. Due to the fact that the transfer of the titles will not be documented, there will be no evidence of transmission and therefore there will not be a taxable event to tax.
Privacy. The owners of the company can remain in almost complete anonymity, since they will not be included in any shareholders register. A change in the shareholding will be a completely confidential act.
main practical uses
Bearer shares have been traditionally used to manage property (particularly vessels and aircrafts) or real estate. The mechanism is simple. It is enough to incorporate an offshore corporation in a traditional tax haven and to register the yacht, the property, etc. in its name. If you want to sell it again, the buyer is just given the bearer shares, thereby changing the company’s ownership and with it the asset in its name. It is an immediate transfer, and best of all, there are no records, notaries nor taxes to pay.
Another common benefit has been to use them to manage family businesses. If a family business consists of bearer shares it is not necessary to stop the activity pending a probate proceeding on the death of the owner to determine who the rightful owner is. The descendants of the deceased only have to submit the titles to be automatically recognized as the new owners. This system of course also works for other assets, whether movable or immovable.
Disadvantages of bearer shares
Limitations and obstructive legislation. The measures against money laundering and tax fraud that many countries and organizations like the OECD (Organization for Economic Cooperation and Development) are adopting have significantly stigmatized and challenged the bearer shares. The pressure on the governments of tax havens has forced many offshore jurisdictions to limit their use. Normally, these constraints involve the immobilization of securities. That is, the bearer shares must be in deposit and custody of a bank, a trust firm or the registered agent of the company who also usually must mantain a record of the owners. The objective of this measure is to register any change in ownership of the company and to be able to determine at all times who holds the legal ownership. With such limitations, not only the whole essence and flexibility of the bearer shares is lost, but their transmission becomes more complicated, because of not being directly in the hands of their rightful owner. These types of limitations have already been imposed in most tax havens, and currently the only offshore jurisdictions that still offer “true” bearer shares are Antigua, the Marshall Islands, Panama and the Seychelles. However the registered agent of the company, must keep a register of bearer shares, where the names and addresses of the owners are recorded.
Distrust of banks. As with the governments of tax havens, banks have also received considerable pressure to collaborate in the fight against money laundering. In this case, it is the FATF (Financial Action Task Force), which has urged banks to exercise greater control over the origin of their deposits. The threat of being included in the dreaded FATF blacklist and being marginalized in the banking system has meant that all serious and regulated banks now apply KYC or ‘know your customer’ policies. This implies that the bank will require the identity of the person who really owns the company (called the beneficial owner) and what the origin of the funds deposited is. In this sense, banks are extremely reluctant to accept as customers companies that have their capital subscribed to bearer shares because by losing control over the identity of the owners of the company, the bank account would become virtually anonymous. For this reason, an important number of banks refuse to work with companies that use bearer shares. Those who do accept them, usually require the customer to deposit them at the bank (against the issuance of a receipt) or to provide a certificate which proofs that they are in custody at the registered agent’s office or with an authorized fiduciary institution, so that they cannot be transferred without their knowledge.
Due to the drawbacks mentioned, bearer shares have lost some popularity. Today an alternative formula is often used, by hiring the services of nominee directors and nominee shareholders. These will be included in the documents of the company, in lieu of its actual owner, who will have their rights to it recognized, through a private contract called a declaration of trust. This way the use of bearer shares can be avoided and it is possible to obtain a similar level of confidentiality, but without the flexibility of the transmission described above.
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