BEARER SHARES:  FRIEND OR FOE?

Bearer shares, like trusts, have both suffered a similar fate:  each has been used for purposes neither was ever intended for, in some instances in ignorance but in most cases by deliberate design.  Most of the abuse of bearer shares (as with trusts) has occurred offshore and, as a consequence of this, bearer shares have been viewed by many onshore professionals such as bankers, accountants and lawyers with deep suspicion. 

Bearer shares are as old as the concept of companies and, originally, were the normal way in which ownership rights were established.  The certificate, however, with no investor’s name recorded, was deemed to be owned by the person possessing the certificate, the bearer, in other words.  Whomsoever had the certificate controlled ownership and, like a US dollar note, it was very easy for a certificate to exchange hands.  Gradually, however, certificates bearing the name of the owner became the norm until the point was reached where some countries, including many states in America, no longer permitted the issue of bearer shares.  Today, shares are usually either certificated (registered in the owner’s name), held through nominees or, as is becoming very common, through a stockbrokers’ depository, in either certificated or dematerialised form (i.e. as a book entry on a register).  Bearer shares have a very long history in Europe where they have been traditionally held by banks in safe custody which have been responsible for collecting the share dividends on behalf of customers.  The fees charged by banks for the safe custody and dividend collection service have proved to be a lucrative source of income.   I remember as a bank inspector visiting the large vault of a bank in the City of London back in the 1970s and seeing several long rows of filing cabinets which were filled with bearer bond and bearer share certificates from all over the world; many, in particular, had been issued by Asian, Latin American and European governments and corporations.  Some of the certificates (especially those from the Far East) had intricate and exotic designs and the collective value of the investments represented must have been staggering.  Controls were effective:  I was told that the vault door weighed the same as a London double-decker bus and you could see that during business hours a custodian was located near the vault entrance, monitoring and recording access to the depository. 

Clearly, bearer shares are the speediest form of transition of ownership, avoiding practically any paperwork whatsoever, but they can be the most hazardous means of ownership if they are not properly protected.  Inevitably, with their inappropriate use offshore in particular, there is an increasing number of court cases around the world in which ownership of bearer shares is being fiercely contested.   The legal process, if more than one jurisdiction is involved in a dispute, can be especially slow and costly.   If the truth be told, however, much of the litigation could have been avoided if the parties had acted responsibly and been properly advised in the first place.  One recent case heard in the Caribbean amply illustrates the point.  It involved an offshore corporation whose entire issued share capital had been put in bearer form and the sole bearer share certificate had then been delivered to the client who was now deceased.  The plaintiff in the case was the deceased’s widow who contended that before her husband died he had handed the certificate to her, thus effecting a proper transmission of ownership, and which, she argued, made her the owner of the company.  The company, however, had been an asset of a trust which had been established by the widow’s late husband.  The trustee told the court that the deceased husband had verbally asked for share certificate number 1 to be cancelled and thereafter a replacement share certificate, number 2, was issued by the company and delivered to the trustee.  There were glaring errors made in the case, the most obvious one in my view being the fundamental mistake which the trustee made of accepting the trusteeship before he had control of share certificate number 1.  No wonder onshore professionals hold their hands up in dismay when they read about such cases.

It is one thing to buy bearer shares in XYZ Petroleum with which you have no relationship beyond an interest in profiting from its worldwide drilling activities; you probably only have a general idea of the composition of its management and a limited knowledge of the extent of its worldwide activities and assets.  Such impersonal relationships lend themselves to bearer shares – always provided that the share certificate is kept in a secure and safe location.  But when bearer shares, in the guise of an offshore company, represent access to your own personal assets, wealth which you may well have accumulated over years and worked hard to acquire, then a different perspective is needed.  Unfortunately, as already stated, their use offshore has spilled over into the mainstream and so many corporations (unlike XYZ Petroleum) which are, really, an investor’s alter ego, have had bearer shares issued. 

Well-experienced and properly-trained offshore professionals can help clients avoid problems down the road – especially litigation such as that mentioned earlier – by making suggestions as to the type of share to be issued.  If you believe in magic wands and the tooth fairy you may still think that anyone presenting bearer share certificates of an offshore corporation to the professionals managing it will be automatically recognised as the new owner and, therefore, of all its assets, such as bank accounts, art collections, stock portfolios and a finca in Panama’s highlands.  Even so, it might still be feasible to use bearer shares when there is perhaps one specific asset such as a piece of undeveloped land; bearer shares may not only reduce paperwork and transfer costs, but can provide, if desired, a degree of confidentiality concerning the transfer of ownership.  And despite bad publicity, bearer shares can also be very useful in estate planning.  If shares are put in either a client’s name or a nominee’s name, it is the client’s executor who will have to approve any post death transfer but if the client wishes to create an offshore estate comprising the shares of the company which can be dealt with after his death, without the need for probate, bearer shares could be issued and held under a simple inexpensive revocable trust.  The trust would act as an agency (bare trust) during the client’s lifetime such that the client could have the share certificates at any time but, otherwise, after the client’s death the trustee would then transfer the shares to the beneficiaries named in the trust deed.  

Bearer shares do have their place but you should always seek expert advice and think about double-decker buses when it comes to protecting them.