A bearer share is a share which is represented by a certificate, warrant or other document which states or otherwise indicates that the bearer is the owner of the share. For the purposes of this article, I will refer to bearer shares as being represented by share warrants for consistency.
The Companies Act 1931 as originally enacted permitted companies to issue bearer shares if authorised by their articles. The Act was modeled on the UK's Companies Act 1929 and the provisions of the two statutes which related to bearer shares were almost identical.
Procedural requirements had to be met such that on issuing a share warrant, the company had to strike out of its register of members the name of the holder of the relevant shares and make the following entries in the register:
- the fact of the issue of the warrant;
- a statement of the shares included in the warrant, distinguishing each share by its number; and
- the date of the issue of the warrant.
A share warrant could be surrendered for cancellation, whereupon the bearer was entitled to have his name entered in the register of members.
A share warrant differed from a share certificate in the following ways:
- the bearer of the warrant was not entered in a register;
- the bearer of the warrant was entitled to the shares specified in the warrant;
- the shares were transferable by delivery of the warrant (and so it was not possible for the company to track transfers of ownership);
- a share warrant was a negotiable instrument and, if stolen and subsequently sold to a bona fide purchaser for value without notice of the fraud, the purchaser could enforce against the company payment of coupons for dividends due in respect of the warrant; and
- coupons for dividends could be attached to the warrant (and, in such cases, the company would disperse dividends to the bearer of the warrant only when a physical coupon was presented).
Although some jurisdictions may still facilitate the issue of bearer shares, this is not the policy of the Isle of Man and, for the reasons set out in the following paragraph, there is an absolute prohibition against the creation of bearer shares under both the Companies Act 1931 and the Companies Act 2006.
Anti-money laundering requirements
Bearer shares were used in the Isle of Man by shareholders who wished to retain anonymity. Needless to say, that anonymity was capable of being abused and it gave rise to opportunities for loss, illegitimate appropriation, fraud, concealment of assets and undisclosed transfers of beneficial ownership. Before the advent of anti-money laundering legislation in the Isle of Man, the fact that bearer shares were open to such abuses posed problems for corporate service providers and made compliance with regulatory requirements difficult. However, since the advent of anti-money laundering legislation and the imposition of onerous obligations on corporate service providers under the Financial Supervision Commission's Anti-Money Laundering and Countering the Financing of Terrorism Handbook (which contains a section which applies specifically to bearer shares), the fact that the identities of the bearers of share warrants are incapable of being tracked has rendered compliance with anti-money laundering requirements impossible.
The Companies, etc. (Amendment) Act 2003
The Companies, etc. (Amendment) Act 2003 (the "2003 Act") was intended to bring Isle of Man companies legislation into line with internationally accepted standards of best practice and corporate governance regarding bearer shares. The 2003 Act amended the Companies Act 1931 to provide that, with effect from 1 April 2004, no new bearer shares could be issued by a company incorporated under the Companies Acts 1931-2004 (a "1931 Act Company") and the rights relating to existing bearer shares could not be exercised until those shares were registered.
The provisions under the 2003 Act which related to bearer shares were introduced with the intention that that all bearer shares issued by 1931 Act Companies would eventually be converted to registered shares. It was anticipated that this would take place shortly after the coming into operation of the 2003 Act since, without registration, bearer shares were rendered worthless.
The Companies (Prohibition of Bearer Shares) Act 2011
The Companies (Prohibition of Bearer Shares) Act 2011 (the "2011 Act") was required because, although the 2003 Act was intended to eradicate bearer shares from all 1931 Act Companies, there was felt to be some residual uncertainty since there could still be bearer shares "out there" which had failed to become registered shares. In addition, there were discrepancies between the Report of the Organisation for Economic Co-operation and Development (OECD) and the Report of the International Monetary Fund (IMF) relating to bearer shares, with the latter suggesting that bearer shares had been abolished entirely since they could simply no longer be issued and the rights relating to them could no longer be exercised without them being registered. It was felt by the Treasury of the Isle of Man that the 2011 Act was required to ensure that there could be no further abuses of the provisions intended to eradicate bearer shares.
Although, with effect from 1 April 2004, the creation of new bearer shares by 1931 Act Companies was prohibited and the rights attached to bearer shares were suspended under section 71(4) of the Companies Act 1931 pending conversion of those shares to registered shares, there remained 43 known 1931 Act Companies which had bearer shares in issue at the time the 2011 Act was drafted. Of those 43 companies, 24 companies had no registered shares in issue but continued in existence. This suggested that the rights attached to bearer shares were still being exercised and the suspension of the rights under section 71(4) of the Companies Act 1931 was in the short term a lesser concern than freedom of disposal and anonymity.
The 2011 Act replaced the provisions brought in under the 2003 Act that were intended to eliminate the issue of bearer shares from 1931 Act Companies and substituted new sections 70A and 71 into the Companies Act 1931.
Offences and penalties
Companies Act 1931
The substituted section 70A of the Companies Act 1931 required all remaining bearer shares issued by 1931 Act Companies to be converted into registered shares by 18 April 2012 irrespective of any contrary provision in the companies' memorandum or articles of association and made it an offence to fail to comply.
The substituted section 71 of the Companies Act 1931 expressly prohibits the issue or creation of new bearer shares by 1931 Act Companies and makes any attempt to do so an offence.
The penalty for offences under each of sections 70A and 71 of the Companies Act 1931 is a fine (which will not be limited except in the case of summary conviction, when it is limited to £5,000).
The 2011 Act may also have implications for company officers of 1931 Act Companies and corporate service providers providing services to 1931 Act Companies since, if a company is guilty of an offence under section 70A or 71 of the Companies Act 1931, such officers and/ or corporate service providers will also be guilty of the offence and liable to the same fine if it can be proved that they authorised, permitted, participated in or failed to take all reasonable steps to prevent the commission of the offence.
Companies Act 2006
Section 30 of the Companies Act 2006 prohibits the issue or creation of new bearer shares by companies incorporated under that Act and makes any attempt to do so an offence.
The penalty for offences under the Companies Act 2006 is a fine (which will not be limited except in the case of summary conviction, when it is limited to £5,000). That Act provides that where an offence committed by a company is proved to have been committed "with the consent or connivance of, or to be attributable to neglect on the part of, a director, manager or other officer of the body corporate, or its registered agent, or a person who was purporting to act in any such capacity" such person will also be guilty of the offence and liable to be prosecuted against and punished accordingly.
What does this mean for corporate service providers under the Companies Act 1931?
Obviously, due to the fact that the identity of the holders of share warrants was not known to all of the 1931 Act Companies which had bearer shares in issue, locating the holders of those warrants in order to convert the bearer shares into registered shares proved problematic in some cases and left some officers and corporate service providers exposed to potential liability. Although severe, the liability of officers and corporate service providers under sections 70A and 71 of the Companies Act 1931 can be mitigated by them taking "all reasonable steps to prevent the commission of, the offence".
Of the 43 1931 Act Companies which had bearer shares in issue when the 2011 Act was enacted, we are informed that 42 have since converted their bearer shares into registered shares and the remaining company has filed for dissolution, though how it did so without knowing the addresses of its members is a matter of conjecture.
Although it seems that the 2011 Act has succeeded in eradicating bearer shares from 1931 Act Companies and section 70A of the Companies Act 1931 now seems largely redundant, company officers of 1931 Act Companies, corporate service providers providing services to those companies and legal advisers should remain mindful of the prohibition and the potential for the commission of an offence under section 71 of the Companies Act 1931.
For the reasons stated above, officers, corporate service providers and legal advisers should be vigilant to prevent any shares which may be construed to be in substance bearer shares from being issued or created. Even if shares are not labelled as bearer shares, it is possible that some instruments could be deemed to be bearer shares and so could give rise to the commission of an offence by the relevant company, its officers and/ or its corporate service providers.
Whilst remaining vigilant, it is also worthwhile undertaking a review of the articles of association of a company to ensure that provisions as to the issue of shares are compliant with the legislation. Any provision which permits the issue of bearer shares is void and it would be good practice to amend the articles to ensure that the constitutional documents do not hark back to the dark ages before the advent of anti-money laundering legislation, or worse, present an opportunity to the unwary for the inadvertent commission of an offence.
As originally appeared in the Isle of Man Regulatory Update – February 2013
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.