On the stroke of midnight on 31 December 2009, all bearer shares not deposited with an authorised or recognised custodian or converted into registered shares were disabled. Unfortunately, despite the transitional period provided for in the legislation to deposit or convert the shares, some companies still have shareholders in possession of their bearer shares. The big question now is, how can a shareholder or a company deal with these disabled bearer shares?
Background
The introduction of the BVI Business Companies Act 2004 (the
"Act'), hailed a new era for the bearer share. The
Act reinforced the concept, previously introduced by an amendment
to the old International Business Companies Act, that all bearer
shares issued by BVI companies (including grandfathered
International Business Companies) would be required to be deposited
with a recognised/authorised custodian. For many new
companies incorporated under the Act and re-registered companies,
the power to issue bearer shares is prohibited from inception and
as such the requirement to deposit bearer shares is not
relevant. Bearer shares in issue that are not deposited with
a recognised/registered custodian are now considered to be
'disabled'.
What are the consequences of disablement of my bearer share?
The Act, states that during the period in which a bearer share is disabled, that share does not carry any of the entitlements which it would otherwise carry. Thus, a holder of a bearer share effectively has all of their rights suspended; they cannot vote, or receive distributions or receive any assets on a liquidation or winding up.
Furthermore, subject to certain exemptions any transfer or purported transfer of an interest in a bearer share is void and of no effect during the period of disablement.
What happens now?
The British Virgin Islands Financial Services Commission (the "FSC") has recently issued guidance on how bearer shareholders and companies can re-enable their immobilised shares. The FSC guidance indicates that the preferred method to re-enable the disabled bearer shares is to apply to the High Court of the British Virgin Islands (the "Court") for the requisite extension period.
The Act states that there are two options available to holders of bearer shares:
1. The bearer share may be redeemed by the company;
or
2. the company can apply to the High Court of the British
Virgin Islands (the "Court") for an extension of time to
deal with the bearer shares.
Because of the position posited by the FSC, we would recommend that with regard to option 1, a redemption should be made only for cash consideration. Consideration other than cash (e.g. a share for share exchange) would not be permitted under the Act. There is nothing to preclude a shareholder from using the cash to subscribe for new shares in the company, but it should be made clear that this is a distinct transaction from the redemption.
Whilst option 1 may seem the most straightforward, it may not always be suitable for the particular situation in which the company or shareholder in question finds itself. For example, the shareholder may simply not wish to redeem his share and retain the bearer share status rather than having a registered share in place of his bearer share.
Another important factor to consider when deciding whether the redemption option is available to the company is that in order to utilise the redemption procedure, the directors of the company must be able to comply with the requirements of the Act, i.e. the redemption payment must be made out of surplus and no redemption may be made unless the company can show that the realisable value of the assets of the company will not be less than the sum of its total liabilities other than deferred taxes, as shown in the company's books of account and its capital and make the required solvency declaration.
It is also important to note that if a company or shareholder chooses to pursue option 1 the company must give notice to the holder of the bearer share stating the redemption price and the manner in which the redemption is to be effected. If the identity of the holder is not known to the company then there is an exemption from this requirement so long as the company has shown that it has made 'reasonable enquiry' as to the identity of the owner. If the shareholder cannot be identified, an amount equivalent to the proceeds must be held on trust for the shareholder in the event they are identified in the future. Furthermore, if the share is to be redeemed without the court application, the member will also have a right to demand payment of a 'fair value' for their shares.
What does the court application process involve?
The application process can be initiated by either the company itself (which is useful if the identity of the holder of the bearer shares is unknown) or the shareholder (or a person interested in the bearer share). The shareholder or company will need to collect as much information and documentation to support their application for an extension. The Court will generally be looking for reasonable explanations as to why the shareholder was not able to comply with the original deadline. It should also be noted that the Court has a discretion whether to consent to the extension so an order to extend may not always be granted.
It should be noted however, that no extensions have yet been
granted by the Court and an application to the Court will not
guarantee that an extension will be granted.
What should I do once I have been granted an
extension?
Upon the grant of an extension, the bearer shares will be re-enabled and the company and shareholders can deal with them again.
There are three options available to the shareholder:
(1) the bearer shares may be converted into registered shares. The company must follow the process as set out in the company's memorandum and articles of association;
(2) the bearer shares may be redeemed by the company (as explained above, also available to the company without a court sanctioned extension); or
(3) the shareholder may deposit the shares with an authorised/registered custodian.
Who is a custodian?
Your bearer shares can be deposited with two types of custodian:
1. an authorised custodian – which comprises a licensed person in the British Virgin Islands or a foreign entity approved by the FSC; or
2. a recognised custodian – which would include an investment exchange or clearing organisation operating a securities clearance or settlement system in a recognised Financial Action Task Force member country.
What happens if I simply do nothing?
If a Company simply does nothing with their bearer shares, the FSC has the power to apply to the Courts in the BVI for the appointment of a liquidator of the company and to liquidate the company. It is therefore important that bearer shareholders and companies with bearer shares in issue, take action as a matter of urgency.
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.
