The term bearer shares is a financial topic many investors have probably never heard of. These types of shares lost their popularity over the years and, in some cases, have even been banned from being issued by companies in certain jurisdictions.
In large part, bearer shares have become mostly obsolete based on vastly improved technology and the ability for investors to own shares digitally. However, even with these shares becoming outdated in recent years, it’s still an important topic that investors should better understand, as these shares have been associated with
In this article, we’ll provide a comprehensive overview of bearer shares, their advantages and disadvantages, the current regulatory landscape surrounding their use, and how they earned their infamous reputation.
What Are Bearer Shares?
Bearer shares largely work in the same way as regular shares do, with some key differences.
Where common shares in a company are registered through the issuing company, as well as being tracked as transfer of ownership happens (investors buying and selling shares), bearer shares do not register the owner of the stock or track the transfer of ownership. A bearer share is a physical share certificate and is considered to be owned by whomever holds the physical document.
Bearer share companies are still required to pay dividends to bearer share certificate holders, however in order to receive dividend pay outs investors must physically present their shares to the company.
When bearer shares are being transferred from one owner to another, there is no regulating body tracking the movement of shares or ensuring shares were not stolen.
History of Bearer Shares
The history of bearer shares can be traced back to the late 19th century, when they were first introduced in Europe as a way to simplify and streamline the process of buying and selling shares to learn more about buying and selling stocks online, check out this video.
At the time, traditional stock certificates required that the names of the shareholders be recorded in official records, and transferring ownership of the shares required complex legal procedures.
Bearer shares were seen as a more flexible and efficient alternative to this system, as they allowed shares to be easily transferred without the need for any official paperwork or record-keeping. They quickly became popular among investors and companies alike, and soon spread to other parts of the world.
Before long, bearer shares began to be associated with a number of legal and regulatory issues, as they were regularly used to facilitate illegal activities such as
As a result, many countries introduced regulations requiring companies to keep records of the ownership of their shares, or in some cases have even banned the use of bearer shares altogether.
An example of using bearer shares for
Jho Low and his associates established multiple entities in Seychelles before 2013 to conceal and manipulate the ownership of these companies using bearer shares. Among these were Good Star Limited and Smart Power, which Low utilized to divert $700 million from a 1MDB investment in collaboration with PetroSaudi International Limited.
Smart Power, the sole corporate director, had complete authority over Good Star Limited, both of which were wholly owned by Mr. Low through bearer shares. This scheme of employing bearer share companies controlled by Low and his associates was replicated multiple times throughout the 1MDB scandal.
Jho Low regularly took advantage of the lack of oversight bearer shares allow and used this to circumvent the policies and safety nets registered shares are built upon.
Tax authorities were unable to trace who owned the fraudulent companies created by Mr. Low, giving him the ability to regularly hide financial information and transfer ownership to his associates with no oversight.
In summary, bearer shares first originated not for criminal activities but to assist investors in transferring ownership of their shares in a more efficient way – before digital ownership existed. However, as the financial world developed, some investors quickly exploited bearer shares to evade taxes, avoid the oversight registered shares are built upon, and circumvent the legal system.
Advantages of Bearer Shares
Bearer shares exist on the outskirts of the financial world, and while they’re not commonly used today they still have some advantages when compared to the more popular common share.
The advantage of confidentiality with bearer shares is primarily rooted in the fact that they are not registered shares.
Although banks that handle purchases may have access to the contact details of the owners, they typically have no legal obligation to reveal the identities of the purchasers in most jurisdictions. Additionally, investors may use different representatives, such as the law firm of the actual owner, to carry out their purchases.
A Bearer share, being a physical stock certificate, gives the holder flexibility in transferring ownership to a willing buyer by simply giving the new owner the physical stock certificate.
For the issuing company as well, it makes distributing shares to investors a much simpler and easier process, as there is no requirements for registering the shares or being expected to track the transfer of ownership of shares as investors buy and sell.
Since bearer shares offer impressive flexibility and privacy there is little paperwork documenting the creation, issuance, or transfer of bearer shares. For investors or companies who are looking to complete the process of issuing or receiving shares quickly, bearer shares offer a very attractive alternative compared to registered shares.
Disadvantages and Risks of Bearer Shares
Even with some legitimate advantages of bearer shares, most executives have shied away from using them due to the numerous disadvantages and risks involved in issuing them.
One of the biggest disadvantages of bearer shares is the lack of transparency regarding the ownership of shares. Since the physical certificate itself serves as proof of ownership, it can be difficult to determine who was originally issued the shares, making it easier for individuals to steal bearers shares with the purpose of engaging in illegal activities such as
Lack of Asset Protection
Because bearer shares are essentially physical certificates, they can be lost, stolen, or damaged. If this happens, it can be difficult to prove the rightful ownership of shares, which can lead to legal disputes or other complications.
Increased Vulnerability for Issuing Companies
Bearer shares can make it challenging for companies to maintain effective corporate governance practices, as they don’t know who their shareholders are. This can make it more difficult for companies to communicate with their shareholders, and to ensure their interests are being represented properly.
Difficulty to Show Proof of Ownership
As we already discussed, physical possession of bearer shares opens the opportunity for theft or loss. Since bearer shares don’t require any registration with the issuing company, they do not provide a clear and verifiable record of ownership.
This can create challenges for shareholders who need to prove their ownership of the shares, such as in the case of an inheritance or a transfer of ownership. The lack of proof of ownership can also make it easier for others to claim ownership of the shares, leading to legal disputes or financial losses.
Limited Investor Rights
Bearer shares typically offer limited investor rights compared to registered shares, including shareholders not having the right to vote on corporate matters or attend shareholder meetings. This makes holding management accountable for their actions or voting on strategic company decisions nearly impossible.
Limited Use Among Companies
Bearer shares are less marketable than registered shares, with many investors hesitant to buy shares that have no clear ownership trail or legal record. This makes it difficult for companies to raise capital through the issuance of bearer shares.
Inconvenience of Receiving Dividends
When a company disperses dividends to bearer share holders because there is no record or process for tracking the movement of ownership, investors must physically go to company headquarters to receive their dividend payment.
This obviously creates significant inconvenience for investors and is an extremely inefficient process compared to common share holders receiving dividend payments electronically.
Are Bearer Shares Still Used Today?
Despite the numerous disadvantages listed above, bearer shares are still used in some countries today, but their use has become increasingly restricted due to concerns over transparency, accountability, and financial crime.
Many countries have implemented regulations to limit or prohibit the use of bearer shares, and international organizations such as the Financial Action Task Force (FATF) have called for tighter controls on bearer share transactions to prevent
In 2019 British Columbia announced that companies will be required to convert bearer share certificates into registered share certificates. If a shareholder attempts to exercise their rights under a bearer share, the company must decline to recognize such rights until it has converted the bearer share certificate into a registered share certificate that satisfies section 57 of the Business Corporations Act.
Similarly, in Switzerland the use of bearer shares was abolished also in 2019. Meaning companies will be prohibited from issuing bearer shares, and any previously issued bearer shares must be converted to registered shares by April 30, 2021 at the latest.
The only exceptions to this rule are for companies whose equity securities are listed on a stock exchange, or for those whose bearer shares are structured as intermediated securities and are held with a custodian designated by the company in Switzerland or are entered in the main register.
Clearly, the trend of countries restricting the use of bearer shares is increasing as governments continue to try and limit financial criminal activities. However, there are still some countries that do permit the user of bearer shares in an unrestricted format, such as Panama and the Marshall Islands.
Bearer shares were initially developed to facilitate the quick and easy transfer of shares between buyers and sellers, which was necessary in the rapidly growing financial world of the 19th century. However, this convenience came at a cost.
The anonymity provided by bearer shares soon became a cause for concern, as it made them attractive to criminals looking to launder
In response to these concerns, most developed countries have moved to ban the use of bearer shares, with many implementing strict regulations on their use. The Financial Action Task Force (FATF), a global anti-money laundering watchdog, has also called for tighter controls on bearer share transactions.
As a result, the use of bearer shares has declined significantly in recent years, with many investors and companies preferring the transparency and accountability of registered (common) shares.
The development of new technologies has also made it easier for investors to own shares digitally, further reducing the need for bearer shares in today’s financial world. While there are still some benefits to allowing companies to issue bearer shares, limiting their use can better protect investors and companies, as well as reduce the amount of financial crime throughout the world.
Ultimately, the move away from bearer shares towards more transparent and secure forms of share ownership should be viewed as a positive step towards a more accountable and responsible financial system.