Bearer shares—how to avoid a grizzly ending

How will the upcoming changes to bearer shares affect lenders? Ruth Marken, partner at Olswang, profiles the detail of the changes to an antiquated form of share ownership, offering the lowdown on how bearer shareholders should aim to deal with the coming changes.

What has been the traditional role of bearer shares?

The most typical scenario in the UK is that ownership of shares is determined by looking at a company’s register of members. With bearer shares, however, ownership is determined by the person who is in actual possession of the share warrant at any particular point in time. As a result of this, bearer shares have been used historically in structuring and tax planning (although they are not common in the UK today).

What is happening in relation to bearer shares in February this year?

The issue of new bearer shares was abolished last year. There is currently a grace period during which, holders of existing bearer shares can surrender and convert them into registered shares. This grace period will end on 26 February 2016.

Why is the change happening now?

Jurisdictions that issue bearer shares have historically been subject to criticism from the international community. Many countries feel that their use leads:

  • to tax evasion
  • money laundering and
  • other criminal activities due to the difficulties of determining ownership

In 2013, the UK government decided to introduce legislation to ban bearer shares in a drive for greater corporate transparency. The relevant legislation was included in the Small Business, Enterprise and Employment Act 2015, which became law in May 2015.

Does the change give rise to any risk for lenders who hold bearer shares as security?

Yes. If a lender holds bearer shares as security and they have not been surrendered by 26 February 2016, the company must apply to court to have the shares cancelled. A lender could see the value of its security seriously eroded or even extinguished.

What should such lenders do to protect their security position?

Any lender still holding bearer shares should immediately surrender the relevant warrants to the company and apply to be registered in the company’s register of members and issued with corresponding share certificates.

Is there anything else lenders need to consider in relation to the change?

Any agreement to transfer bearer shares after 26 December 2015 will be deemed void. Lenders should consider the impact on their enforcement position.

From the same date, the company will have been required to pay any dividends or other distributions in respect of the bearer shares into a separate interest bearing bank account (this could potentially be paid out to the holder later). A lender should take legal advice to the extent dividends are required to be paid to it under its finance documentation.

A lender should consider the terms of its existing security documentation, as this may not work in respect of registered shares. Security taken over bearer shares could be in a very different form (eg a pledge) to security which should be taken over registered shares (usually an equitable mortgage). Perfection steps should also be considered.

Interviewed by Julian Sayarer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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