A bearer share is an equity security wholly owned by the person or entity that holds the physical stock certificate. Unlike registered shares, the issuing firm neither registers the owner of the stock nor tracks transfers of ownership. Dividends are dispersed when a physical coupon is presented to the firm. As the share is not registered to any entity, transferring ownership only requires delivering the physical document.
Highlights of Bearer Shares
- Unregistered Equity Securities: Bearer shares are owned by whoever possesses the physical share documents. The issuing company pays out dividends to the holders upon presentation of the physical coupons.
- Global Transition to Registered Shares: While previously common in various parts of the world, many large corporations have moved away from bearer shares in favor of registered shares.
- Decline in Usage Due to Regulatory Concerns: The decline in bearer shares worldwide is driven by increased costs and their use in funding terrorism and other criminal activities.
How Bearer Shares Function
Bearer shares, much like bearer bonds, operate without the regulation and control found in registered shares, with ownership never recorded. They are common in certain regions, including Europe and South America, although their use has been curtailed in these areas due to governmental crackdowns on anonymous financial activities.
Some jurisdictions, like Panama, allow bearer shares but impose heavy tax burdens on dividends to deter their usage. The Marshall Islands is notably the only place where bearer shares can be freely used without additional costs.
Many large corporations have transitioned to registered shares. For example, Bayer AG, based in Germany, started converting all its bearer shares to registered shares in 2009. The UK abolished bearer shares in 2015, and Switzerland, a jurisdiction renowned for financial privacy, ended them in June 2019, except for specific exemptions.
In the United States, the legality of bearer shares is determined at the state level, with Delaware being the first state to ban their sale in 2002.
Benefits of Bearer Shares
The primary benefit is privacy. Ownership of a company is entirely anonymous, as bearer shares are held by the individual possessing the physical certificates. In some jurisdictions, banks handling these purchases are not required to disclose the identity of the buyer, and representatives, such as law firms, can make purchases for an owner.
One valid use is asset protection; for instance, individuals who want to avoid asset seizure due to legal proceedings such as divorce or liability suits may utilize bearer shares for their privacy benefits.
Disadvantages and Risks of Bearer Shares
Bearer shares come with additional costs related to maintaining anonymity, including hiring professional advisors and dealing with complex legal and tax challenges. Without expertise, evading legal and tax pitfalls can be formidable.
The post-9/11 emphasis on curbing terrorism has significantly tightened regulations around bearer shares, with increased enforcement against their use in terrorism funding, money laundering, and other illicit activities. Many jurisdictions now have stringent laws or have outright abolished bearer shares.
Illustrative Example: The Panama Papers Scandal
The infamous Panama Papers scandal extensively utilized bearer shares to mask the real ownership of shares. This scandal revealed over 200,000 tax havens involving high-profile individuals and entities from more than 200 nations. The aftermath of these revelations led many banks and financial institutions to avoid associations with those dealing in bearer shares, narrowing their viable financial channels considerably.
Related Terms: Bearer bonds, Registered shares, Financial regulation, Tax evasion, Anti-money laundering.
References
- Bayer. “Announcement of the conversion of the no-par value bearer shares to no-par value registered shares”.
- The National Archives. “Small Business, Enterprise and Employment Act 2015: Abolition of share warrants to bearer”.
- The Federal Council. “Federal Council brings Federal Act on Implementation of Recommendations of Global Forum into force”.
- Delaware Corporate Law. “Facts and Myths”.
- International Consortium of Investigative Journalists. “Explore the Panama Papers Key Figures”.
