The Small Business, Employment and Enterprise Act 2015 (the Act) contains a number of significant reforms to company law in the UK which, it is intended, will be implemented in stages; the abolition of bearer shares, with effect from 26 May 2015, is one of the first of these provisions. The reforms are part of the government’s determination to promote corporate transparency and trust. Bearer shares were seen as a target because ownership of such shares can’t be easily identified, which raises difficulties both for taxation and money laundering legislation.
What are bearer shares?
Bearer shares, also referred to as share warrants to bearer, are shares where proof of ownership is a certificate, in contrast to registered shares where ownership is recorded in the register of members; the names of the holders of bearer shares are not included in a company’s register of members. A company can only issue bearer shares if its articles of association permit this.
Although not that common in the UK, according to government research there are estimated to be about 1,200 companies currently with bearer shares in issue. From 26 May 2015, the Act has prohibited the issue of new bearer shares notwithstanding provisions in a company’s articles of association. In addition, where a company’s articles of association do permit the issue of bearer shares, from this date, such articles may be amended to delete such provision without having to pass a special resolution or having to comply with any entrenchment provision.
Timetable and action points for a company with bearer shares
In addition to the prohibition on the issue of new bearer shares, the Act sets out a timeframe and procedure under which all existing bearer shares are to be converted into registered shares or cancelled:-
26 May 2015 (Commencement Date) – the clock starts running for the company to serve notice on holders of bearer shares explaining their surrender rights and consequences of failing to do this;
25 June 2015 – this is thedeadline by which a company must have sent this first notice to bearer shareholders (in addition this must be published in the Gazette and on the company’s website);
25 December 2015 (seven months after Commencement Date) – if bearer shares have not been surrendered by this date, any transfer of such shares will be void, all rights attaching to them will be suspended and any dividends paid into a separate interest bearing account;
25 January 2016 (eight months after Commencement Date) – the company must send a second notice explaining the consequences of failing to surrender bearer shares;
25 February 2016 – end of the surrender period. The company is required to make an application to court for cancellation of outstanding bearer shares within three months.
What are the practical implications for a company?
It is important for a company which has bearer shares in issue to act now to notify bearer shareholders of their surrender rights. Although the timetable is tight, it is a much better option both for the company and any holders of bearer shares, to have such shares surrendered and converted into registered shares. If a company still has bearer shares on 26 February 2016, it must go to court to have these cancelled and pay into court an amount equal to the nominal value of the shares, together with any suspended dividends. This alternative will be an expensive administrative burden for the company and disastrous for the bearer shareholders who will lose their shares. Only in exceptional circumstances can the money paid into court be claimed by bearer shareholders who failed to surrender their shares.