What is a Bearer Share?
A bearer share is an equity security wholly owned by whoever holds the physical stock certificate, thus the name "bearer" share. The issuing firm neither registers the owner of the stock nor tracks transfers of ownership; the company disperses dividends to bearer shares when a physical coupon is presented to the firm. Because the share is not registered to any authority, transferring the ownership of the stock involves only delivering the physical document.
Understanding Bearer Share
Bearer shares lack the regulation and control of common shares because ownership is never recorded. Bearer shares are similar to bearer bonds, which are fixed-income securities belonging to the holders of physical certificates rather than registered owners.
- Bearer shares are unregistered equity securities owned by the possessor of the physical share documents. The issuing company pays out dividends to owners of the physical coupons.
- The use of bearer shares has dwindled worldwide because they incur increased costs and are convenient instruments to secure funding for terrorism and other criminal activities.
The Dwindling Issuance of Bearer Bonds
Bearer shares are often international securities, common in Europe and South America — although the use of bearer shares in these nations has dwindled as governments crack down on anonymity-related illegal activity. While some jurisdictions, such as Panama, allow the use of bearer shares, they impose punitive tax withholdings on dividends issued to owners to discourage their use. Marshall Islands is the only country in the world where the shares can be used without problems or extra costs.
Many large foreign corporations over the past decade or so have also chosen to transition to full usage of registered shares. Germany-based pharmaceutical giant Bayer AG, for example, started to convert all its bearer shares to registered shares in 2009, and in 2015, the United Kingdom abolished the issuance of bearer shares under the provisions of the Small Business, Enterprise and Employment Act 2015.
Switzerland, a jurisdiction known for its emphasis on secrecy in banking transactions, has also begun the process of converting bearer shares into registered shareholdings. As of March 2019, the Swiss Federal Council has already begun the process of consultation to abolish bearer shares in the country.
In the United States, bearer shares are mostly an issue of state governance, and they are not traditionally endorsed in many jurisdictions' corporate laws. Delaware became the first state in the U.S. to ban by statute the sale of bearer shares in 2002, per the state's site page on corporate law.
Benefits of Using Bearer Shares
The only tangible benefit to be gained from using bearer shares is privacy. The highest degree of anonymity possible is maintained with respect to ownership in a corporation by a holder of bearer shares. Although the banks that handle the purchases know the contact information of the people purchasing the shares, in some jurisdictions, banks are under no legal obligation to disclose the identity of the purchaser. Banks may also receive dividend payments on behalf of the shareholder and provide ownership confirmation at shareholders' general meetings. Moreover, purchases can be made by a representative, such as a law firm, of the actual owner.
Disadvantages and Risks of Bearer Shares
The ownership of bearer shares often coincides with an increased cost incurred from hiring professional representation and advisors to maintain the anonymity that bearer shares provide. Unless the bearer shareholder is a financial and/or legal expert in these matters, avoiding the many legal and tax traps associated with bearer shares can be a difficult challenge.
Also, in a post-911 world in which the threat of terrorism looms heavily, part of the strategy to counter the threat is to cut off the sources of terrorist funding. Consequently, in a worldwide effort to deter terrorism funding, money laundering and other illicit nefarious corporate activity, many jurisdictions have enacted new legislation that places very tight restrictions on the use of bearer shares or, as mentioned, have altogether abolished their use. For example, the Panama papers scandal extensively used bearer shares to conceal true ownership of shares. This has resulted in the reluctance of many banks and financial institutions to open accounts or have any associations with corporations or shareholders that deal in bearer shares. The choice of jurisdictions and financial institutions willing to deal in bearer shares has narrowed significantly.
Uses of Bearer Shares
Bearer shares have some valid uses, albeit their inherent detriments. Asset protection is the most common reason to use bearer shares because of the privacy they provide. For example, individuals who do not want to risk their assets being seized as part of a legal proceeding such as a divorce or a liability suit may resort to the use of bearer shares.