What Is a Bearer Share?
Let me explain what a bearer share is: it's an equity security that's wholly owned by whoever holds the physical stock certificate— that's why we call it a 'bearer' share. The company that issues it doesn't register the owner or track any transfers of ownership. Instead, they pay out dividends when you present a physical coupon to them. Transferring ownership? It's as straightforward as handing over the physical document, since there's no authority registering it.
Key Takeaways
- Bearer shares are unregistered equity securities owned by the possessor of the physical share documents, with the issuing company paying dividends to owners of the physical coupons.
- While bearer shares were often used internationally in Europe, South America, and other regions, many large corporations no longer use them and have transitioned to registered shares.
- 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.
How a Bearer Share Works
Bearer shares operate without the regulation and control you see in common shares, since ownership isn't recorded anywhere. They're similar to bearer bonds, which are fixed-income securities that belong to the holder of the physical certificate rather than a registered owner.
These shares are often international, common in Europe and South America, but their use has decreased as governments crack down on anonymity-related illegal activities. In places like Panama, you can still use them, but they come with punitive tax withholdings on dividends to discourage it. The Marshall Islands stands out as the only country where you can use bearer shares without issues or extra costs.
Over the past decade, many large foreign corporations have shifted entirely to registered shares. For instance, Bayer AG in Germany began converting all its bearer shares to registered ones in 2009. In 2015, the United Kingdom abolished issuing bearer shares under the Small Business, Enterprise and Employment Act. Switzerland, known for banking secrecy, has also ended bearer shares, adopting a Federal Act in June 2019 that requires converting them to registered shares, except for publicly-listed companies and intermediated securities.
In the United States, bearer shares are largely a state matter, and they're not traditionally supported in many corporate laws. Delaware was the first state to ban their sale back in 2002.
Important Note on Bearer Shares
Bearer shares appeal to some investors because of the privacy they offer, but you have to weigh that against the increased costs of maintaining that privacy, including attorney fees and taxes.
Benefits of Using Bearer Shares
The main tangible benefit you get from bearer shares is privacy. They allow the highest degree of anonymity in corporate ownership. Banks handling the purchases might know your contact info, but in some jurisdictions, they're not legally required to disclose it. They can even receive dividend payments for you and confirm ownership at meetings. Plus, you can have a representative, like a law firm, make the purchase on your behalf.
Despite their downsides, bearer shares have valid uses. Asset protection is a common reason— if you don't want your assets seized in something like a divorce or liability suit, bearer shares can help with the privacy they provide.
Disadvantages and Risks of Bearer Shares
Owning bearer shares often means higher costs, like hiring professionals and advisors to keep that anonymity intact. Unless you're an expert in finance or law, navigating the legal and tax pitfalls of bearer shares is tough.
In the post-9/11 world, with terrorism threats, governments are cutting off funding sources for such activities. That's led to global efforts against terrorism funding, money laundering, and other corporate crimes, resulting in tight restrictions or outright bans on bearer shares in many places.
Bearer Shares Example
Take the Panama Papers scandal as an example: it heavily involved bearer shares to hide true ownership. This leak exposed over 200,000 tax havens linked to high-net-worth individuals, officials, and entities from 200 nations. As a result, many banks and institutions are now reluctant to deal with companies or shareholders using bearer shares, narrowing your options for jurisdictions and financial partners significantly.
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