Here form the law firm of Mossack Fonseca is a great article on bearer shares.
On August 6, 2013, the Republic of Panama enacted Law 47 which adopted a custody regime applicable to bearer shares. The system used for the “custody” or “immobilization” of bearer share certificates is similar to that already adopted by other jurisdictions and is also a part of Panama’s commitment to conform to international transparency standards. Basically, the concept of an Authorized Custodian authorized by law is created. This custodian will keep “custody” of the share certificates of companies issuing bearer shares. The custodian will also keep all necessary information regarding the “owners” or “holders” of those shares.
From our point of view, this law somehow distorts the notion of bearer shares formerly included in Law 32 of 1927 governing Panama Corporations. On the one hand, in practice, the owner or “holder” no longer holds such certificates and, on the other hand, it is no longer possible to transfer said shares via the sole tradition of the certificates (we need to bear in mind that in legal terms “tradition” means a voluntary handover and receipt of things without formalities). Following the entry into force of this law, the intervention and information of the Authorized Custodian of shares is required, in compliance with the guidelines stated in the law, for each and every one of these cases and for any matter regarding this kind of shares.
Nonetheless, rather than debating the positive or negative impact of this new legal disposition of Panama’s bearer shares, I would like to point out Article 13, Chapter VI of Law 47, which regulates Hereditary Disposition Regarding Bearer Shares. This is the article that mainly caught our attention when we first reviewed Law 47, keeping in mind its implications regarding estate planning.
Historically, bearer shares have been widely used due to their easy transfer and their implicit confidentiality. Basically, all that was required was the aforementioned “tradition” of the certificate or title containing bearer shares in order for the formalization of the share transfer to take place, as was actually indicated by the law. Likewise and in accordance with our laws, ownership of said shares was presumed to belong to the possessor of the share certificate. This allowed confidentiality regarding the share ownership and its regular use for inheritance purposes by the holders of shares. In practice, the owners or holders of said shares would exercise their political and financial rights during their lifetime. Subsequently, upon the owners’ death and under specific but informal instructions, their chosen heirs or beneficiaries would take possession and, therefore, control and ownership of the shares, without need for a will or any protracted probate proceedings with rules contrary to their original wishes. It is worth clarifying that in many cases, this system was not followed as planned, since other interests altered its course.
Since the entry into force of Law 47, the above mentioned system which had been used informally for many years no longer has any use or validity and changes completely the scenario regarding inheritance of bearer shares. We may argue that this provision improves inheritance rules, as it grants legal formality and certainty to the transfer of such shares upon the owner’s death.
Article 13 of Law 47 reads as follows:
“Article 13. Hereditary Disposition regarding bearer shares. Any hereditary disposition that the owner of bearer shares has left during his lifetime with respect to the ownership of same and which has been communicated to the Authorized Custodian, in writing and in accordance with the formalities established for such purpose in the regulations made to that effect, shall be valid and shall prevail over any other inheritance right, whether there is a will or not.
The designation of the heir of bearer shares does not grant any ownership right regarding those shares. Therefore, ownership will fall on the person or persons designated as heirs only upon the death of the person who during his/her lifetime had left the hereditary disposition referred to herein, without need for a declaratory judgment.
The existence of legal provisions regarding inheritance matters at the domicile of the owner of the bearer shares given in custody will not be enforceable on the authorized custodian nor will it affect the validity of the designation of the heir of such shares upon the death of the person who during his/her lifetime had left the hereditary disposition referred to herein”.
In view of the inclusion of this provision in the law, it is possible, from its effective date, to give instructions to the authorized custodians concerning the inheritance of bearer shares given in custody. In spite of the fact that, as stated in the first paragraph of Article 13, regulations regarding the rule in question can still be issued, it has been clearly stated that said instructions will prevail over other succession rules, and as also pointed out in paragraph three, they will even override foreign provisions with regard to instructions given to the custodian. It is important to stress that this is strictly an inheritance regulation and, as noted in the second paragraph, no ownership rights of the heirs will be accepted unless the condition concerning the death of the owner of the instruction is fulfilled.
Taking this provision into consideration, owners of shares who formerly gave instructions informally to their heirs for the control and ownership of shares issued to the bearer may now simply give formal instructions to the authorized custodian, such that after their death said shares be transferred to their heirs. This opens a whole new range of possibilities, as shares may be transferred to whomever the owner wishes, without taking into account the mandatory rules of succession, if any. Since there is no mention in the law of limitations as to legal persons or any criteria of any kind, assuming that this is not included in the subsequent regulation, the owner may even designate any other estate planning tools as heirs, of all or part. For example, a holding company, a private foundation or a trust vehicle, each of which may also have its own rules, regulations and guidelines will become effective upon the death of the owner of bearer shares and the subsesequent transfer by the authorized custodian.
It is also important to mention, although it may be included in the implementation of this provision, that certain cases must be considered as they may prevent complete fulfillment of the inheritance instructions given. This includes cases where the authorized custodian is a lawyer and an individual, according to what the law allows, as this person may die before being able to fulfill the owner’s instructions. In addition, cases where there is a change of authorized custodian, whether by unilateral resignation of same or a substitution decided by the owner are also of special consideration, as it would be necessary to somehow renew the instructions with the new authorized custodian. Finally, particular consideration must be given to cases where, in accordance with the law, a suspension is applied to the exercise of a custodian since, as in the aforementioned case, the instructions given to such custodian must be automatically transferred to the new custodian or renewed completely by the owner of the bearer shares.
In conclusion, when considering the options and tools for asset organization and estate planning, it is interesting to study the hereditary disposition of bearer shares in custody of authorized custodians who have received specific hereditary instructions from the registered owners of such shares. As occurs with all new estate planning provisions, it will certainly be relevant to consider, analyze and use this possibility in cases where it is applicable.
Monday, March 31st, 2014