Bearer Shares – Immobilization

by Edison Teano

The option of issuing bearer shares has been allowed since the inception of Panama’s Corporation Law in 1927.  Unlike nominative shares (which are issued in the name of an individual or a legal entity), “bearer” share certificates do not include the name of the individual or legal entity that is the owner of the shares.  Once issued, whoever holds the shares is their owner.  Bearer shares are characterized by their free transferability from one person to another.  They do not need to be endorsed nor is there any need to issue a share certificate in the name of the new owner, as in the case of nominative shares.

Bearer shares have throughout the history of companies had their raison d’être, from facilitating their transfer to allowing the anonymity of their owners for good and valid reasons (for example, for persons living in countries where security is a problem).  However, the issuance of this sort of shares has become increasingly stigmatized during the last fifteen years.  Attempts have been made to link the issuance of bearer shares to the concealment of something that is illicit or negative.

At the same time, “know your client” rules have evolved, making institutions adopt policies to ensure that they comply with rules requiring that they know the actual owners of companies.  So much progress has been made that, for example, there now are banks that do not open accounts for any company that is allowed to issue bearer shares.  Other banks still allow the opening of accounts for companies that have actually issued bearer shares, but they require the shares to be kept under “custody” in order to comply with “know your client” policies.

To stem or appease the pressures that it has received from international organizations such as the OECD (Organisation for Economic Cooperation and Development) since 2013, Panama has, by means of Law 47 of 6th August, agreed to adopt a custody system applicable to bearer shares.  What is known as the immobilization of bearer shares takes place through this custody mechanism.  Adopting such a regime continues to allow the existence of bearer shares, but their free transfer no longer exists, as such shares need to be held in the hands of a custodian, who is the one who needs to be notified about the transfer of such shares to the new owner.

My personal point of view is that, although it is true that certain advantages of bearer shares are lost with such a measure – namely, their free transferability – Panamanian authorities have chosen the best option: the custody of bearer shares.  This is the path appropriately taken about ten years ago by the British Virgin Islands, and it has been proven over time that this is the decision that least affects the product.  We feel as well that it would have been a serious mistake if Panama had done away with bearer shares, as the Bahamas did at the time, which was very damaging for the business of company formation in that jurisdiction.

We believe that the law that immobilizes bearer shares has been well thought-out, as it allows the owners of Panama companies to:

– Have the possibility of issuing bearer shares without the need for a custodian until August 2015, and

– Have until August 2018 to place bearer shares under custody before the law enters into effect in August 2015.

With the adoption of such terms, we feel that the law gives enough time to service providers (attorneys, trust companies, etc.) and clients to adapt to such changes.

In practice, Panama will continue to issue bearer shares.  Considering the pressures we have been subjected to, we feel that the immobilization of shares is the best choice, as it allows the possibility of issuing bearer shares, but beginning in August 2015, new bearer shares issued shall need to be placed under custody and immobilized).  Clients will have the chance to assess whether it is better to issue bearer shares (with the obligation to immobilize them) or to issue them in nominative form (issuing shares in the name of an individual or a legal entity).  It is quite probable, as has happened in other markets where this share custody or immobilization mechanism was adopted, that clients may prefer to issue shares in nominative form, whether in the name of another company, in that of a Panama Private Foundation, or in that of a trust.  We feel certain that Panama Private Foundations will be the product most chosen by clients to issue shares in nominative form, as they will be able to immediately organize estates issued through such a vehicle.

Bearer shares remain a valid option.  We can still issue them in Panama as we have in the past, and they are freely transferable.  Beginning in August 2015, we will continue to issue bearer shares, but we shall need to immobilize them and consequently turn them over to a custodian.  The time allowed to us by the law will allow us to adapt to such changes and will allow us to ascertain whether the rest of the countries competing with us have also immobilized or done away with bearer shares, making it possible for all of us to compete on an even playing field.