Bearer shares are a type of stock ownership where the physical stock certificate holder is the owner. These shares are unique because the company that issues them does not keep a record of who owns them. Ownership changes hands simply by passing along the certificate. Companies distribute dividends to these shares only upon presenting a physical coupon. One of the key characteristics of bearer shares is the lack of formal regulation compared to standard shares, mainly because their ownership isn't officially recorded. This makes them similar to bearer bonds, owned by whoever holds the physical bond certificates.

Globally, bearer shares have been more prevalent in European and South American countries. However, there's been a notable decline in their use as governments intensify efforts to combat illegal activities rooted in anonymity. Some countries, like Panama, still allow bearer shares but discourage their use through heavy taxes on dividends. The Marshall Islands stands out as a place where bearer shares can be used freely without additional costs.

Many large international companies have shifted from bearer to registered shares in recent years. For example, the German pharmaceuticals manufacturer Bayer AG, in 2009, gradually moved from bearer shares to registered ones. In fact, the UK abandoned issuing bearer shares altogether by 2015 when its Small Business, Enterprise, and Employment Act went into effect.

Switzerland, known for its banking secrecy, also phased out bearer shares in June 2019. The Swiss Federal Council implemented a new law, ending the use of bearer shares except those in publicly listed companies or intermediated securities. All other bearer shares had to be converted to registered shares. In the United States, bearer shares are primarily governed at the state level, with many states not typically supporting them in their corporate laws. Delaware was the first state to prohibit the sale of bearer shares in 2002.

Benefits of Bearer Shares

Privacy

The standout benefit of bearer shares lies in their privacy. These shares don't record the owner's name or contact details anywhere. This means no one can track the owner's identity, be it registration bodies, law firms, or banks. Even if the initial owner's details were recorded, tracking subsequent ownership changes is not feasible, ensuring the current owner's anonymity. The company issuing these shares is not obligated to verify how someone acquired the share certificate. Possession of the physical document is the only requirement to claim ownership, no matter how it was obtained.

This high level of privacy makes bearer shares a favorable option for asset protection. They are useful for individuals concerned about asset seizure in legal situations like divorce, lawsuits, or bankruptcy. Bearer shares linked to companies in foreign countries with strong asset protection laws provide an added shield against domestic asset risks. However, other effective methods for offshore asset protection and financial privacy may be considered more legitimate and less risky than bearer shares.

Convenience

The ease of transferring bearer shares is another significant advantage. Ownership is established merely by holding the share certificate, so transferring ownership is as simple as handing over this certificate. This process ensures confidentiality and brings benefits like increased liquidity, reduced administrative burden, and no transfer costs. Yet, it's important to recognize that this ease of transfer can also bring its risks, which need careful consideration.

Risks of Bearer Shares

Bearer shares, despite their legitimate applications, come with several notable risks and drawbacks. Here are some of the risks of bearer shares:

• Risk of Theft and Loss: The main drawback of bearer shares is that they are subject to theft or loss. Because ownership depends entirely on holding the actual paper share certificate, and changes in ownership are not registered anywhere, possession of another's certificate makes one equally a possessor. In events like natural disasters (floods, fires), the lack of a backup record means there's no way to reclaim ownership.
• Challenges in Proving Ownership: But situations where ownership must be proven, like starting up subsidiaries or opening bank accounts abroad present a headache for bearer shareholders. The UK and Switzerland, for example, are two countries that do not recognize bearer share certificates as legally valid since they lack the owner's name.
• Difficulties in Opening Company Bank Accounts: Banks often hesitate to work with companies issuing bearer shares due to the inability to track company ownership. This reluctance exposes banks to potential risks, making it increasingly hard to find banks willing to open accounts for such companies.
• Tax Complications: From a historical perspective, tax evasion has always been linked with bearer shares. Higher levels of regulatory oversight have made tax avoidance with bearer shares less convenient and unsound. Furthermore, bearer shares without accurate records can cause even bigger tax problems-usually expensive professional help is needed to resolve them.
• Negative Reputation: As a result, bearer shares have acquired tainted clients for tax evasion, money laundering, and other criminal activities. We suspect that companies dealing in bearer shares and individuals involved may be engaged in illegal activities. Such suspicion creates unnecessary challenges and greater magnification of scrutiny.

Bearer Shares Example

The Panama Papers scandal highlights a prominent example of the risks associated with bearer shares. This scandal involved a massive leak of financial documents, revealing a complex web of over 200,000 offshore entities. These entities, linked to high-net-worth individuals and public officials worldwide, utilized bearer shares, among other mechanisms, to obscure the real ownership of shares.

The fallout from the Panama Papers scandal was significant. It led to a widespread hesitancy among banks and financial institutions to engage with companies or individuals that use bearer shares. Consequently, the range of jurisdictions and financial institutions open to dealing with bearer shares has shrunk considerably. This situation showcases the potential pitfalls and reputational risks bearer shares can bring to individual holders and the broader financial system.

Bottom Line

Hold the bearer share certificate to receive protection. However, they can easily be stolen or lost, and it is hard to prove that one owns the website. Opening bank accounts may also present difficulties because of them. And you have tax considerations, too. Nevertheless, individuals and companies should consider their risks when using these services for asset protection or financial privacy needs. Their declining popularity worldwide reflects the growing regulatory hounding and restrictions on their use in many countries.