The past few years have seen considerable debate between Offshore Financial Centres and a number of overseas authorities and governments, including the UK government (highlighted by the KPMG report), the OECD and its Financial Action Task Force regarding bearer shares. Most British Virgin Island International Business Companies (IBCs) have included in their memoranda of association the power to issue bearer shares. The reality seems to be that only a minority of IBCs actually issue bearer shares. However, the possibility that a large number of the Islands' IBCs may have actually issued bearer shares has placed the British Virgin Islands, in particular, under intense international scrutiny.
It was no surprise when in June 2000 the chief minister of the British Virgin Islands made a commitment on behalf of the government to immobilize bearer shares. A bill to amend the IBC Act is now being finalized and an aide mémoire was issued on November 12 2002 by the Financial Services Commission describing the main substantive issues to be addressed in the amendment. A summary of the aide mémoire follows.
Bearer shares will be required to be held in custody by either an authorized custodian or a recognized custodian.
Authorized custodians will consist of persons who hold a valid licence issued pursuant to the British Virgin Islands Banks and Trust Companies Act and whose licence specifically includes an authorization permitting the holder to act as a custodian of bearer shares.
Recognized custodians will consist of two classes. Category I will consist of a select list of readily-identified investment or securities clearing organizations or settlement systems that specialize in the custody business and that are specifically designated by the Commission as recognized custodians. Category II will be regulated financial institutions anywhere in the world that are subject to Financial Action Task Force, the Basel Committee on Banking Supervision or International Organization of Securities Commissions customer due diligence obligations and principles. They must also satisfy the Commission that certain safeguards are in place for the secure custody of British Virgin Islands company bearer shares pursuant to the rules it has established.
The bill will also mandate that where bearer shares are deposited with authorized custodians in the British Virgin Islands, the company issuing the bearer shares or the person depositing the bearer shares must provide the custodian with the name of the beneficial owner of the shares, the name of any other person having an interest in the shares and any other information that may be prescribed.
Although the provisions regarding the custodianship of bearer shares will take effect immediately for all new companies formed after the effective date of the bill, existing companies will have a two-year grace period for all existing bearer shares certificates to be brought under the new regime.
Consequences or failure to comply
The intention behind the bill is clearly that in the majority of cases compliance is achieved simply by exchanging bearer shares for registered shares.
However, the bill includes a specific provision for the Commission to apply to the Court to wind up a company where more than two years have expired after the effective date of the new law, and where the company still has bearer shares that are not held by a custodian in accordance with the bill's provision. The bill also contains provisions whereby the directors can force the redemption of bearer shares.
Where a company is wound up pursuant to an order of the Court, like any other liquidation the net proceeds, whether in cash or specie, will be available to holders of bearer shares upon surrender of the bearer-share certificates to the liquidator of the company. Where the directors of a company exercise the power of compulsory redemption, redemption proceeds will be held for the holders of bearer shares until such time as the bearer share certificates are surrendered where upon the proceeds will be paid to the holders of the bearer-share certificate. Liquidation and redemption proceeds will be held by the company for shareholders subject to the usual statutory limitation periods.
Holders of bearer shares who wish to avoid compulsory redemption, and holders of a majority of issued bearer shares in companies that wish to avoid compulsory liquidation, have a two-year period during which they may surrender their bearer share certificates to a custodian, exchange their bearer share certificates for registered shares issued in their names or the names of nominees or redeem their bearer shares.
Power to issue bearer shares
It is expected that the bill will also include a provision whereby companies that include in their memoranda of association the power to issue bearer shares will be liable to a much higher incorporation and annual government fee. Details must be worked out but it is expected that for existing companies there would again be another grace period to permit companies to amend their memoranda of association to remove such powers.
The bill will make it mandatory for a register of directors to be kept at the registered office of each company in the British Virgin Islands. Companies incorporated after the effective date of the bill will be expected to maintain details of directors in the register from the date of incorporation. With respect to existing companies such information would have to be entered from the effective date only. There will be a one-year compliance period.