Luxembourg reforms its bearer shares regime

On 16 July 2014, Luxembourg adopted the law concerning the compulsory deposit and immobilization of shares and units in bearer form (hereafter the "Law"), which aims to adapt Luxembourg law to the requirements of the Financial Action Task Force (on Money Laundering) (the "FATF") and the Global Forum on Transparency and Exchange of Information for Tax Purposes (the "World Forum") in relation to the identification of the holders of bearer shares and bearer units.

From a situation which may give rise to tax issues...

Before the adoption of the Law, bearer shares had a certain particularity. In fact, ownership of such shares, and exercising the social rights related to them, stemmed from the mere physical possession of a title which represented the relevant shares. This resulted in the fact that the entity issuing the bearer shares did not know the identity of the owner of the issued titles. This presented a number of taxation issues, inter alia, regarding the ‘fight' against illegal behavior.

... towards a situation of increased transparency

Nevertheless, as of the issuance of the Law, bearer shares issued by a public limited liability company, by a corporate partnership limited by shares or by a management company of undertaking for collective investment (UCI) constituted as common fund, need to be deposited with a depository chosen by the management body of the issuing company, from among the following list of professionals to whom anti-money laundering obligations apply: credit institutions; asset managers; distributors of UCI shares/units; specialized professionals of the financial sector accredited as family office, as domiciliary agent, as professional performing services of incorporation or management of companies, as registrar agent, or as professional depositary of financial instruments; lawyers (list I and IV); notaries; statutory auditors and approved statutory auditors; and chartered accountants.

The depository has to maintain a register of bearer shares that contains information on the holder of the bearer shares and the shares themselves, i.e. the identity of the shareholder, the deposit date of the shares, their eventual transfer date or their possible conversion into registered securities. This register is not freely accessible. The holder of bearer shares may only consult the share register entries that relate to his own shares.

Among the major impacts of the Law, it should be noted that ownership of the shares by the shareholder is established by registration of the bearer shares in the register and not by the possession of a title. As such, the holder of bearer shares may require the submission of a certificate which certifies the deposit of the shares. This certificate, however, does not prove ownership.

It is important to recognize that the transfer of bearer shares happens in the same way as registered shares, which means not by merely handing over a title. If the bearer shares are not filed with the depository and consequently the supra mentioned required information is not entered into the register, the holder will not be allowed to exercise the rights attached thereto, including financial and voting.

In principal, it is forbidden for the depository to return the bearer shares that have been filed to the shareholder. Such restitution is however needed in 4 different limited cases:

  • When the depository ceases its functions,
  • When the bearer shares are converted into registered shares,
  • When the bearer shares are repurchased by the company,
  • When the bearer shares are cancelled as a result of a capital reduction.

The civil liability of the depositories, in case of non-fulfillment of their obligations, is copied from the liability of directors/managers. A criminal fine between EUR 500 and EUR 25,000 is also made possible by law.

The Law also includes a regulation concerning the liability of the management bodies of the company. Management may incur a fine between EUR 5,000 and EUR 125,000 for the following reasons:

  • Failing to hold a share register in relation to registered shares (knowingly),
  • Failing to appoint a depository,
  • Failing to ensure that the issued shares are ‘immobilized' with a depository,
  • Failing to distribute dividends and give voting rights to shareholders detaining bearer shares which are not filed with the depository.

In order to ensure legal compliance, the bearer shares already existing prior to the entry into force of the Law must be ‘immobilized' as soon as possible. A transitional period is provided by law during which issuers have a period of six months as from the entry into force of the Law to appoint a depository. The shareholders shall have an additional period of twelve months to deposit their bearer shares with the designated depository.

The voting rights attached to bearer shares that have not been ‘immobilized' within the above mentioned period of six months shall be automatically suspended until the bearer shares are immobilized. Distributions are deferred until the date of ‘immobilization', provided that the rights to distribute are not prescribed (after 5 years) and without it being necessary to pay interest.

If all bearer shares are not deposited within 18 months after the entry into force of the Law, they must be cancelled. A capital reduction of the subscribed capital with the amount corresponding to the cancelled bearer shares will have to follow. After capital reduction, the corresponding amount is deposited with the Caisse de Consignations until the entitled person asks for restitution. If no beneficiary has requested the return of the recorded funds before the thirty-year expiration period, then the funds are to be acquired by the State.

It is, nevertheless, important to mention that the bearer shares/units issued after the entry into force of the Law do not benefit from the supra described transitional regime. They have to immediately comply with the new regime.

...with adjustments made for the sake of efficiency

Luxembourg has made a further step towards greater transparency by adopting an intermediate, less disruptive solution then prohibiting bearer shares, i.e. share ‘immobilization' with a regulated depository. Such a mechanism ensures availability of information relating to the identity of the holder of bearer shares and facilitates access to this information by judicial and tax authorities while preserving data confidentiality vis-à-vis third parties and other shareholders of the issuing company. This, in turn, allows the bearer shares regime and registered shares regime to get closer to each other. In time, evidence-based practice outcomes will ultimately tell us whether keeping the bearer shares proves to be of a beneficial nature.