The BVI Bearer Shares Regime
For 20 years, between 1984 and 2004, the International Business Companies Act (the "IBC Act") was the legislation under which international corporate vehicles were incorporated in the British Virgin Islands ("BVI"). Then, as part of the BVI's objective of providing a modern and flexible legislative framework, the IBC Act was repealed and replaced by the BVI Business Companies Act, 2004 (the "BC Act"). Both the IBC Act and the BC Act permitted the use of bearer shares by a BVI company. However, due to the territory's commitment to the maintenance of a transparent and robust regulatory regime, the BC Act introduced tighter regulation on the use bearer shares in the form of the “Custodian Regime”.
The transition between the IBC Act and the BC Act was initially managed by the two pieces of legislation running in parallel. During this period, companies incorporated under the IBC Act were given the option of voluntarily re-registering as a BVI Business Company under the BC Act by 30 November 2006 or being automatically re-registered on 1 January 2007.
Companies that voluntarily re-registered were required to submit new Memoranda and Articles of Association that were fully compliant with the BC Act, but companies that were automatically re-registered on 1 January 2007 were not. Therefore, in order to ensure that they would nevertheless comply with the provisions of the BC Act, certain key sections of the IBC Act were 'grandfathered' into the new Act for a limited period of time. These transitional provisions temporarily maintained concepts from the old Act, such as authorised capital, capital and surplus accounts, until such time as the company in question elected to adopt and register a new, fully compliant, form of Memorandum and Articles of Association. Companies that were automatically re-registered - but which had bearer shares in issue - also benefited from the extended timeframe in order to enable them to comply with the new BC Act provisions regarding bearer shares. The deadline for compliance was 31 December 2009.
The Custodian Regime
The change in the legislation in BVI has effectively created three sub-groups of company; those incorporated under the BC Act, those incorporated under the IBC Act and voluntarily re-registered under the BC Act before 30 November 2006 and those incorporated under the IBC Act and automatically re-registered on 1 January 2007. As far as the Custodian Regime is concerned, there are two options:
(1) A company that was incorporated under the BC Act, or that was incorporated under the IBC Act and voluntarily re-registered under the BC Act before 30 November 2006 may only issue bearer shares to the extent it is specifically authorised to do so by its Memorandum and Articles of Association. In addition, immediately upon the issue of any such authorised bearer shares, the certificates must be lodged with a custodian approved by the BVI Financial Services Commission (a "Custodian"); or
(2) A company incorporated under the IBC Act and automatically re-registered on 1 January 2007 had the option (on or before 31 December 2009) to retain its bearer shares or to convert them into registered shares.
In the event that a holder of bearer shares decided that there was no longer a need to hold the shares in bearer form, conversion to (or exchange for) registered shares in the company had to take place before the deadline of 31 December 2009. No action was required in respect of the company's Memorandum and Articles of Association, which were subject to a deemed automatic amendment that prohibited the company from issuing bearer shares after 31 December 2009.
In the event that a holder of bearer shares decided to retain the shares in bearer form, the bearer share certificates had to be deposited with a Custodian before 31 December 2009. In addition, the company was required to file a notice with the BVI Registrar of Corporate Affairs so as to prevent the company's Memorandum and Articles of Association being subjected to the automatic amendment referred to above.
The relationship between the Custodian and the owner of a bearer share is a statutory one regulated by the BC Act and supplemented by contract between the parties. The Custodian will not be considered a shareholder of the relevant BVI company nor be entitled to the rights attaching to the bearer share, unless that is provided for by agreement between the parties.
The legislation provides for two categories of Custodian: 'authorised' and 'recognised', although currently no recognised custodians have been approved. Authorised custodians can either be a BVI resident licence holder or a body corporate formed outside the BVI (such entities need not be resident in the BVI nor have a place of business in the BVI). A current list of authorised custodians can be found on the BVI Financial Services Commission (the "Commission") website at www.bvifsc.vg in the 'Regulated Entity' section.
When depositing bearer shares certificates with a Custodian, the steps required to establish and document the relationship are prescribed by the BC Act:
(a) The Custody Agreement - The beneficial owner of the bearer shares must enter into a formal custody agreement with the Custodian;
(b) Notice - The Custodian must not accept custody of a bearer share unless it is accompanied by a notice setting out the full name of the beneficial owner of the share and of any other person having an interest in that share, together with such other information as may be required by the Custodian;
(c) Register of Members – The BVI Business Companies (Amendment) Act 2012 has now imposed an additional requirement on the registered agent of the company. The agent is required to maintain a register of the company’s bearer shares, specifying in relation to each bearer share the identifying number of the bearer share certificate; the full name of the beneficial owner of the share, or any other person with an interest in the share - whether by virtue of a charge on the share or otherwise; and the name and address of the Custodian.
In many cases, the registered agent of the company will be a different entity from the Custodian.
Additional Annual Fees Payable to the Commission for Bearer Share Companies
Every BVI company is liable for an annual licence fee, the amount of which is determined by the maximum number of shares the company is authorised to issue. For a company authorised to issue up to a maximum of 50,000 shares, the annual fee will be US$350; those able to issue in excess of 50,000 shares will pay an annual fee of US$1,100.
Where a company wishes to retain its ability to issue bearer shares, it will incur a supplementary annual fee in addition to the standard fees set out above. Again, the level of these additional fees will be determined by the number of shares that a company is authorised to issue, as well as by the location of the Custodian. Companies authorised to issue a maximum of 50,000 shares, whose bearer shares are held by a BVI resident Custodian, will pay an additional US$450 per annum; those whose bearer shares are held by a non-BVI resident Custodian, will pay an additional US$750 per annum. For companies authorised to issue more than 50,000 shares, the additional fees will be US$150 per annum for those with resident Custodians and US$250 per annum for those with non-resident Custodians.
Failure to Comply with the Custodian Regime
In the event of a failure to comply with the Custodian Regime, there are consequences for both the bearer shareholder and the company itself.
If a bearer share certificate is not deposited with a Custodian, this will result in the shares represented by that certificate being 'disabled'. Disabled shares do not carry any of the rights that they would ordinarily enjoy. For example, the bearer shareholder will not have the right to vote the shares, to receive any dividends or to obtain a share of the assets in the event of a liquidation of the company. In addition, any purported transfer of an interest in a disabled bearer share is void and of no effect. However, as soon as the bearer share certificate is deposited with a Custodian, the status of the bearer shares and the rights attached to them are restored.
A potentially serious consequence for the company is that the Commission may apply to the BVI Court for the appointment of a liquidator over the company under the Insolvency Act 2003. Given that a disabled bearer share has no rights to receive a share of the assets, it is unclear who would be entitled to the surplus assets of the company in the event of a forced liquidation.
Bearer Shares in Issue, But No Custodian
Companies that were: (i) incorporated under the BC Act; or, (ii) incorporated under the IBC Act and voluntarily re-registered under the BC Act before 30 November 2006 (and retained bearer share provisions in their constitutional documents); or, (iii) automatically re-registered and dis-applied the automatic amendment on or before 31 December 2009, all have the power to issue bearer shares and keep them in issue. In the event that the shares have not yet been deposited with a Custodian, the bearer shareholder may then either convert the bearer shares to registered shares or deposit the bearer share certificates with a Custodian. Either of these options will immediately bring the company and shareholder back into compliance with the BC Act and will restore the rights of those shares.
If the company was automatically re-registered under the BCA on 1 January 2007, but failed to file the notice to dis-apply the automatic amendment on or before 31 December 2009, the position is slightly more complicated. As a result of its failure to file the notice, the company’s constitutional documents are deemed to have been amended so that the company is no longer permitted to issue any bearer shares. In these circumstances, the company has three options:
(1) In the event that it is no longer necessary to hold the shares in bearer format, they may be converted to registered shares at any time;
(2) If the shareholder wishes to retain the shares as bearer shares, he can apply to the BVI Court for an order approving the late filing of the notice that should have been filed prior to 31 December 2009; or
(3) The shareholder may convert the bearer shares to registered shares, submit a notice to dis-apply the transitional provisions and permit the company to issue bearer shares going forward, after which they can convert the shares back into bearer share format.
The Custodian Regime in the BVI has a fundamental effect on the nature of a bearer share in the territory. It prevents transfer of that share by physical delivery, as well as providing that the physical holder of the share certificate is no longer its legal owner. While the BVI regime does allow some flexibility for shareholders who wish to retain their shares in bearer format, it introduces a system that helps to restrict abuse of the bearer share as a way to side step regulation.
While the majority of companies are in compliance with the regime, there are some that
still have bearer shares in issue that are not. In light of the new requirements brought in by the BVI Business Companies (Amendment) Act 2012, registered agents should be reviewing their company files. They should also alert any such companies to their responsibilities as soon as possible before the Commission begins to exercise its power to force liquidations of non-compliant entities.
For further information, please speak with your usual Maples and Calder contact or one of the individuals listed above.