This note provides practical guidance for companies incorporated in the British Virgin Islands (“BVI”) whose memorandum of association and articles of association (“constitutional documents”) still provide for the issue of bearer shares, or who currently have bearer shares in issue. In brief, a 31 December 2009 deadline (the “transition date”) looms for BVI companies which have issued bearer shares, but have not taken steps either to place them with a custodian, or to exchange them for registered shares. Prior to the transition date, specific action will need to be taken if such companies intend to retain the right to issue bearer shares; otherwise any bearer shares in issue will be “disabled”, so that they will cease to carry any of the rights and entitlements which they would otherwise carry and any transfer of an interest in such shares will be void. If no action is taken, on the transition date the constitutional documents for BVI companies which currently provide for the issue of bearer shares will automatically lose the power to issue bearer shares and the power to convert registered shares for bearer shares.
Do all BVI companies have to act in relation to bearer shares before the transition date?
Under the BVI Business Companies Act 2004 (the “Act”) companies incorporated prior to 1 January 2005 whose constitutional documents do not have provisions dealing with bearer shares, or else have bearer shares provisions but have not and do not intend to issue bearer shares in the future need not do anything further. Companies incorporated after 1 January 2005 are already subject to provisions of the Act which specify that bearer shares issued by them cannot be delivered to the beneficial owner of the shares but only to a custodian, and the rights attaching to bearer shares are “disabled” unless they are deposited with a custodian1.
You must consider taking action if you have (a) issued bearer shares, but these have neither been placed into custodianship, nor exchanged for registered shares; or (b) intend to disapply the Act’s provisions dealing with “deemed amendments of the memorandum”.
What do I need to know if I hold bearer shares in a BVI company?
Legal title to bearer shares passes on physical delivery of the bearer share certificates. Bearer shares are recorded on a register of members as held by “Bearer”, without further identification, a feature which allows them to be easily transferred to others with the only formality being the passing of the bearer share certificate. By comparison, in order to transfer legal title to a registered share, details of the new shareholder will be required each time for inclusion into the register of members and issue of share certificates, with the entry of the name of such shareholder in the register of members as a holder of the registered share serving as prima facie evidence of legal title2.
BVI companies incorporated under the earlier International Business Companies Act 1984 which have automatically been re-registered under the Act and which have bearer shares in issue are required prior to the transition date to bring their bearer shares into compliance with the Act.
We had understood that the deadline for compliance was in 2010?
The deadline is no longer 31 December 2010 – the Act was amended by the BVI Business Companies (Amendment of Schedules) Order, 20073 the effect of which has been to bring forward the deadline a year earlier to the transition date.
What if our company’s constitutional documents have authorised the issue of bearer shares, but we have never issued bearer shares?
If a company incorporated prior to 1 January 2005 has authorised the issue of bearer shares under its constitutional documents, but does not have bearer shares in issue (or intends to exchange any existing issued bearer shares for registered shares, prior to the transition date), no further action is required.
The Act4 provides for a “deemed amendment of memorandum” and on the transition date the company will automatically lose the power to issue bearer shares, and the power to convert registered shares for bearer shares, and will therefore cease to be a bearer share company.
Who is able to serve as a custodian of bearer shares?
A custodian can be either an authorised custodian (a licensed person in the BVI or a foreign entity approved by the BVI Financial Services Commission to act as a custodian) or a recognised custodian (an investment exchange or a clearing organisation operating a securities clearance or settlement system in a FATF country). Under the Act, proof of deposit with a custodian takes the form of a receipt by the registered agent of the BVI company of a “notification of deposit” from a custodian5.
What if our company has bearer shares which are not in custody? Where a company incorporated prior to 1 January 2005 has issued bearer shares and those bearer shares remain in issue, it must start to take steps now to comply with the Act. If bearer shares have been issued, on or before the transition date the holders of such shares must deal with these shares by either: (i) depositing them with a custodian; or (ii) arranging for the bearer shares to be converted by the company into, or exchanged for, registered shares6.
If a company intends to retain the right to issue bearer shares a “notice of disapplication” with a declaration as to how it has dealt with its bearer shares (i.e. which of the options in the preceding paragraph have been followed) should be filed with the BVI Registrar of Companies (the “Registrar”). Unless a company files the notice with the Registrar by the transition date, it can no longer issue bearer shares and any bearer share already issued will be “disabled” meaning that the bearer share will cease to carry any of the rights and entitlements which it would otherwise carry (i.e. the right to vote or to receive dividends) and any transfer of an interest in the share shall be void7. The bearer share shall cease to be disabled when it is delivered to and held by a custodian who has agreed to hold such bearer share8.
Will our government fees change in 2010?
After the transition date, a company incorporated prior to 1 January 2005 whose powers to issue, convert and exchange for bearer shares have been removed by the deeming provision will cease to be a bearer share company and will pay the same licence fees as a non-bearer share company - US$350 per annum if it is authorised to issue 50,000 shares or less, or US$1,100 per annum if it is authorised to issue more than 50,000 shares.
The licence fee for companies incorporated prior to 1 January 2005 which can issue bearer shares and which elect to disapply the deeming provision before the transition date, will from 1 January 2010 increase to US$1,100 per annum, (or US$1,350 per annum, if the company is authorised to issue more than 50,000 shares)9.
Our company (with bearer shares in issue) is unable to contact several of our shareholders for instructions regarding their bearer shares. What steps can we consider if we fail to get instructions before the transition date?
The Act provides for the possibility of an application to the BVI courts for an extension of time, to be made by either of the company or a person interested in a bearer share. The court can decide based on the merits of the application whether or not to grant an extension which may be a time period or periods not exceeding a year10. However, a company should appreciate that a court process is involved, with related fees and time considerations - determining a shareholder’s intention before the transition date would be the easier route.