Luxembourg enacted a new law on the “immobilisation” of bearer shares and units (Law) on 28 July 2014. The Law entered into force on 18 August 2014 (Effective Date) – thereafter, units and shares issued or to be issued in bearer form by a Luxembourg entity must be deposited with a professional depositary appointed by the board of directors. References hereafter to bearer shares will be deemed to include bearer units.
The Law’s aim is to adapt the Luxembourg legal provisions to the requirements of the Financial Action Task Force (FATF) and the Global Forum on Transparency and Exchange of Information for Tax Purposes, as to the identification of holders of bearer shares. Indeed, the anonymity of the holders of bearer shares has raised difficulties with respect to the fight against illegal behaviours, as well as taxation.
Bearer Shares in Luxembourg
According to the Luxembourg law dated 10 August 1915 on commercial companies, as amended, shares issued by Luxembourg public companies limited by shares (sociétés anonymes or SAs) or Luxembourg corporate partnerships limited by shares (sociétés en commandite par actions or SCAs) are in registered, bearer1 or dematerialised2 form. Under the new regime established by the Law, these types of Luxembourg companies continue to be authorised to issue shares in bearer form; however, the ownership, transfer and exercise of the rights attached to such shares will be subject to new rules.
The Law applies to bearer shares issued by all types of SAs and SCAs, including regulated investment funds (i.e., investment companies with variable capital or SICAVs, investment companies with fixed capital or SICAFs, and investment companies in risk capital or SICARs), as well as to bearer units issued by contractual co-ownership schemes (fonds commun de placement or FCPs). The Law also applies to bearer shares admitted to trading on a regulated market.
Deposit and Immobilisation of Bearer Shares
According to the Law, bearer shares must be deposited with a depositary appointed by the board of directors. The depositary: cannot be a shareholder of the issuing company; must be established in Luxembourg; and must be one of the professionals listed in the Law as authorised to perform such activity (including, among other professionals, credit institutions, portfolio managers, family offices, domiciliation agents, registrars, lawyers, notaries and auditors).
An extract of the board resolution appointing the depositary must be filed with the Luxembourg trade register and published in the Luxembourg official gazette.
The depositary must maintain in Luxembourg a register of the bearer shares, which includes: (i) the details of each holder of bearer shares, with an indication of the number of its shares; (ii) the date on which the shares were deposited; and (iii) any transfer of these shares or their conversion into registered shares.
The rights attached to bearer shares can be exercised only if they are deposited with the depositary, and proper entries are made in the register of bearer shares.
Ownership and Transfer of Bearer Shares
The depositary holds the bearer shares on behalf of the shareholders (who remain the owners of the shares) and is not authorised to transfer those shares, except to the company (in cases of conversion of the bearer shares into registered shares, share buy-back or capital reduction) or to a successor depositary.
As a change to the previous regime – where the transfer of bearer shares was made by the mere delivery of these shares to the transferee – the Law now provides that the ownership of bearer shares is as set forth in the register of bearer shares, and transfers of bearer shares must be recorded by the depositary in such register.
The Luxembourg law dated 5 August 2005 on financial collateral arrangements has also been amended, to provide that the dispossession (dépossession) necessary for the granting of a pledge over bearer shares is properly implemented by a registration of the pledge in the register of bearer shares.
Liability and Sanctions
The directors of a company are subject to criminal fines (up to EUR 125,000) in case they knowingly fail to appoint a depositary, or deposit bearer shares with the depositary, or if they recognise rights to bearer shares that were not deposited with the depositary or were not properly recorded in the register of bearer shares. The Luxembourg legislator also took the opportunity to provide for similar criminal sanctions for directors who fail to maintain a register of registered shares.
The Law further provides for criminal fines (up to EUR 25,000) for depositaries (or the members of their management board in case the depositary is a legal entity) that knowingly violate their legal obligations as to the maintenance of the bearer shares register and the holding and transfer of the bearer shares. The Law also provides that the civil liability of depositaries for such legal obligations is similar to the civil liability of the directors of a Luxembourg company.
Important Dates – Transitional Provisions
The Law applies not only to bearer shares issued after the Effective Date, but also to bearer shares already in existence and circulation.
Luxembourg companies that issued bearer shares before the Effective Date must appoint a depositary within six months thereafter (i.e., by 17 February 2015).
Bearer shares issued by companies before the Effective Date must be deposited with the depositary within 18 months thereafter (i.e., by 17 February 2016), failing which such shares must be cancelled through a capital reduction.
Voting rights attached to bearer shares not deposited with the depositary within six months of the Effective Date (i.e., by 17 February 2015) must be suspended until such time as these shares are deposited with the depositary – the shares are not taken into account for quorum and majority purposes, and their holders may not be admitted to general meetings. Any distribution with respect to such shares must be postponed until such time as the shares have been deposited with the depositary, subject to prescription, and without a right to interest on the deferred amounts.
The Law is a good example of the maintenance by the Luxembourg legislator of a flexible regime, while eliminating features that have been problematic. Practical problems that could initially arise in relation to the implementation of the Law will, in principle, be resolved in the near future.