Instead of abolishing bearer shares as already done or planed to be done by some neighboring countries, the Luxembourg lawmaker, after leading an in-depth reflection of many years on the subject and as a result of the introduction of the dematerialised securities regime in 2013, has chosen to retain the possibility, for Luxembourg commercial companies, to issue bearer shares provided to their immobilisation and has thus begun to reform the legal system attached to the bearer shares.
Within such context, Luxembourg has adopted the law of 28 July 2014 (“the Law”) concerning the immobilisation of the bearer shares and the keeping of the register of shareholders and the register of bearer shares and amending:
- the law of 10 August 1915 on commercial companies (the “LSC”); and
- the amended law of 5 August 2005 on financial collateral arrangements (the “Financial Collateral Law”).
By initiating this reform, the Luxembourg legislator sought to make the Luxembourg company law in line with the requirements formulated as from 2010 by the international organisations, including the Financial Action Task Force (the "FATF") and the Global Forum on the transparency and the exchange of information for tax purposes, in the field of the identification of holders of shares and bearer shares (the "Global Forum") to ensure a greater transparency in the ownership of commercial companies.
The FATF had left the choice to the States between the outright abolition of bearer shares, approach adopted by some states, and the dematerialisation of securities or the immobilisation of securities
beside a qualified depositary. Consistent in this to its weighting tradition, Luxembourg chose the middle path for the immobilisation of the bearer shares.
The Law introduced the obligation for holders of bearer shares to immobilise them. Materially, this immobilisation is reflected in the requirement for their holders to deposit such securities, when localisable, with a qualified professional based in Luxembourg, which becomes the depositary (dépositaire) of these securities, including the obligation for the latter to ensure the keeping of a register and its update.
In order to strengthen the incentive for holders of securities to deposit their securities with the depositary within the time allowed, the legislator has provided a mechanism to suspend the rights attached to bearer shares which may therefore be exercised only in case of deposit beside the depositary. The legislator has positioned this new actor halfway between shareholders, which guarantees the confidentiality of the identity, and the issuing company of which he is the agent because he is appointed by the management body.
“BY INITIATING THIS REFORM, THE LUXEMBOURG LEGISLATOR SOUGHT TO MAKE THE LUXEMBOURG COMPANY LAW IN LINE WITH THE REQUIREMENTS FORMULATED AS FROM 2010 BY THE INTERNATIONAL ORGANISATIONS.”
© 2015 WILDGEN | Reform of the Bearer Shares Regime in Luxembourg
THE OBLIGATION OF IMMOBILISATION
The targeted securities are equity securities and not debt securities. The Law removed the possibility of immobilised bearer bonds by the amendment of Article 84 of the LSC.
Bearer shares in stock companies
The relevant securities are those issued by stock companies (ociétés de capitaux). The Law specifically targets bearer shares issued by limited companies (SA) (including the bearer shares in limited companies admitted to trading on a regulated market) or those issued by a partnership limited by shares (SCA). While the legislator did not clearly identified them, it seems self-evident that European companies and investment companies (SICAF, SICAV, SICAR and SIF) are also concerned, since they were constituted in the form of a limited company, placing thus
themselves under the rules applicable to limited companies.
Bearer shares of mutual fund management companies
The Law also makes the immobilisation duty applicable to bearer shares of management companies of undertakings for collective investment constituted as mutual funds management companies, which are characterised as an undivided mass devoid of legal personality. The legislator went beyond the FATF recommendations that were aimed to commercial companies and entities with legal personality.
The immobilisation duty requires issuers to choose a depositary fulfilling several criteria and who will be responsible for keeping a register containing the identity of the holders of bearer shares. This duty tolls the bell of the transfer of bearer shares by handling of the physical security.
Choice of a depositary
Under the new Article 42 (1) and (2) LSC, bearer shares must be deposited with a depositary appointed by the Board of Directors or, if necessary, the management of the issuing company from a limited list of professionals subject to the obligations arising from legislation concerning the fight against money laundering and terrorist financing, namely:
- credit institutions,
- asset managers,
- the distributors of UCI units (distributeurs de parts d’OPC),
- financial sector professionals (PSF) as Family Offices, domiciliary companies, professionals performing services for incorporation or management of companies, register agents or as professional depositary of financial instruments,
- the lawyers registered in List I and IV,
- the notaries public,
- the auditors and accredited auditors, and
- the accountants.
The professionals listed above are, in addition to be subject to criminal and civil responsibility, are also supervised by the Financial Sector Supervisory Commission (CSSF) or, if necessary, by a professional association which, inter alia, control their depositary activity.
The Law requires depositaries being professionals established in the Grand-Duchy of Luxembourg.
To avoid any conflict of interest, the Law provides that the depositary may not accumulate the depositary function with that of a shareholder of the issuing company. The detention of a single share prevents the shareholder to act as depositary.
Establishment of a register
With the introduction of the Law, the rights attached to the bearer shares may only be exercised in case of deposit of the bearer shares with the depositary and in case of inclusion in the register of all the particulars relating thereto.
The depositary holding bearer shares on behalf of the shareholder who still owns these shares shall keep a register of such shares in Luxembourg, which contains information concerning the shareholders, i.e. their identity and the indication of the number of shares or coupons they owns, the date of the deposit of the shares, of their transfer or of their possible conversion into registered shares.
Since the introduction of the Law, the register determines the property as is the case for registered shares and property is no longer determined by the mere possession of physical security.
One of the characteristic elements of the bearer share in the previous regime was precisely its anonymity. To still maintain a degree of anonymity, and therefore not to create a registered share bis, the draft Law specifies that contrary to registered shares which are held at the registered office of the issuer, the register of bearer shares is held beside a third party depositary.
End of the transfer by handing of the bearer shares
As the register determines the property, the transfer of bearer shares is no more carried by handling of the physical security but by a transfer statement recorded on the same register by the depositary. This procedure makes the assignment enforceable against third parties.
In order to ensure a legal certainty and to ensure the effectiveness of the new bearer shares system, the Luxembourg legislator has authorised a transitional period in order to allow the companies referred above to comply with the new legislation. Thus, the management body of the issuing company has the obligation to appoint a depositary within 6 months as from 18 August 2014. In practice this means that the management body of the issuing company shall appoint the depositary before 18 February 2015.
In parallel, bearer shares that were issued before the entry into force of the Law must be immobilised within a maximum period of 18 months. In practice this means that holders of shares or bearer shares must deposit their shares before 18 February 2016.
However, this transitional period has been framed by a system of sanctions both civil and criminal and the offender, either the board of directors for failing to appoint a depositary or to have accepted the exercise of rights attached to shares suspended yet, or shareholders who have not immobilised their shares on time, will be themselves heavily repressed.
After February 18, 2015, application of criminal sanctions with regard to the management body
The Law introduces a new article 171-2 in the LSC providing a fine ranging from 5,000 Euros to 125,000 Euros against managers or directors who, knowingly, will not have held a nominative shares
register in accordance with Article 39 of the LSC or who have not appointed a depositary or deposited the shares and bearer shares beside the said depositary pursuant to the new Article 42 of the LSC.
However, as from February 18, 2015, sanctions will be applied automatically and will rapidly multiply
Given the impossibility of reaching the holders of bearer shares remaining anonymous by not being reported in time, the Law has provided for blocking mechanisms with automatic character that will focus directly to the securities themselves and directly affecting one of the fundamental attributes of shareholders is their right to vote their shares. This sanction mechanism is similar in all respects to sanctions which are applicable in case of non-payment of capital of Article 67 paragraph 7 of the LSC.
Automatic suspension of voting rights of the bearer shares not yet immobilised and its corollaries
Voting rights attached to bearer shares that have not been immobilised within the period of 6 months from the entry into force of the Law are automatically suspended at the end of that period until their immobilisation. This period of 6 months is extremely short, but is necessary to remedy the shortcomings which are considered very serious by the Global Forum and to ensure compliance of the law with the international standard.
Sanctions for bearer shares not immobilised on time
The bearer shares not immobilised within the 18 months period are required to be canceled and it must be carried out a reduction of the subscribed capital by a corresponding amount. The funds corresponding to the amount of the reduction of capital are deposited beside the Caisse des
Consignations until a beneficiary solicits restitution. If at the expiry of a period of 30 years, no beneficiary has requested to retrieve the funds, they will be deemed to belong to the state.
Bearer shares issued after August 18, 2014
For completeness, the shares or bearer shares issued after the entry into force of the Law does not benefit from the above transition plan to the extent. They have to comply from their creation to the new capital requirements.
- Date of entry into force: 18 August 2014
- Last date to appoint a depositary: 18 February 2015
- Compulsory suspension of voting rights failing deposit of the bearer shares: 18 February 2015
- Last date for deposit of bearer shares: 18 February 2016
- Start of cancellation procedure: 18 February 2016