Bearer shares (also bearer instruments) are physical shares which are owned by whomever has them (bears them). This is unlike registered shares, which although they may be physical, are registered to a person (legal or natural) in a registry. The exact maintenance procedure around the share registry varies between company legal forms and jurisdictions.

Bearer shares can be traded very quickly and easily, by simply handing over the shares to the new share holder. This means companies with bearer shares can change owners several times without anyone finding out.

Risks

There are two perspectives to this. The first is the risk imposed by bearer shares to the share holder.

If you form a company that issued its entire (or even just a majority) of its shares as bearer shares, if you lose the shares you are no longer the owner of the company. The process of restoring a company that has lost its bearer shares is typically a long and difficult process – if it’s even possible at all.

Similarly, if someone steals your bearer shares, they are the new legal owner of the company until such time it can be proven that the shares were stolen, which may require just a police report in some cases or a court sentence in other cases. During that time, the new (illegitimate) share holder can make enormous damage to the company.

The other side of the coin is the risk bearer shares pose to banks. Under international standards on compliance, banks are required to be aware of the UBO (ultimate beneficial owner) of each account. A UBO is normally a person who has a controlling interest in a company and/or owns at least 20% of a company’s shares. A company that has issued bearer shares can change UBO several times in a single day, without the bank finding out.

This causes a huge concern for money laundering and other criminal activity through bearer shares companies.

These days, it’s virtually impossible for a new bearer shares company to open a bank account. It’s getting harder and harder even for existing companies, with banks putting increased pressure due diligence, or themselves being put under pressure.

Jurisdictions that issue bearer shares have been subject to enormous criticism from the international community. The problems arising from bearer shares go beyond just tax evasion.

Response to Criticism

The response to the criticism has been either to abolish bearer shares and instead require companies to switch to registered shares, or do what’s called immobilization of bearer shares.

Most jurisdictions that issued mobile bearer shares have since switched to registered shares. A handful, such as the infamous Czech Republic, have opted for recommending that companies switch to registered shares but permitting immobilized bearer shares.

Immobilized bearer shares are still technically bearer shares, but they must be with a registered custodian. While the shares are physically with the custodian, the custodian is not and cannot be a share holder. Instead, the custodian acts as a trustee and keeps the bearer shares safe. The true owner is registered by the custodian, which in a way makes them registered shares.

When opening a bank account for a company with immobilized shares, the bank can either rely on the custodian to perform due diligence and keep updated records of the shareholder and/or require authorization to inquire with the custodian about the current owner(s) of the company.

Bearer Shares Jurisdictions

Take this list with a grain of salt. It’s possible that laws have changed or are currently undergoing change. The world is moving towards complete immobilization of bearer shares, if allowed at all.

Note that just because, for example, Switzerland permits (mobile) bearer shares, its banks are not automatically open to offshore bearer shares companies.