Financiers and their advisors should be aware that from 31 December 2009, bearer shares in certain companies incorporated in the British Virgin Islands (BVI) will be ‘disabled’ for any period that they are held by a person other than an ‘authorised custodian’ or a ‘recognised custodian’. Where bearer shares are disabled, the shares do not carry any entitlement to vote, to a distribution or to a share in the assets of the company on its winding up or dissolution. Financiers who have taken security over bearer shares should consider what impact this will have on their security, any potential enforcement of the security and sale of the secured bearer shares, as well as the representations and covenants contained in the finance documents related to such bearer shares. Holders of security over bearer shares will want to consider whether they should arrange for the bearer shares to be deposited with a custodian, or exchange these shares for registered shares, and in any case take appropriate action prior to 31 December 2009.
The Legal Position
The BVI Business Companies Act, 2004 of the British Virgin Islands (the ‘Act’) provides that bearer shares that were issued by certain BVI companies prior to 1 January 2005 must, on or before 31 December 2009 (the ‘Transition Date’), be either (a) deposited with an ‘authorised’ or ‘recognised’ custodian (the meanings of which will be defined further below) who has agreed to hold the shares, or (b) converted to or exchanged for registered shares. A ‘bearer share’ for the purposes of the Act means a share represented by a certificate which states that the bearer of the certificate is the owner of the share and includes a share warrant to bearer.
If bearer shares are not held by a custodian, then from the Transition Date the bearer shares will be ‘disabled’ for the period they are not held by a custodian, which means that the bearer shares will not carry any of the entitlements which they would otherwise carry, and any transfer or purported transfer of an interest in the bearer shares will be void and of no effect. Under the Act, ‘entitlement’ includes without limitation any entitlement to vote, an entitlement to a distribution and an entitlement to share in the assets of the company on its winding up. The bearer shares may, however, still be transferred or delivered to an authorised or recognised custodian. Further, the bearer shares may still be transferred to the company itself where they are to be converted or exchanged for registered shares, redeemed or purchased by the company, or forfeited by the company (provided that the company does not hold the bearer share for or on behalf of any other person).
In addition, the memorandum of certain BVI companies that have issued bearer shares prior to 1 January 2005 will be deemed to be amended from the Transition Date to state that the company is not authorised to issue bearer shares, convert registered shares to bearer shares or exchange registered shares for bearer shares. To avoid this situation the company can file a notice in the prescribed form and accompanying declaration to the effect that any bearer shares in issue have been deposited with a custodian, but again, this must be done before the Transition Date.
The fact that the bearer shares have been disabled has implications for persons that have taken security over the bearer shares. For example, financiers in secured lending transactions that have taken security over shares would generally expect to exercise voting rights in respect of such shares following an enforcement event. However, if the voting rights of bearer shares have been disabled then they would not be able to do this. Similarly, on an enforcement of security over shares financiers would want to be able to procure the sale of the shares to a third party. Again, if bearer shares have been disabled then any transfer of an interest in the bearer shares would be void and not be recognised. Also, in the context of representations given in respect of secured shares, often the security provider will represent (on a repeating basis) that the secured shares are duly authorised, freely transferable, and that the voting and dividend rights are solely as set out in the constitutional documents . Such provisions would clearly need to be re-examined in the light of bearer shares following the Transition Date.
Further, after the Transition Date financiers should be aware that where a company has issued bearer shares that have not been deposited with a custodian in accordance with the Act, the Commission may apply to the High Court for the appointment of a liquidator of the company under the BVI Insolvency Act. In addition, if bearer shares are not deposited with a custodian who has agreed to hold the shares prior to the Transition Date, the company may redeem the shares, notwithstanding any provision to the contrary in its memorandum or articles of association or any shareholders agreement.
In view of the foregoing, financiers with security over bearer shares should consider whether to deposit the bearer shares with an authorised or recognised custodian or exchange them for registered shares, and whether to procure the company to file a notice to disapply the deemed amendment to the memorandum discussed above. We would note that while the BVI High Court may, on the application of the company or of a person interested in a bearer share, extend the 31 December 2009 deadline by up to one year, this would be at the High Court's discretion. We suggest that financiers should not rely on being able to obtain such an extension.
Authorised and Recognised Custodians
An ‘authorised custodian’ means a person approved by the Financial Services Commission established under the Financial Services Commission Act, 2001 of the British Virgin Islands (the ‘Commission’), while a ‘recognised custodian’ means a person recognised by the Commission as a custodian under the Financial Services Commission Act, 2001.
The Commission may approve a person as an authorised custodian of bearer shares if it is satisfied that the person is a fit and proper person to act as such (and in determining whether a person incorporated outside the BVI is fit and proper this would involve a consideration of the prudential regulation exercised over it and the anti-money laundering obligations imposed on it outside the BVI), has systems and procedures in place for the secure custody or bearer shares and is otherwise able to comply with the obligations imposed on it by law.
The Commission may by order recognise a person as a recognised custodian of bearer shares if it is satisfied that the person concerned is either an investment exchange or clearing organisation operating a securities clearance or settlement system and carries on business in a jurisdiction that is a member of the Financial Action Task Force on money laundering. Walkers can assist in putting clients in touch with either authorised or recognised custodians in the BVI. Walkers can also assist with the process of obtaining the relevant approval or recognition for clients who are interested in exploring this.
Delivery to Custodians
Where bearer shares in a company are delivered to or deposited with an authorised custodian, a notice must be provided to the custodian in the approved form. The notice must state the full name of the beneficial owner of the bearer shares, as well as the full name of any other person having an interest in the bearer shares (whether by virtue of a charge on the bearer shares or otherwise) or containing a statement that no other person has an interest in the bearer shares. If such an approved form notice is not provided, the authorised custodian will not accept the bearer shares.
Similarly, where bearer shares are delivered to or deposited with a recognised custodian, the registered agent of the company must be provided with proof (within 14 days) in the approved form of the delivery or deposit of the bearer shares and a notice in the approved form containing the same information as is provided to the authorised custodian as noted above. Walkers can assist with the process of preparing the approved form documents and lodging these with a custodian in the BVI.
Convert or Exchange for Registered Shares
If the relevant parties do not want to deposit the relevant bearer shares with a custodian, another option would be to convert or exchange the bearer shares for registered shares, or request that they be redeemed or otherwise acquired by the company. Walkers can assist with preparing the necessary documentation and advising on the process of conversion or redemption as required.
While the taking of security over bearer shares by financiers is relatively uncommon, it is important for financiers to take stock well before 31 December 2009 of their existing security packages to see to what extent this type of security features in their financing arrangements. To the extent that they fail to take appropriate action, they may find that they hold security over shares which have been disabled with the consequence that they are not readily transferable and the rights pertaining to them are not exercisable until further action has been taken. Walkers would be happy to advise on the issues for financiers who hold security over bearer shares and the alternative ways forward.
Ashley Davies Ashley Davies is an associate in Walkers' Hong Kong office. He advises on Cayman Islands and BVI law in relation to real estate finance, construction finance, structured finance, acquisition finance, syndicated loans, private equity and general corporate transactions.
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