Senior Company Secretarial Advisor
The Small Business, Enterprise and Employment Act 2015 (the Act) received Royal Assent on 26 March 2015. Whilst the implementation of Parts 7 and 8 of the Act (being those parts of the Act that deal with the corporate aspects and changes to the Companies Act 2006) is to be phased in over the next 12 months there are a number of issues companies should consider now so as to prepare themselves for the changes ahead.
In this second in our series of SBEEA Alerts on the corporate aspects (which broadly follow the order of their implementation) we look at the abolition of bearer shares. These are the first changes to come into effect and will do so from 26 May 2015.
To access a copy of the Act click here.
To read the Government's provisional implementation timetable click here.
You can read the AG overview of the implementation timetable here
What is the reason for the change?
Bearer shares are unregistered shares that are owned by whoever physically holds the share warrant. As no one is entered in the company's register of members as the owner of such shares, it allows them to be held anonymously and be easily transferable, thereby facilitating the concealment of, for example, a person exercising significant control. As part of the Government's Trust and Transparency reforms, which aim to remove legislation which inadvertently assists illicit activity (such as tax evasion or money laundering) the Act provides that:
- companies will no longer be able to create new bearer shares from 26 May 2015; and
- any bearer shares already in existence will need to be surrendered by the bearer shareholder and exchanged for registered shares and, if not exchanged, then cancelled within a relatively short, nine month window, the timetable for which starts on 26 May 2015.
Whilst this is not likely to impact on many companies, given that the issuing of bearer shares has not been commonplace for a number of years, for those that have issued bearer shares in the past, there will be some work to do.
Below are some frequently asked questions and action points for companies that have issued bearer shares to enable them to prepare themselves for these changes:
What are the key changes to the Companies Act 2006 relating to bearer share warrants?
With effect from 26 May 2015, the Companies Act 2006 will be amended[1] to prohibit the creation of bearer shares, irrespective of the provisions of a company's articles of association. The Act[2] sets out the transitional arrangements for the conversion of surrendered existing bearer shares into registered shares or for their cancellation if not surrendered.
My company's articles contain a provision that permits the issue of bearer shares – do I need to amend them?
A company is not required to amend its articles to remove such a provision, but any issue of bearer shares, even if the articles permit it, will not be valid from 26 May 2015. However, should a company wish to amend its articles to remove any inconsistencies with the Act, the Act[3] allows it to do so by way of an ordinary resolution rather than a special resolution and without having to comply with any entrenchment provisions. Articles amended in this way still need to be filed at Companies House.
What must a company do if it has issued bearer share warrants in the past?
Below is a short summary of the process involved - the detail is set out in Schedule 4 of the Act:
Voluntary surrender for cancellation and conversion
Bearer shareholders will have a nine month surrender period, running from 26 May 2015, (the “surrender period”) in which to surrender their bearer shares voluntarily for conversion into registered shares and have their name entered as a member in the register of members.
First notice from the company
The company must give notice to their bearer shareholders informing them of their rights to surrender and the consequences of not doing so. Up to two notices may need to be given (within the first month of the surrender period and again before the end of the eighth month if there are any outstanding bearer shares remaining – see below for more details).
Companies with bearer shares will need to move quickly; they have one month from 26 May 2015, to give the first notice to the bearer of a share warrant informing them of:
- their right to surrender;
- the consequences of not exercising that right before the end of the period of seven months from 26 May 2015 (i.e. by 26 December 2015);
- the fact that the right to surrender will cease to be exercisable at the end of the nine month surrender period (i.e. by 26 February 2016); and
- the consequences of not exercising the right to surrender before the end of that surrender period.
Companies with bearer shares should start to prepare those notices now. Notices must be:
- published in the Gazette;
- sent to the bearer in the same way (if any) that the company has normally communicated with that person regarding the shares specified in the warrant; and
- stated (prominently) on the company’s website.
Failure to give notice will constitute an offence by the company's officers.
Provision of share certificates for surrendered bearer shares
A company must, as soon as reasonably practicable and in any event within two months of the date of surrender, provide the bearer shareholder with a share certificate for the relevant shares. Failure to do so is an offence by the officers of the company.
Failure to surrender in first seven months of the surrender period
To encourage bearer shareholders to surrender their bearer shares, all rights attached to the bearer shares will be suspended automatically from month seven of the nine month surrender period. This will include voting, dividend rights and other rights of distribution. In addition, any transfer or agreement to transfer the share warrants made after this seven month period will be void (thereby making the share warrants non-transferable). The suspension of rights will cease to have effect if the bearer shares are later surrendered before the end of the surrender period.
The company must pay any dividends or other distributions attaching to those bearer shares into a separate, interest bearing, bank account (details of which are set out in Schedule 4 of the Act).
Second notice from the company of the right to surrender
Companies must give a second notice of right to surrender before the end of the period of eight months from 26 May 2015 (i.e. before 26 January 2016), should any bearer shares remain in issue. The notice must inform the bearer shareholder of:
- their right to surrender;
- the consequences of not having exercised that right before the end of the period of seven months (see above);
- the fact that the right to surrender will cease at the end of the nine month surrender period (i.e. by 26 February 2016); and
- the consequences of not exercising the right of surrender before the end of that surrender period (see below regarding cancellation orders).
Notices must be:
- published in the Gazette;
- sent to the bearer in the same way (if any) that the company has normally communicated with that person regarding the shares specified in the warrant; and
- stated (prominently) on the company’s website.
Failure to give notice will constitute an offence by the company's officers.
Application to court to cancel remaining bearer shares
If any bearer shares have not been surrendered by the end of the nine month surrender period, the company must apply to court within three months of the day after the end of the surrender period, for a “cancellation order” cancelling the share warrant and the shares specified in it.
The company needs to notify the bearer shareholder of this application (enclosing a copy of the application) within a short set time limit and give immediate notice of the application to the Registrar of Companies. Failure to make the application and provide the requisite notice will constitute an offence by the company's officers (and the company, in the case of notice to the Registrar).
Making a cancellation order
If the court is satisfied that a company has complied with the notice requirements with respect to the bearer shareholders during the surrender period, it must make a cancellation order. If it is not satisfied, it will make a suspended cancellation order. Where a suspended cancellation order is made, the company must notify the bearer shareholder, who will then have a two month grace period in which to surrender the relevant bearer shares. As with the other notices, there is various information that this notice must include.
What happens once a cancellation order has been made?
When shares are cancelled by a cancellation order or a suspended cancellation order, the company must provide a number of documents (including a copy of the order and a statement of capital) to the Registrar within 15 days of the cancellation date. Failure to do so is an offence by the company and every officer in default.
If the company is a public company, and cancellation results in a reduction in share capital below the authorised minimum, the company must be re-registered as a private company before the cancellation is registered unless the court directs otherwise.
Within 14 days of the cancellation of the bearer shares, the company must pay into court the nominal value of the cancelled shares and any premium paid on them, together with the value of any dividends accrued on the shares since the rights attaching to them were suspended. A former bearer shareholder may apply to the court to claim any sum paid into court in respect of their shares. Such an application may be made between six months and three years after the bearer shares have been cancelled, but the court will only make such a payment if there were exceptional circumstances preventing the holder of the bearer share warrant from making a surrender during the surrender period. After this three year period, any sums remaining in court will be paid into what is known as the 'Consolidated Fund' (being a fund established by the Treasury).
Can a company apply to be struck off the register if there are bearer shares still in issue?
A company with issued bearer share warrants will be unable to make an application for striking off.
Checklist
- Review group structures and check register of members to ascertain the existence of any bearer shares and identify to whom these were issued.
- If bearer shares have been issued, start to prepare the first notice to be sent to the bearer shareholders as this will need to be given, in its various forms, before 26 June 2015.
- Diarise the various dates set out above to ensure compliance with the statutory timetable.
If your company has issued any bearer shares and needs assistance with the procedures set out in the Act to convert or cancel any that are not surrendered, please get in touch. Please note that this Alert is not a substitute for reviewing, in detail, the relevant provisions of the Act and the Companies Act 2006 as amended.
[1] Section 84 of the Act inserts a new sub-section 779(4) into the Companies Act 2006
[2] Schedule 4
[3] Section 85 of the Act