Why Hong Kong Bearer Shares Aren’t What They Used to Be

In March 2014, Hong Kong introduced the Companies Ordinance (Cap. 622), a comprehensive reform of its company law aimed at enhancing corporate governance and transparency. One key aspect of this ordinance was the prohibition of bearer shares, which required companies to either convert existing bearer shares into registered shares or cancel them entirely. This move aligned Hong Kong with international efforts to improve transparency in corporate ownership. The prohibition is specifically detailed under Part 4 of the ordinance, which addresses share capital and related matters.

Table of Contents

• What Were Bearer Shares?
• Comparison between Bearer Shares and Registered Shares
• Historical Advantages and Disadvantages of Bearer Shares
• Reasons for Abolition
• What Did the Policy Change Involve in Hong Kong?
• Modern Methods for Achieving Privacy and Flexibility in Share Ownership
• How Can Monx Help You with Setting Up a Company?

What Were Bearer Shares?

Bearer shares are a type of equity security where ownership is determined by possession of the physical stock certificate. Unlike registered shares, the issuing company does not record the owner’s information or monitor the transfer of ownership. Instead, the transfer of ownership simply requires the handover of the physical document.

• Ownership by Possession: Bearer shares are owned by whoever physically holds the share certificates, making them a form of unregistered equity security.
• Dividend Distribution: The company issuing these shares pays dividends when the physical coupons attached to the shares are presented.
• Lack of Regulation: Unlike common shares, the ownership of bearer shares is not recorded or regulated, leading to minimal control over the transfer and ownership.
• Comparison to Bearer Bonds: Bearer shares are similar to bearer bonds, where the fixed-income securities are owned by the individual holding the physical certificate rather than being registered to a specific owner.

This method of shareholding provides a high degree of anonymity and ease of transfer, as ownership changes hands through the physical exchange of the certificate itself.

Comparison between Bearer Shares and Registered Shares

Bearer shares and registered shares differ primarily in how ownership is documented and transferred. Here are the key distinctions:

Ownership Documentation

Registered Shares: The name of the shareholder is indicated on the share certificate and recorded in the company’s share register, which is kept confidentially at the company’s registered office.

Bearer Shares: The share certificate does not display the owner’s name. However, in many International Business Company (IBC) jurisdictions, the holder’s name must be recorded confidentially in the share register at the company’s registered office.

Transfer of Ownership

Registered Shares: Transferring ownership requires meeting legal criteria to show intent, such as a share sale agreement. A signed share transfer document must be submitted to the company’s registered office along with the original share certificate and due diligence/identification documents of the new shareholder.

Bearer Shares: Bearer shares are a type of share sold by a company that cannot be traced back to the owner and are not registered in any official records. The person who physically holds the share certificate is considered the owner and is entitled to receive dividends.

Historical Advantages and Disadvantages of Bearer Shares

Advantages of Bearer Shares

• Anonymity: Bearer shares offer a high level of privacy as the shareholder’s identity is not disclosed. This can be advantageous for individuals who prefer to keep their financial dealings confidential.
• Ease of Transfer: The highly transferable nature of bearer shares allows for easy buying and selling in secondary markets. This facilitates quick liquidation of holdings by shareholders.
• Flexibility: Bearer shares provide significant flexibility since they are not associated with any particular individual. They can be used as collateral for loans or as a method of payment without the need for additional formalities.

Disadvantages of Bearer Shares

The removal of bearer shares in Hong Kong under the Companies Ordinance (Cap. 622) addressed several critical issues:

• Security Issues: The anonymity of bearer shares increases risks of fraud, money laundering, and theft, making ownership tracking difficult and complicated regulatory compliance.
• Limited Communication and Control: Companies struggle to manage and communicate with anonymous shareholders, making it challenging to organise meetings and share important information.
• Tax Considerations: In Hong Kong, bearer shares could potentially lead to higher tax liabilities, as their anonymity might affect tax treatment, including withholding tax rates on dividends.

This legislative change enhanced transparency, governance, and security, aligning Hong Kong with global standards.

Reasons for Abolition

Bearer shares had long been scrutinised globally due to their potential misuse in activities like money laundering, fraud, and tax evasion. Recognising these risks, Hong Kong abolished bearer shares to align with international standards. Several key factors influenced Hong Kong’s decision:

1. International Pressure and Compliance with Global Standards: The Financial Action Task Force (FATF) had been advocating for the abolition of bearer shares worldwide due to their lack of transparency. To maintain its status as a leading financial centre, Hong Kong eliminated bearer shares in line with FATF guidelines, ensuring compliance with international transparency standards.
2. Combating Corruption and Fraud: The anonymity of bearer shares made it difficult for authorities in Hong Kong to trace ownership in cases of corruption and fraud. Abolishing bearer shares increased transparency and reduced opportunities for illicit activities, thereby strengthening corporate governance.
3. Preventing Tax Evasion and Financial Crimes: Bearer shares were often used to evade taxes and conceal assets due to their lack of transparency. By abolishing these shares, Hong Kong closed loopholes, improving tax compliance and enhancing the integrity of its financial system.
4. Enhancing Trust in Financial Markets: The abolition of bearer shares bolstered the integrity of financial markets in Hong Kong. By ensuring that all shares are registered and traceable, the move increased investor confidence and contributed to a more stable and secure financial environment.

Overall, the global push to eliminate bearer shares has been driven by the demand for increased transparency, the prevention of financial crimes, and the need to adhere to international norms. In Hong Kong, this change marked a crucial step toward improving corporate governance. By mandating the proper recording of all share ownership, Hong Kong has strengthened the integrity of its financial system and reaffirmed its commitment to global transparency standards.

What Did the Policy Change Involve in Hong Kong?

The policy change in Hong Kong under the 2014 Companies Ordinance (Cap. 622) introduced several key adjustments to enhance transparency and accountability in share ownership:

1. Prohibition of Bearer Share Warrants: The new law removed the power of companies to issue bearer share warrants, which were previously allowed under the old Companies Ordinance (Cap. 32). This change addressed concerns about the anonymity associated with bearer shares, as they enabled ownership transfers without recording the new owner’s identity in the company’s register.
2. Grandfathering Existing Warrants: Existing bearer share warrants issued before the new law were grandfathered, meaning they could continue to exist. However, upon surrender, the bearer’s name had to be registered in the company’s official register of members, gradually eliminating anonymous ownership.
3. Preservation of Records: The law required that records related to existing bearer warrants be preserved until they were surrendered. This ensured a complete and accurate record of ownership during the transition period.

Modern Methods for Achieving Privacy and Flexibility in Share Ownership

In Hong Kong, modern methods for achieving privacy and flexibility in share ownership involve several legal frameworks and mechanisms. The Companies (Amendment) Ordinance 2018 requires companies to maintain a “significant controllers register,” which contains information about individuals with significant control over the company. This register is not publicly accessible, ensuring privacy while complying with regulatory requirements. Only specific authorities and law enforcement agencies can access this information, balancing transparency with privacy. This amendment to the Companies Ordinance (Cap. 622) enhances transparency of corporate beneficial ownership, fulfilling Hong Kong’s international obligations and ensuring compliance with global transparency standards.

How Can Monx Help You with Setting Up a Company?

To ensure your company in Hong Kong complies with the latest regulations, contact Monx today! Our team of experts is ready to assist you in setting up a compliant and efficient corporate structure that meets your unique needs. Reach out today to us at hello@monx.team to learn more about how we can support your business.