The end of the road for bearer shares in Switzerland?

Last Wednesday, the Swiss Federal Council opened a consultation (lasting until 24 April 2018) into discontinuing bearer shares in Swiss companies limited by shares not quoted on the stock exchange. The draft bill will be debated by parliament in autumn 2018. If it becomes law, existing bearer shares will be converted automatically into registered shares. Companies will be required to adapt their articles of association within two years of the new law being passed.

Companies will also be required to keep a register of beneficial owners of shares (family name, given name and address). Failure on the part of a shareholder to report information and failure on the part of a company to keep a register will become criminal offences (new). A shareholder, creditor or registrar may also bring a case before a civil judge to have this failing in company procedures rectified.

Scrapping bearer shares would represent a minor revolution for Switzerland. It would bring our country into line with other financial centres such as the United Kingdom, Singapore, Hong Kong and the USA. However, it is important to understand that this change is not a Swiss initiative. It is a result of pressure from the Global Forum on Transparency and Exchange of Information for Tax Purposes, which seems to assume that all human beings have criminal intentions. Switzerland’s aim is to adapt its law to ensure the ticks go in the right boxes (and sanctions are avoided) during its next Peer Review, due to begin in the second half of 2018.

From a legal point of view, it is true that new provisions introduced by the FATF law on 1 July 2015 have brought bearer shares and registered shares very close together, to the point that the two securities have become almost identical in terms of anonymity and transfers. Consequently, the formal abolition of bearer shares as outlined in the project would not fundamentally alter shareholders’ rights and obligations.

Under the current law, anyone who buys bearer shares is required to inform the company within one month. They are required to provide their given name and family name (for an individual) or business name (for a legal entity) together with their address.

If, following the acquisition, one person or entity holds 25% of the share capital or voting rights, the identity of the beneficial owner must also be disclosed.

The buyer must produce an official piece of photographic ID (passport, identity card or driving licence) or a copy of a Commercial Register entry. Proof of share purchase is also required.

If anything is missing, the shareholder’s membership rights (e.g. voting rights) and their economic rights (payment of dividends) in relation to the shares are suspended until all the obligations have been fulfilled.

Under the new draft legislation, holders of bearer shares who have not informed the company of their identity as outlined above are required to rectify the situation within 18 months of the law entering into force so that their shares can be converted. If they have not communicated their details within this period of time, their rights to the bearer shares will cease definitively and the shares will be cancelled. The board of directors will then issue the company’s own shares to replace them. These will be paid up using contributions gained by the company as a result of the cancellation. The company is then free to use the replacement shares as it sees fit, by selling them, distributing them to shareholders, cancelling them and reducing the share capital, keeping them, etc.

In addition, limited companies (and also sole proprietorships, partnerships, branches and other legal entities) will be required to hold a bank account in Switzerland if they made sales of CHF 100,000 or more during the previous financial year. The idea of this is to bring companies within the scope of Swiss legislation against money laundering, because bankers are required to check the identity of contracting partners and beneficial owners.

Furthermore, as well as the authorities, financial intermediaries will be permitted to consult company registers (register of shareholders and beneficial owners) for the purposes of fulfilling their legal obligations. The idea of creating a central electronic register of owners of registered shares has been rejected at this time.

Finally, holders of registered powers of attorney representing Swiss branches of companies based abroad will be required to have access to information regarding shareholders of the main company abroad and the beneficial owners of the shares, and to be able to communicate this information to financial intermediaries and the authorities. This obligation is a simple legal prescription, with no sanctions attached. However, financial intermediaries will no doubt refuse to enter into a business relationship with a company that is unable to provide the information.

As we have outlined above, the consequences of this modification on Swiss company law will be minor. The impact is above all psychological, as the right to anonymity has existed since 1936. However, it is regrettable to see supranational bodies once again dictating changes in Swiss law. In addition, there is no guarantee that all these measures will work. A determined criminal will happily create a false document and use a nominee company to hold shares. The threat of a fine will prove little deterrent.

In Switzerland, a company limited by shares is known as a société “anonyme”. Perhaps the time has come for a new name…

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