The End of Anonymous Share Ownership?
Federal and provincial finance ministers, in a release dated December 11, 2017, announced an "Agreement To Strengthen Beneficial Ownership Transparency."
Prominent among the agreement's terms was a commitment to pursue
legislative amendments "to eliminate the use of bearer shares and bearer
share warrants or options and to replace existing ones with registered
instruments"; the promised legislation is to come into force by July 1,
2019. The strength of this commitment is uncertain, since it was made by
finance ministers rather than their bosses (the first ministers), and
New Brunswick, in particular, issued a press release noting that "[t]he business community and other stakeholders will be engaged in this process."
For bearer shares, the individual who is entitled to the corporation's
underlying assets is the individual who has physical possession of the
share certificates; names of the owners are not recorded in the
company's share register or on the certificates. Bearer shares allow for
complete anonymity of ownership and transfer, and they are therefore
vulnerable to misuse. The 2016 Panama papers leak of 11.5 million
documents from the law firm Mossack Fonseca revealed that high net worth
taxpayers (and others) take advantage of bearer shares to hide and move
The finance ministers' commitment follows the OECD's recommendation that
countries either eliminate bearer shares or introduce appropriate
mechanisms that allow the owners of such shares to be identified
(perhaps through a custodial arrangement with a recognized custodian:
see the OECD policy on exchange of information on request). The OECD's 2016 tax transparency progress report
noted that about 30 jurisdictions had eliminated or immobilized bearer
shares since the OECD's initiative in this area began. The report also
noted that the number of companies formed by Mossack Fonseca allowing
bearer shares had fallen to almost zero in 2015. Despite this clear
shift away from the use of bearer shares, Canada has been reluctant to
eliminate them. It is surprising that after all these years of OECD
pressure, Canadian federal and provincial corporate statutes still allow
the issuance of bearer shares.
Last February, Bill C-25 was introduced, amending the Canada Business
Corporations Act and adding sections to prohibit the issuance of new
bearer shares. Interestingly, the Canadian Bar Association advised against the prohibition,
stating that it would create inconsistencies between Canadian
jurisdictions and would make federal incorporation less appealing than
incorporation in provincial jurisdictions that allowed the use of bearer
shares. However, the OECD's 2017 Global Forum on Transparency and Exchange of Information for Tax Purposes
stated that most provinces and territories already regulate the use of
bearer shares. Such regulation varies from clear prohibitions to
provisions allowing the existence of bearer shares if they are already
issued by an extraprovincial corporation before its continuation in the
province. Presumably, the December release from Finance Canada suggests
that federal and provincial governments agree to prohibit every possible
use of bearer shares, thereby eliminating the disparity between
Finance Canada's statement specifies that existing bearer shares, share
warrants, and options are to be exchanged for registered instruments.
This method is similar to that used by the United Kingdom when it banned
the use of bearer shares in 2015 (see the press release).
Conversely, when the government of the Netherlands announced the ban on
bearer shares in April 2017, it opted for a more regulated approach
(see the press release).
It announced that bearer shares would have to be traded through a bank
or investment firm, thereby removing their holders' anonymity and
eliminating the incentive to use the shares for fraudulent purposes.
Furthermore, shareholders were given a two-year period to register their
shares with an intermediary designated by the corporation. At the
expiry of the two-year period, the shares will be cancelled and
corporations will have to pay the value of the cancelled shares into a
deposit fund monitored by the Ministry of Finance. Therefore,
shareholders who want to redeem the value of their shares will have to
report to the Ministry of Finance.
Soloway Wright LLP, Ottawa