Cayman disposes of bearer shares

Alric Lindsay, Higgs & Johnson

The Companies Law was recently amended by The Companies (Amendment) Law, 2016 (the “Amended Law”), published in the Cayman Islands gazette on May 13. The purpose of the Amended Law is to remove “bearer shares” from circulation, ultimately improving transparency in relation to beneficial ownership of companies in the Cayman Islands. In order to understand the reasons for the change, it is useful to set out a brief background on bearer shares.

Bearer shares

Most people are familiar with the concept of owning shares in a company and how ownership is transferred to another person. As a start (and generally speaking), the “owner” is the person recorded on the register of shareholders of the relevant company. In order to legally effect a sale or transfer, the parties would comply with the terms of the applicable documentation and follow the necessary procedures. Upon completion of the transaction, the register of shareholders would be amended to reflect the new owner.

When it comes to bearer shares, however, the normal question is “who is the owner?” The answer is hidden in the name i.e. “bearer.”

The “bearer” is the person who literally holds the bearer share instrument in his hands at any given moment. He cannot be identified on the register of shareholders because there is no entry reflecting his name. Where he wishes to transfer bearer shares, the simple action of delivery to another person would signify transmission.

In light of the threat of terrorist financing and global anti-money laundering activities, the existence of bearer shares grew as a concern to regulatory bodies and governments alike. This was because regulators were unable to identify the owners of bearer shares and, in failing to do so, could not determine whether ownership of such shares was for surreptitious reasons.

In order to combat this practice, global watchdogs established various policies to improve transparency. One such body is the Financial Action Task Force (FATF).


The stated objectives of FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Its policies are intended to be implemented as regulations or laws in relevant countries.

Published policies include the series of recommendations developed by FATF (the FATF Recommendations), which lay out the framework that should be followed regarding the identification of beneficial owners. In particular, the FATF Recommendations require countries to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities, and that countries that have legal persons who are able to issue bearer shares or bearer share warrants should take effective measures to ensure that they are not misused for money laundering or terrorist financing.

Cayman Islands compliance with FATF

In the case of the Cayman Islands, anti-money laundering and anti-terrorist regulations and legislation have been in existence for several years and comply with FATF Recommendations. This requires robust due diligence procedures (including background checks) to be completed prior to the acceptance of new business and on an ongoing basis. Due diligence must be in place for directors, officers, shareholders and ultimate beneficial owners of relevant entities. Unlike onshore locales like Delaware and Nevada, service providers in the Cayman Islands can be expected to “know their client.”

In addition to the know-your-client regime, the Cayman Islands is a signatory to U.S. FATCA, U.K. FATCA and the Common Reporting Standard, all of which have been implemented through domestic regulations and legislation in the Cayman Islands. Reporting Financial Institutions subject to the foregoing legislation and regulations must submit financial account and other information to the Cayman Islands tax authority, which may then be shared with the U.S., U.K. and, in the case of the Common Reporting Standard, certain partner jurisdictions. Therefore, full cooperation by the Cayman Islands is currently in place.

Collaboration (through understandings and undertakings) also exists between the Cayman Islands regulator and international regulators. These international bodies include the Guernsey Financial Services Commission, Finanzdienstleistungsaufsicht of Germany (BaFin), France Financial Markets Authority, Central Bank of Ireland, United Kingdom Financial Conduct Authority and Financial Services Authority U.K., Canada Office of Superintendent of Financial Institutions, U.S. Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

Where the Cayman Islands regulator is satisfied that a request for assistance from an overseas regulatory authority should be granted, the Cayman Islands regulator may disclose information necessary to enable the overseas regulatory authority to exercise regulatory functions, including the conduct of civil and administrative proceedings to enforce laws, regulations and rules administered by the overseas regulatory authority. In some cases, the Cayman Islands regulator may permit the overseas regulatory authority to carry out, in relation to an entity in the Cayman Islands that is subject to its supervision or regulation, an on-site inspection or visit in a manner agreed in writing by the Cayman Islands regulator and the overseas regulatory authority.

In this sense, the Cayman Islands has always sought to be FATF compliant, fully transparent and cooperative.

Beneficial changes

Notwithstanding the full compliance by the Cayman Islands with international policies, the Cayman Islands continued to pursue further improvements. The most recent evidence of the same is the statement by the Cayman Islands government that:

The Cayman Islands and the United Kingdom have signed an agreement on the enhanced sharing of beneficial ownership information.

The Cayman Islands will implement a central (non-public) platform that will allow designated Cayman Islands officials to directly obtain and provide details of beneficial ownership of companies incorporated in Cayman to the U.K.

Legislative changes will be made in connection with beneficial owner information.

As a result of new legislation, the Cayman Islands is demonstrating that it is not only open for business, but it is also open to transparency and committed to maintaining the integrity of the global financial system.

The Amended Law

Prior to the Amended Law, the register of shareholders of a Cayman Islands company was required to state the name of the custodian of any bearer shares and the fact that a certificate in respect thereof was issued to bearer. In addition, where bearer shares were held by an authorized custodian (approved by Cayman Islands authorities), a person holding the beneficial interest in those bearer shares was not permitted to agree to transfer or otherwise dispose of or deal in the interest in those shares without the approval of the custodian. The Amended Law ultimately eliminates all transactions in bearer shares. The implications and time line for bearer share removal are set out below.

No new bearer shares may be issued

Clients incorporating new companies must bear in mind that no new shares may be issued by a Cayman Islands company in bearer form after May 13, 2016. This means that all memorandum and articles of association must be carefully drafted and reviewed by a Cayman Islands lawyer in order to prevent a breach of the Amended Law. Any use of previously used “template” documents to save on legal costs must be avoided.

Conversion of existing bearer shares to registered form by July 13

With the prohibition of new bearer share issues being in place after May 2016, the July 13 stop date means that relevant companies in the Cayman Islands must now liaise with beneficial owners and custodians in order to arrange the conversion of any bearer shares into registered form. A company or custodian notifying a beneficial owner shall either obtain confirmation from the beneficial owner of a name in which a share converted is to be registered or register the converted share in the name of a custodian. The relevant name must appear in the company’s register of members by July 13, 2016.

Dealings in unconverted shares

Following the July stop date, any bearer shares which have not been converted pursuant to the Amended Law will be null and void and shall be without effect for all purposes of Cayman Islands law. This rule extends to Cayman Islands companies which were previously terminated by way of strike off, as no court of the Cayman Islands will be permitted to reinstate a company with bearer shares in issue (the Amended Law will apply if the company is reinstated).

Annual declarations

Clients will be familiar with the annual declarations required to be filed by them with the registrar of companies in the Cayman Islands. Previously, such annual filings were required to include a statement that all bearer shares are kept by a custodian. As a result of the Amended Law, all future annual declarations (commencing in January 2017) must confirm that any bearer shares issued by the relevant company have been registered in the form required by the Amended Law.

Any company that fails to comply with the Amended Law shall not be considered to be in good standing.

Alric Lindsay is an attorney and senior associate with Higgs & Johnson, a law firm based in the Cayman Islands and The Bahamas.

The purpose of the Amended Law is to remove “bearer shares” from circulation, ultimately improving transparency in relation to beneficial ownership of companies in the Cayman Islands.