Based on the Czech government bill, the Parliament of the Czech Republic is reading for the second time the Amendment to the Commercial Code, the Act on Securities and the Act on Capital Market Business (hereinafter the ‘Amendment’). The essence of the Amendment is legislative measures which are to remove anonymous shares and help trace share owners in all cases. Clearly, the aim is to provide greater transparency and restrict corruption environment for which anonymous shares are breeding ground.
If the bill is passed without major changes, it will be the most significant crackdown on shareholder rights in the last twenty years.
What are anonymous shares and why are they a problem?
Anonymous shares are share warrants payable to bearer, which do not include the name of the person who owns these shares. They are transferred merely by handing over and their owner does not have to register in any public register. It is therefore impossible to trace the owner. Bearer share warrants are also called owner share warrants under the Act on Securities; it is, however, the same instrument.
These shares are usually kept in safe or notarial deposit, which adds on greater maintenance cost. Moreover, the share warrant transfers are more costly, risky and lengthy than book-entered share transfers. This economical ineffectiveness is balanced by another aspect. It is anonymity of the owner, who is not registered in any register and cannot, in fact, be traced. The company must regularly publish in the Commercial Register the owners with a share over 20%; however, whether such information is true cannot be verified. Hence, such information often does not reflect the actual facts.
The anonymous shareholder issue is notable especially in public tendering, when it cannot be ruled out that the winner of the tender was not, for example, a company owned by a politician who can influence the bidding process or by a related person. All this increases corruption risks. Another issue lies in tax area. Currently, nothing makes ex-owners of anonymous shares to put the sale of shares on their tax return, which can result in tax evasion.
The proposed Amendment should deal with this situation; especially eliminate the issues connected to the ownership of bearer share warrants by means of amending the Commercial Code, the Act on Securities and the Act on Capital Market Business.
The government has decided to tackle the issue by the Amendment.
Transformation of Shares
If the anonymous shares are to disappear in future, such share owners must be offered ways to replace them. The Amendment includes the following options:
1. Transforming share warrant to book-entered share
This is the possibility to keep bearer share in existence, but at the same time, it would be obligatory to enter such share in the central depository books. Therefore, the owner would hand in the share warrant, which would continue to exist in its electronic form only and the handling thereof would be supervised by the central depository. The share entering in books will enable the owner identification.
Entering share in the central depository books is rather exceptional within the EU, because European countries are not familiar with the central depository concept and its role is fulfilled by immobilization.
2. Immobilization, physical depositing with the bank
The second possibility to keep bearer share warrant in existence is the immobilization thereof. Immobilization of securities means depositing the share warrant with the bank, which opens an account for handling the share. This will enable the owner identification as well as monitoring the payment of dividends. Only a bank institution based in the EU or some OECD country will be able to open the account.
In both aforesaid cases the share transfer will be carried out by the entry in an investment tool register. The copy of an entry in such register will be a shareholder proof of identification. This identification of shareholder could be used by bodies in charge of criminal proceedings and other supervision and administrative bodies, public tender owners, subsidy and grant providers, and other persons as set out by special regulations.
At the same time, a new duty is introduced for shareholders who hold registered share warrants. It is the duty to open an account with a bank for the dividend payment purposes so that it would be possible to verify the shareholder identification carried out by the company itself, and at the same time, to monitor flow of dividend and other financial performance for benefit of the shareholder.
3. Transforming bearer shares to registered share
The Amendment also deals with the situation when the shareholder does not want to use any of the aforementioned options. In such case, any and all bearer shares change to registered shares by statute as from January 1, 2014, i.e. the day the Act on Business Corporations (hereinafter the ‘ABC’) becomes effective. The company will have a six-month deadline to amend its incorporation documents accordingly and apply for the change of an entry in the Commercial Register. This option is more cost-effective for shareholders.
How is the Amendment linked to the ABC
The ABC shall become effective as from January 1, 2014. The ABC assumes that joint stock companies will only be allowed to have registered shares in the form of a share warrant. Should they decide to have bearer shares, they shall be obliged to immobilize or have them entered in the central depository books.
The Chamber of Deputies agreed on the passage of a separate law regulating this legislation during the consideration of the ABC. The reason is the fact that legislation will be independent of the rules laid down by the ABC. The passage of the separate law, which constitutes a part of the Amendment, has one advantage: it enables to move the transformation forward in the course of another legislation process. The separate law is drafted in such a way so that it can be applied both in case the ABC becomes effective as well as in case the ABC fails to become effective as from January 1, 2014 due to any reason.
The Amendment deals with the transformation of joint stock companies with share warrants in greater detail than the ABC, which lacks, for example, the rules of changing shares and procedure in case shareholders fail to present to the company the bearer share warrants to be exchanged for registered shares.
The procedure during change of the form under the Amendment is as follows: The shareholders present bearer share warrants either to be exchanged for registered shares or to have the changes made on the shares (that the change occurred under the statute and who is the owner). The board of directors makes a decision whether the shares will be exchanged or the changes will be made on the existing shares.
A shareholder who fails to discharge this duty will not be able to exercise rights related to these shares and also loses the right to dividends from such shares.
Anonymous shares abroad
The use of anonymous shares varies in the European Union countries. They are used in, for example, Germany, Great Britain or Poland. Other EU countries (the Netherlands or Luxembourg) do no prohibit these shares, but have a follow-up protection in place for public tenders. Often, that means a ban to participate in the bidding process of a certain type or over a certain contract value.
EU legislation does not impose the duty to ban bearer shares.
It is mainly legal and economical situation of the Czech Republic which gave rise to legislative change. The number of bearer shares is growing and often, the underlying reason is to breach or get round the law. There is domestic political demand in reducing corruption which leads to passage of the Amendment.
Conclusion
The aforesaid Amendment was inspired mainly by Austrian legal order. The Amendment objective is to expose ownership links of the joint stock companies and hence achieve greater transparency in the business environment and help reduce economic crime.
The Amendment means that anonymous share owners could switch over to new legislation under the Act on Business Corporations (effective as from January 1, 2014) slightly earlier, and could benefit from account administration costs at ‘introductory prices’ as the banks (or central depositary) may offer. However, should they wish to maintain their anonymity, nothing is stopping them from waiting until the Act on Business Corporations becomes effective, i.e. January 1, 2014.