New Legislation Concerning The Immobilisation Of Bearer Shares And Units

by Allen & Overy LLP
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A new Luxembourg act dated 28 July 2014 on the immobilisation of bearer shares and units (the Act) was published in the Luxembourg Official Gazette on 14 August 2014. The Act will enter into force on 18 August 2014.
The Act intends to adapt Luxembourg legislation to the recommendations of the Financial Action Task Force (the FATF) and the global Forum on transparency and exchange of information for tax purposes (the Global Forum) in terms of the identification of holders of bearer shares and units.
To achieve this, the Act sets up a mechanism of immobilisation for bearer shares and units with a depositary. The new mechanism, which will be set out in the Luxembourg companies act of 10 August 1915, as amended (the Companies Act), will ensure, at any time, the availability of information regarding the identity of bearer shareholders or unitholders, while preserving the confidentiality of such information towards third parties and other shareholders or unitholders.
The new regime applies to bearer shares and units, whether they are listed or not, issued by Luxembourg companies and contractual funds (fonds commun de placement, FCPs).
As soon as the Act enters into force, bearer shares and units must be deposited with a depositary established in Luxembourg, which is subject to anti-money laundering requirements. A transitional period of six months is, however, provided for bearer shares and units issued prior to the entry into force of the Act.
Depositaries and directors and managers of companies and management companies of FCPs which fail to comply with the new requirements shall incur specific sanctions (civil and criminal).
Incidentally, the Act also applies to Issuers which have issued registered shares when their share register is not held at their registered office or otherwise the share register does not comply with the related applicable requirements of the Companies Act. As from the entry into force of the Act, criminal fines will be imposed in such situations.

Scope

The Act is applicable to Luxembourg public limited liability companies (sociétés anonymes, SA), corporate partnerships limited by shares (sociétés en commandite par actions, SCA), European companies (sociétés européennes, SE), and FCPs (each an Issuer).
The Act does not provide for any exemption in respect of bearer shares or units issued by Issuers whose shares or units are admitted to trading on a regulated market or a multilateral trading facility (MTF) and, therefore, the Act is applicable to those Issuers.
The Act primarily intends to adapt Luxembourg legislation to the recommendations of the FATF and the Global Forum in terms of the identification of holders of bearer shares and units, and as such applies to Issuers which issue bearer shares or units.
The Act further provides for criminal fines applicable to the managers and directors of Issuers which have issued registered shares, if and to the extent that their share register is not held at their registered office or if, more generally, their share register does not comply with the requirements set out in the Companies Act.

Entry into force

The Act will enter into force on 18 August 2014 and all provisions of the Act are applicable immediately.
A transitory period of six months is, however, provided for Issuers which have issued bearer shares or units prior to the entry into force of the Act. Before the end of this period, such Issuers must appoint a depositary which will hold the bearer shares or units issued by them in deposit. Within the same timeframe, the shareholders or unitholders of these Issuers must deposit their bearer shares or units with the depositary so appointed.

What you need to do as an issuer

Maintaining of the share register in compliance with the Companies Act

In respect of an Issuer which has issued registered shares, if and to the extent that the share register of that Issuer is not held at its registered office or if, more generally, its share register does not comply with the requirements set out in article 39 of the Companies Act, the managers or directors of such Issuer may incur a criminal fine ranging from 5,000 euros up to 125,000 euros. The management body of such an Issuer would therefore need to take all necessary steps to remedy this in order to comply with the Act.
Appointment of a depositary
The management body of an Issuer, which has issued or intends to issue bearer shares or units, or has converted or intends to convert registered shares or units into bearer shares or units, must appoint a depositary. The Act provides a list of persons authorised to act as depositary, all of which are subject to anti-money laundering regulations: credit institutions, asset managers (gérants de fortune), distributors of UCIs shares or units, certain professionals of the financial sector (PSF), lawyers (list I and list IV), notaries, independent auditors and chartered accountants (experts comptables). The depository must be established in Luxembourg and cannot be a shareholder of the Issuer.
The Issuer and the depositary should enter into a depositary agreement which will set out their respective rights and obligations. This agreement should in particular set out the terms and conditions relating to the deposit of the bearer shares or units, their transfer and the exercise of the rights attached thereto.
The appointment of the depositary (and any successor depositary, if applicable) will be filed with the Luxembourg Trade and Companies Register and published in the Luxembourg Official Gazette. The details of the depositary will not, however, appear on extracts from the Trade and Companies Register. It is the intention of the Luxembourg legislator to remedy this in the act that will reform the Luxembourg Trade and Companies Register, which is still at the early stage of the parliamentary process.
Failure by the management body of the Issuer to appoint a depositary or deposit the bearer shares or units in accordance with the Act may lead its directors and managers to incur a criminal fine ranging from 5,000 euros up to 125,000 euros.

What you need to do as a depositary

According to the Act, the depositary will hold the bearer shares or units of an Issuer on behalf of the bearer shareholder or unitholder who owns them.
The depositary will maintain a register where the ownership of the bearer shares or units will be recorded. Bearer shareholders or unitholders may request in writing a certificate containing all the entries related to them.
Transfers of bearer shares or units will be recorded in the register by the depositary. The depositary may accept any written document or notice of transfer for that purpose.
The depositary will not be allowed to dispose of the bearer shares or units, except in the following cases where it must deliver the bearer shares or units to:
  1. its successor, in the event of cessation of its duties; or
  2. the Issuer, in the event of (a) a conversion of the bearer shares or units into registered shares or units, (b) a share buy-back according to the rules laid down in articles 49-2 and 49-3 of the Companies Act, and (c) a capital decrease according to article 69-1 of the Companies Act.
If the depositary knowingly fails to comply with the above-mentioned obligations, it may incur a criminal fine ranging from 500 euros up to 25,000 euros. If the depositary is a legal entity, the criminal fines would be incurred by its managers or directors. In addition, it will be civilly liable in the same manner as directors of the board of directors or members of the management board of an SA.
What you need to do as a bearer shareholder/unitholder
Bearer shareholders or unitholders will have to ensure that their bearer shares or units are deposited with the depositary in accordance with the Act. If their bearer shares or units are outstanding prior to the entry into force of the Act, they will have six months to deposit them.
The rights attached to bearer shares or units which have not been deposited in accordance with the Act will be suspended.
In respect of the bearer shares or units which are outstanding prior to the entry into force of the Act, the rights attached thereto will not be suspended until the end of the transitional period of six months. If, however, such shares or units are still not deposited within 18 months of the entry into force of the Act, the Issuer will have to cancel them.
What you need to do if the bearer shares or units are pledged
Prior to the entry into force of the Act, perfection of a pledge over bearer shares or units required the remittance of the bearer shares or units to the pledgee (créancier gagiste) or an agreed third party (tiers convenu).
Following the entry into force of the Act, the bearer shares or units will have to be deposited with a depositary and, for perfection purposes, the pledge must be registered in the register maintained by the depositary.
If the pledgee or the agreed third party (currently holding the bearer shares or units) are eligible to be appointed as depositary of the bearer shares or units and willing to take on this role, the Issuer could elect to appoint the relevant pledgee or agreed third party (as applicable) as depositary. In such a case, the pledgee or the agreed third party, as applicable, will create a register and record therein the ownership of the bearer shares or units and the pledge.
If the pledgee or agreed third party are not eligible (or not willing) to act as depositary or if the Issuer does not accept to appoint them, the pledgee or agreed third party, as the case may be, will have to deposit the bearer shares or units with the depositary appointed by the Issuer and the depositary will have to register the pledge in the register.
Amendment and confirmation agreements to existing pledge agreements over bearer shares or units will need to be entered into (e.g. to reflect the new perfection formalities provided for in the Act and other relevant changes related to the new regime).
To the extent applicable, similar or other relevant steps will need to be taken where the bearer shares or units are subject to a transfer of title by way of security (transfert de propriété à titre de garantie).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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