LEGAL FEATURES OF PANAMA’S BEARER SHARE CUSTODY REGIME
In 2013, when Panama enacted Law 47 of 2013, which adopted a regime for the custody of bearer shares, it did not create such waves as now with enactment of Law 18 of 2015, which reduced the deadline to place the shares in custody to December 31st, 2015.
With the original Law, there was a 2 year period expiring in August 6th, 2015 for the law to enter into force, and then a transition period of 3 years supposedly ending in August 6th, 2018 to place the bearer shares in custody. This 5 years implementation and transition period was considered too long for international organizations such as FATF, which placed some pressure on Panamanian Authorities to reduce the date for the law to come into force. That was the reason of Law 18 of 2015 amendments which in fact entered into force last May, and most important, reduced to the last day of 2015 the deadline for corporations to expressly adopt the custody regime.
Now, let’s see what is this all about and what are the main features of the so called “custody regime”.
AUTHORIZED CUSTODIANS
Who can be an authorized custodian of bearer shares?
The first thing to consider is who can be an authorized custodian according to the law. There are two categories, local and foreign custodians.
Banks with general local license and trustees licensed by the Superintendence of Banks, Brokers and Central Securities Depositories (CSD) regulated by Superintendence of Securities Market, and individual lawyers and law firms duly registered before the Supreme Court of Justice to act as custodians, can act as local authorized custodians.
Banks, trustees and financial intermediaries licensed in jurisdictions members of the FATF (Financial Action Task Force) or its associate members, can act as Foreign authorized custodians. Those entities must be registered at a Registry of International Custodians that the Panamanian Superintendence of Banks will arrange for the purpose.
What documents and information should I provide to the custodian?
Apart from any other due diligence requirements set by the chosen custodian, any holder of a bearer share certificate must provide an affidavit containing the following information:
1. Name, nationality, country of incorporation, ID and/or passport number or incorporation number, physical address, phone number, email address or fax number of the owner of the bearer share certificate.
2. Complete identification details such as name, address, phone number, etc., of the registered agent of the issuing corporation.
Resignation, Substitution or Suspension of the Custodian.
If an appointed custodian resigns to his duty, it is necessary to notify the owner of the bearer share certificate with at least 15 day notice. During said 15 day term, the owner will have to appoint another custodian and notify the resigning custodian of the new appointment, providing the name and relevant information such as address and contact details. Once this communication is received, the previous custodian will have 15 days to deliver the certificates to the newly appointed custodian.
The owner is the only person authorized to substitute the custodian, case in which a formal notice is required, giving the name and contact details of the new custodian, and same as above, the previous custodian will have 15 days to deliver the certificates to the newly appointed custodian.
If for any legal reason as provided in the law, the authorized custodian is suspended by his respective regulatory body, the suspended custodian will have to notify the owner of the bearer share certificate and resident agent of the issuing corporation within the next 15 days of receiving the notice of suspension. The owner will have then 10 days to appoint a new custodian, and the suspended custodian will have 15 days to deliver the certificates to the newly appointed custodian.
THE DEFAULT RULE: CORPORATIONS WITH REGISTERED SHARES
From now on, in order to be able to issue bearer shares, newly formed corporations will have to expressly provide that they are subject to the immobilization of bearer shares regime, and of course their shares will have to be placed under custody in hands of any of the custodians mentioned above.
As per existing companies, it is important to take into account the deadline imposed by the 2015 amendment (transition period) which fixes to December 31st 2015 the deadline to expressly adopt the custody regime by recording into the Public Registry Office of Panama a resolution of the Board of Directors or from the Shareholders adopting the bearer shares immobilization and placing the shares in hands of an authorized custodians.
If said resolution is not adopted and recorded in the Public Registry Office during said transition period, the corporation will be considered amended and will be prohibited from issuing bearer shares.
What happens if I do not place the bearer shares in custody during the transition period?
If the bearer shares are not delivered to the custodian during the transition period, the shareholder will be prevented from exercising his political rights such as the right to vote, and his economic rights such as the right to perceive and collect dividends.
EXCERCISING MY RIGHTS AS SHAREHOLDER IN THE NEW REGIME.
Shareholders rights and transfer of certificates.
Panama’s corporate law provides that the holder of a bearer share certificate is presumed to be the legal owner. Also, it contains the provision that bearer share certificate holders must show the possession of the bearer share certificate in order to participate and vote in a shareholders meeting. With this new regime and law in place, the mechanism has been changed by legal mandate. The owner will be the person appointed in the registry of the custodian, and the requisite of presence will be from now on satisfied by showing the certificate of custody that will be rendered for such purposes as the physical certificate itself.
Prior to this law, the transfer of a bearer share certificate was made by physically delivering the certificate to the new owner. From now on, to complete the transfer of a bearer share certificate, the owner of a bearer share certificate will have to notify the transfer to the authorized custodian, and the new owner will have to complete the affidavit with all the required information and due diligence requirements as per the relevant custodian standards.
Interesting inheritance provisions.
This law also contains an interesting hereditary provision in case of death of an owner of a bearer share certificate in custody. According to the law, if the custodian of a bearer share certificate receives during the life of the owner, an instruction regarding the disposition of the share certificates upon his death, that instruction will prevail over any hereditary rights without the need of a judicial pronouncement, and furthermore, any inheritance legal provision from the domicile of the owner cannot be opposed to the custodian and will not affect the designation of the successor previously communicated to the custodian. This is an important feature that will have to be taken seriously into account when organizing any client succession plans.
Pledge of bearer shares.
Creditors of pledged shares must adopt the same measures as owners in regards to the obligation of placing the shares in custody. They also will have to notify the owner of the pledged shares of the designation of the custodian. The enforcement action to execute a previously pledged bearer share certificate will be completed when the authorized custodian is given notice of the execution and the creditor delivers the affidavit with the required information as mentioned in previous paragraphs.
WILL THIS REGIME WORK AS BEFORE?
In my personal opinion, under increased pressure for more transparency, this immobilization regime should work even better than before because it will prevent conflicts such as who the real owner of the share certificate is, or problems related to inheritance rights form people holding the possession of the bearer share certificates in detriment of the legitimate successors. In cases where extended disclosure is required, or simply when registered shares are the only available option, there are other options available to ensure asset protection and inheritance planning. Should you need assistance in such, please contact us and we will be happy to assist.
Jan Christian Brewer
Partner
Moreno & Arjona – Bureau
Panama