Legal implications of non-compliance with deadline for deposit of bearer securities


For the record, the 2014 Act followed recommendations of the Financial Action Task Force[1] advocating the abolition of bearer securities because of the anonymity they provided their holders and the risk of misuse for money laundering purposes. So two periods were stipulated: first, for shareholders who have not registered their bearer shares with a custodian, the automatic suspension of such shares after six months from the entry into force of the 2014 Act (from 18 February 2015), hence depriving such shareholders of their voting rights and rights to dividends on the bearer securities concerned; secondly, an 18-month period from the entry into force of the 2014 Act (i.e. until 18 February 2016) to deposit bearer securities, under penalty of cancellation of the bearer securities.

This could cause significant practical problems for the various affected stakeholders, whether shareholders or practitioners. This article will attempt to (I) define the role of the management body (which will be limited to the boards of directors of limited liability companies under Luxembourg law, the so-called SA (société anonyme) for the purposes of this discussion) in the implementation of the 2014 Act, then (II) consider the legal implications and possible solutions with regard to the non-deposit of securities in bearer form after the deadline of 18 February 2016.

I. Role of the board of directors

The 2014 Act wording is unclear regarding the fate of bearer shares from the expiry of the 18-month period. Indeed, Article 6 (5) merely states that “bearer shares which have not been immobilized within a period of 18 months from the entry into force of this Act shall be cancelled and a reduction in the subscribed capital by a corresponding amount must be applied”. The law is silent on both the body charged with this task and how to cancel these shares and reduce the capital thereon. However, in view of the sanctions under the 2014 Act against directors only[2], the role is therefore reserved for the board of directors.

Two solutions seem a priori possible: to convene a general meeting of shareholders for the purpose of enacting the cancellation of the relevant bearer securities or the obligation for the board of directors to cancel the shares proprio motu.

This raises the question of the relationship between the 2014 Act and the 1915 Act for the boards affected by this situation: is it a derogation from the formalism imposed by the 1915 Act and a new way of cancellation of shares and reduction of capital reserved for bearer shares?

In principle, under Luxembourg company law, not only is a capital reduction an important formality within the ambit of Article 69 of the 1915 Act, especially for SAs (convening an extraordinary general meeting, held in the presence of a notary, special quorum and majority requirements[3], establishment of adequate guarantees in favour of creditors[4]...) but also the 1915 Act bears a reverse logic to that of Article 6 (5) quoted above: it first reduces the capital before cancelling the corresponding surplus shares.

Where the 2014 Act is silent on the role of the general meeting of shareholders to realize the cancellation, a distinction inevitably arises between companies whose capital is represented by 100% of bearer shares not yet registered by their holders (whose voting rights were suspended from 18 February 2015) and those in which shareholders are not affected by such suspension.

No shareholders’ consent required

In the first case, it seems readily apparent that the 2014 Act would be ineffective for various reasons: first, because of the impossibility of convening a general meeting of shareholders for companies that have only "non-compliant" bearer shareholders (i.e. shareholders who have not complied with the obligation to deposit their shares), the participation in such meeting of shareholders being prohibited by Article 6 (4); secondly, because, in the case of companies where some shareholders are able to exercise their voting rights, there is the risk of such shareholders’ refusal to cancel “non-compliant” shares in order to maintain bearer shareholders in the company. Similarly, there are sanctions under the 2014 Act for administrators who have not complied with its requirements. However, there are no sanctions for shareholders who refuse to proceed with such cancellation, nor does the 2014 Act refer to the provisions of Article 69 of the 1915 Law on the capital reduction in the SA. This suggests that it is open to the board to overrule the shareholders who do so. All in all, the 2014 Act seems to only target the directors to the exclusion of the shareholders, hence the necessity to define the role of the board of directors in respect of the cancellation of the bearer shares.

New role of the board of directors

It is worth noting that a comparable legal concept already exists in Luxembourg law. Indeed a parallel can be made between Article 6 (5) of the 2014 Act and the capital increase mechanism in the SA within the ambit of the 1915 Law, which may under the articles of association allow the board to itself initiate such increase[5] and request a notary to acknowledge it by way of a deed afterwards[6]. At the same time, one can presume that the board will request a notary to enact the capital decrease following the cancellation of shares. Thus, such capital decrease requires a mandatory amendment of the articles of association (in principle, held before a notary) and needs to be formalized vis-à-vis third parties. We note in this regard that certain authors also emphasized the compendious nature of Article 6 (5) of the 2014 Act, such Article implying an "automatic" capital decrease without specifying how to implement it[7].

Ultimately, the board clearly has new responsibilities under the 2014 Act. However, this has implications for notaries who will face such cancellation procedures. Even though some will be justifiably hesitant to act on the significant legislative changes enacted at the stroke of a pen under Luxembourg law, they must have the courage to enact capital decreases following a board’s cancellation of bearer securities without fearing the consequences, however unorthodox this approach might seem at first.

In view of this, it is interesting to look at the capital decrease in companies whose capital is composed solely of non-compliant shares. Indeed, for them, it does not seem to make sense for a board of directors to proceed with the cancellation of the bearer shares and then have a notary to record the capital decrease, because there will be no capital and the company will effectively be liquidated. A direct application for liquidation before the State Prosecutor without a notary would be more appropriate. However, in companies where the capital decrease has the effect of reducing the capital to below the minimum level required by the 1915 Law, a diligent board should convene a general meeting of shareholders before a notary in order to comply with the law, to first arrange a capital increase and then to authorize the capital decrease caused by the cancellation of non-compliant shares, so that the company’s capital does not fall below the statutory minimum level[8].

Plainly, the 2014 Act gives the board a new role. However, it must be analysed in light of its consequences for the non-compliant bearer shareholder acting in good faith as well as for the board.

II. Legal consequences and possible solutions

With the 2014 Law now fully in force, the 18 February 2016 deadline having expired, it appears that cancellations of bearer securities not yet registered with a custodian are inevitable. Therefore, this part of the article is primarily addressed to directors employed by the numerous Luxembourg financial services providers for company domiciliation or company administration purposes, as these are directly involved in the actual implementation of the 2014 Act.

First, the 2014 Act does not specify how soon the boards need to perform the cancellations. Also, is each affected board de facto "punishable" on the strict application of the 2014 Act or is there a measure of discretion in its implementation?

Two views are possible: either the boards must conduct a "marathon" to do the necessary work in view of the cancellations or they must be reasonably diligent, keeping in mind that they must provide the necessary notices for holding a board of directors meeting, which may take some time. It seems that the assessment of compliance with the 2014 Act by the boards of directors concerned may be by reference to a normally diligent board making resolutions aimed at the cancellations. That is, a board which acts within a reasonable time (necessary for the holding of board meetings) may not be reproached. As the 2014 Act is silent on this, the question remains open.

In this regard, one can only regret the choice of radical wording of the 2014 Act by the legislator. Indeed, it seems it could have been left to the board to either convert the bearer shares not registered within the period into registered shares, provided of course that the information about their owners is known and reliable, or simply cancel shares that are not compliant with the 2014 Act. Furthermore, it is legitimate to question the lawmakers’ choice of maintaining a heavily modified bearer shares regime rather than providing the option of simply deleting such regime[9]. Indeed, since the lawmakers’ rationale for maintaining the legal status of bearer shares might be the preservation of a certain anonymity between shareholders, it would have also been possible to provide for the conversion of non-compliant bearer shares into registered shares and the subsequent restriction of access to the shareholders’ register to only the securities owned by a shareholder instead of all shares, through a simple modification of Article 39 of the 1915 Act[10].

Issue of new shares

Thus, for the first type of company, one may wonder if a "non-compliant” bearer shareholder could, if agreed with the other voting shareholders, request the issuance of new shares in its favour by the latter. Indeed, in this case, the fate of bearer shareholders rests on the shareholders able to vote. They will be able to vote either for or against bearer shareholders remaining in the company, especially as not only will the quorum for such vote not include bearer shares, but also bearer shareholders “non-compliant” with the 2014 Act are denied any participation in general meetings[11]. This could be a possible solution if there’s agreement between the shareholders.

However, for companies whose capital is fully represented by bearer shares not registered in time, the question is much more delicate: if affected bearer shareholders can not participate in any meeting, then there are no shareholders to make decisions. So it seems that the only solution is an outright liquidation of such companies. Also, regardless of whether it happens before or after the cancellation of all the shares representing the capital, it seems that the inevitable company liquidation should be requested by the board before the State Prosecutor.

Conversion into registered shares

Finally, it seems that as long as the bearer shares are not cancelled, the request for conversion into registered shares could be a possible solution. Indeed, it is useful to recall that many bearer securities have been lost or stolen mainly because of their age and subsequent transmission over time, so such a conversion would make sense, especially since there are no required formalities under the 1915 Act, a simple request of the shareholder being sufficient[12]. However, reluctance to take such steps is understandable, given that the 2014 Act is not explicit about the practical procedures for its implementation.

[1] FATF Recommendation no. 24, dated 2012:
[2] A new article 171-2 was added to the 1915 Law, which provides for such sanctions.
[3] Article 67 of the 1915 Act providing quorum and majority for the amendment of articles of association applicable to SAs.
[4] Articles 69 (2) et seq. of the 1915 Act.
[5] Article 32 (2) of the 1915 Act.
[6] Article 32-1 (4) of the 1915 Act.
[7] See article by I. Charlier, L.- A. Takerkart-Wolf and L. Licata, Réforme du régime des actions au porteur (only in French), in ACE 2014/10, p.21.
[8] Article 26-2 of the 1915 Act provides for a minimum capital of EUR 31,000 for SAs.
[9] For instance, France and Belgium opted for the suppression of bearer shares regime, respectively in 1975 and 2005.
[10] Article 39 of the 1915 Act provides that: "At the Company’s registered office is held a register of registered shares to which each shareholder can have access which contains: [...] the accurate designation of each shareholder and the indication of the number of its shares [...]”.
[11] Article 6 (4) of the 2014 Act.
[12] Article 43, para. 3 of the 1915 Act provides that: "The owners of bearer shares or securities may, at any time, request the conversion, at their expense, in registered shares or securities".