Executive Summary: The Panamanian government has engaged in an extensive period of consultations with local and foreign experts, practitioners, professionals and regulators, in a concerted effort to ensure that the jurisdiction continues to embody the highest international standards in terms of functionality and transparency (while preserving confidentiality). To that effect, the Panamanian legislature enacted Law 47 of 2013 (the “Bearer Shares Law”), which creates a regulatory framework for the continued and lawful use of bearer shares in Panama.

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For the past several months, the Panamanian government has engaged in an extensive period of consultations with local and foreign experts, practitioners, professionals and regulators, in a concerted effort to ensure that the jurisdiction continues to embody the highest international standards in terms of functionality and transparency (while preserving confidentiality). To that effect, the Panamanian legislature enacted Law 47 of 2013 (the “Bearer Shares Law”), which creates a regulatory framework for the continued and lawful use of bearer shares in Panama.

Implications for M&A activity

Today, Panama’s robust regulatory framework provides domestic and international investors alike with unparalleled investment opportunities in the region: a dollarised economy, no exchange controls or restrictions on the movement of capital, readily accessible credit and increasingly sophisticated and liquid capital markets.  In order to attract the best and brightest, Panama continues to enact pro-business legislation, based on successful models culled from other parts of the world.  Given the country’s diminutive size and limited domestic consumer market, the country has turned to globalisation as a central driver of its long-term economic growth (the Bearer Shares Law being the latest iteration of this commitment).

In the context of M&A and Panamanian companies with bearer shares, the Bearer Shares Law introduces a new party into the mix: the authorized custodian.  Prior to the Bearer Shares Law, the parties (i.e., buyer/seller or acquirer/target) could transact privately, with the notable exception that any merger with a Panamanian entity requires the parties to register the merger agreement with the Panamanian Public Registry.  As a result of the Bearer Shares Law, the authorized custodian becomes an important component of any M&A transaction involving a Panamanian company with bearer shares, given that the authorized custodian must be notified of the transaction and the new counterparty (i.e., the party that did not have a preexisting relationship with the authorized custodian) may be required to provide the authorized custodian with certain information/documentation as described below.  From a best practices standpoint, the parties should coordinate with the authorized custodian(s) beforehand, and include the above referenced requisite information/documentation as part of the closing deliverables within the transaction documents. 

Aspects of the Bearer Shares Law

This law has several interesting and innovative features that are worth highlighting:

• Timing:  The Bearer Shares Law shall come into effect two (2) years after this law’s enactment (i.e., August 7, 2015 or the “Implementation Date”). As such, the provisions of the Bearer Shares Law shall not become binding and enforceable until such time as this law comes into effect. Furthermore, holders of bearer share certificates validly issued and outstanding prior to the Implementation Date shall have an additional three (3) year period following the Implementation Date to deliver any and all such bearer shares into custody or alternatively, reissue them into registered form. Bearer shares validly issued on or after the Implementation Date may not avail themselves of this additional three (3) year grace period, and must be delivered to an authorized custodian.
• Delivering Bearer Share Certificates into Custody:  Holders of bearer share certificates that were validly issued and outstanding prior to the Implementation Date shall be given an additional three (3) year grace period to deliver any and all such bearer shares into the custody of an authorized custodian. Any and all bearer shares that are validly issued on or after the Implementation Date must be delivered into the custody of an authorized custodian within twenty (20) calendar days of the issuance of said bear shares.  For the avoidance of doubt, in the event any bearer share certificates that were validly issued and outstanding prior to the Implementation Date were to be redeemed or cancelled after the Implementation Date, any new bearer share certificate(s) that is/are issued representing said redeemed/cancelled shares shall be deemed as having been issued after the Implementation Date, and thus, the three (3) year grace period would not be applicable to said bearer share certificate(s).
  For the purposes of the Bearer Shares Law, delivery into the custody of an authorized custodian shall be deemed perfected upon (i) the delivery of the original bearer share certificate to the authorized custodian, and (ii) the delivery of any and all applicable information required under the Bearer Shares Law, which should be sufficient to identify the beneficial owner(s) of the bearer share certificate (ie, affidavit of share ownership).  The beneficial owner(s) of any and all bearer shares that fails to comply with his/her duties in a timely manner may definitely lose his/her rights to exercise any and all political and economic rights associated to these bearer shares.
• Authorized Custodian:  An authorized custodian is a duly authorized person or entity that may exercise custody over duly issued and outstanding bearer shares.  Authorized custodians are divided into two categories: local authorized custodians or foreign authorized custodians.  The following persons and/or entities may act as authorized custodians:
• Local Authorized Custodians:
  • Duly licensed attorneys and/or resident agents (registered with the Fourth Chamber of the Supreme Court of Panama);
  • Banks having a general banking license and trust companies, both of which must be regulated and subject to the supervision of the Panamanian Superintendence of Banks; or
  • Brokerage houses (Casas de Valores) and clearing houses (Central de Valores), both of which must be regulated and subject to the supervision of the Panamanian Superintendence of the Securities Markets.
• Foreign Authorized Custodians:
  • Banks, trust companies and financial intermediaries that are duly licensed and regulated in member jurisdictions of the Financial Action Task Force on Money Laundering (FATF) or their associated members.  In addition to complying with the provisions of the Bearer Shares Law and applicable law, please note that all foreign authorized custodians must be registered with the Panamanian Superintendence of Banks and designate a process/notification agent (agente de notificación).  A process/notification agent (agente de notificación) is defined as an attorney, general license bank or trust company based in Panama that is duly authorized by a foreign authorized custodian to receive any and all notices and demands for and on its behalf related to said foreign authorized custodian’s responsibilities as per the Bearer Shares Law and applicable law.
• Responsibilities of an Authorized Custodian:  An authorized custodian cannot automatically release a beneficial owner’s confidential information, and thus, fishing expeditions are not being authorized under the Bearer Shares Law.  Instead, any request for information must be made in connection to an ongoing investigation by a competent authority into money laundering or in connection to a commitment established in an international agreement and/or convention to which Panama is a signatory.
  Any and all foreign authorized custodians are required to deliver sufficient information to identify the beneficial owner(s) of any and all bearer share certificates to the resident agent of the Panamanian corporations that issued these bearer shares.  This provision does not require the resident agent to make a specific request in order to be entitled to receive this information (ie, a foreign authorized custodian has the positive obligation of delivering this information to the resident agent upon becoming the custodian of any and all bearer share certificates).  The Bearer Shares Law provides a limited carve out for foreign authorized custodians wanting to delay the delivery of such information until such time as the resident agent provides it with notice that a competent authority in Panama has duly requested such information.  In order to avail itself of this carve out, a foreign authorized custodian must provide the Panamanian Treasury Department with a US$25,000.00 bond, which must be issued by an insurance company or a bank licensed to operate in Panama.

•  Perfecting the Transfer of Bearer Shares that have already been Delivered into Custody:  Bearer share certificates that have been delivered into the custody of an authorized custodian shall only be deemed transferred upon the beneficial owner(s) providing the authorized custodian with formal written notice of said transfer, and upon the new beneficial owner(s) providing the authorized custodian with a sworn statement containing specific information about the new beneficial owner(s).  The above assumes that the bearer share certificates shall remain in the custody of the same authorized custodian.  In the event the new beneficial owner(s) wish(es) to transfer the bearer share certificates to a new authorized custodian, additional steps would be required.
• Inheritance:  An interesting new feature of the Bearer Shares Law is that beneficial owners may now engage in estate/succession planning through the authorized custodian of their bearer shares. The beneficial owner(s) of any and all bearer shares held in custody may designate in writing one or more beneficiaries.  As such, upon receiving evidence of the beneficial owner(s) death, an authorized custodian may transfer any and all bearer share certificates to the duly designated beneficiaries, without having to wait for probate and/or a court order.  The Bearer Shares Law states that the transfer of any and all bearer share certificates to the designated beneficiaries (ie, as designated by the beneficial owner(s) in writing, said written instrument having been delivered to the authorized custodian) shall be valid, irrespective of any other rights that may be asserted (whether these rights be testamentary or intestate).
• Pledging Bearer Shares:  A pledgee in possession of bearer shares that were issued and outstanding prior to the Implementation Date and that are subject to a pledge must nevertheless (i) deliver the bearer share certificate into the custody of an authorized custodian, or (ii) if applicable, register as an authorized custodian.  The authorized custodian of the pledged bearer shares shall act as a depository (depositario prendario) of such shares.
• Penalties:  The failure to adhere to the provisions of the Bearer Shares Law shall be punishable as outlined in this law.  The beneficial owner(s) failure to comply with the provisions of this law in a timely manner may result in him/her definitely losing his/her rights to exercise any and all political and economic rights associated to the bearer shares.  Any authorized custodian that fails to comply with the provisions of this law in a timely manner may be subject to financial as well as regulatory penalties (eg, temporally lose the right to act as an authorized custodian for a period of three (3) years).  Unauthorized breaches of confidentiality by an authorized custodian are stringently penalized pursuant to the Bearer Shares Law.