Anonymous shares may see regulation

The Czech Republic remains one of only a handful of countries not regulating anonymous shares in companies, a dubious distinction it shares with Nauru and the Marshall Islands - but not for long if the Justice Ministry has its way.

Anonymous shares, or so-called bearer shares, are equity securities wholly owned by whoever is the "bearer" of the physical stock certificate. The issuing company does not register the stock and doesn't track changes in ownership, leading to some highly flexible but opaque ownership structures of companies that many say are a threat to market transparency, especially if companies with secret owners are vying for public contracts.

According to a report from January this year conducted by research agency ČEKIA, more than half of Czech joint-stock companies have bearer shares that allow the real company owners to remain anonymous. Researchers studied share activity between May and December 2010 and found that instead of being deterred by politicians' promises to finally regulate bearer shares, companies did the opposite.

"On the contrary, the number of joint-stock companies with anonymous owners in the monitored period increased more than 200 companies, or 1.7 percent," said ČEKIA analyst Petra Štěpánová.

Three proposals

Justice Minister Jiří Pospíšil plans to submit three proposals to Parliament in the coming weeks that would regulate bearer stock certificates. The first proposal, which Pospíšil said has the most support, would require shares be registered at a central Securities Center, a practice common with bearer certificates in other countries that effectively strips them of anonymity. Another possibility is to ban anonymous shares altogether, while a third option would see companies with opaque ownership structures banned from public tenders.

"The ministry is leaning toward the opinion that forbidding physical bearer shares will not solve the unsatisfactory situation with nontransparent companies, since even if some identity of the owner was established, it would only be the formal owner, not necessarily the real owner," said Tereza Palečková, spokeswoman for the Justice Ministry.

Palečková added that the ministry is interested in taking more concrete steps where the public interest is at stake - for example, in the case of public tenders - and points to the United Kingdom and the Netherlands as example countries where bearer shares are allowed but still sufficiently regulated.

Michal Mišun, a senior transaction adviser with merger and acquisition advisers IMAP, said a simple condition that the shares be registered will do little to stop the trade in bearer certificates.

"I assume people who want to be covered will do it by transferring the ownership to offshore anonymous companies. No real advance will happen unless the law prevents participation in government tenders for companies where the ultimate majority owner, as a person, is not known," Mišun said.

Although bearer certificates may be an attractive device for owners who, for whatever reason, want to conceal their identity, Mišun said they should be a red flag for small-time investors.

"For small private companies, investors always care who the other investors are and have other legal possibilities to prevent changes of ownership," he said. "Investors should never invest in small private companies where they do not know who the majority owner is."

Critics say bearer certificates are overused in the Czech Republic, and usually with unscrupulous aims, like hiding the ownership structures of companies with owners connected to lobbying efforts for public tenders. Some have even suggested bearer stocks are bestowed on politicians by companies as a reward for favorable treatment in tender competitions.

"Here they are used in the worst way," said Jan Novotný, an economist with the Center for Economic Research and Graduate Education at Charles University. "The use of these instruments is connected with the Czech background and behavior. It's only been 20 years since we've learned how to operate a market economy. They're really very dangerous."

Novotný said the existence of bearer shares is clearly disadvantageous for investors who don't know who owns the companies they're buying into. The best solution, he said, would be to do away with them altogether, but he conceded that if the device were restricted to the private market, there would be less of a transparency issue.

Others, however, argue that transparency of ownership is just as important, even if there are no government contracts involved.

Michael Smith, a sociologist at the Czech Academy of Sciences who researches transparency issues, called bearer shares the "single largest source of corruption risk in the Czech Republic."

"If bearer shares exist," he said, "it is impossible to know who ultimately influences Czech politics through lobbying or party donations - whether they are 'good' citizens and corporations, or rather persons related to the mafia, to foreign governments or others who don't have the Czech Republic's best interests at heart."

Emily Thompson can be reached at
ethompson@praguepost.com