The prohibition of bearer form securities
With Law no. 15/2017 of May 3rd coming into force, new issuance of bearer securities became prohibited in Portugal and the conversion of the existing ones into registered form became compulsory. The legal regime was later on developed, by Decree-Law no. 123/2017, of September 25th, which sets out specific rules for the conversion process.
Once the conversion procedures have been completed, all shares, bonds and other securities will be registered, meaning their holder's identification is known by the issuer at any time. Holders’ names will become part of the registers, in case of book-entry securities, or on the certificates, in case of certificated securities.
Transitional period and conversion procedure
Law no. 15/2017 established a period of 6 months for the conversion of existing bearer form securities (article 2nd/2), counted from the date of its enforceability, i.e. regardless of the publication of further legislation, which was expected within 120 days.
In this scenario, it was possible for issuers to initiate procedures for the conversion of existing securities even before the publication of Decree-Law no. 123/2017.
Nevertheless, the conversion procedures now set out in Decree-Law 123/2017 have advantages for issuers and holders, such as:
• Amendments to the by-laws and any other documents concerning the securities may be adopted by the board of directors (i.e. without the need to convene a shareholders’ meeting);
• Conversion is done at the issuer’s expense;
• In the absence of compliance by the company, there is a conversion procedure by the centralized system management entity or by the financial intermediary;
• Registration at the Commercial Registrar of Companies will be updated with the resolution and the amended by laws, or with the declaration of the central management entity or financial intermediary, as the case may be;
• No Commercial Registration and publication fees will apply.
The conversion shall be published, with identification of the securities and of the consequences of absence of conversion. Announcements shall be made at the company's website and at the official publications online site of the Portuguese Ministry of Justice and, in case of public companies and/or issuers of securities traded on a regulated market or in a multilateral trading system, disclosed at the website managed by the Portuguese Securities Commission.
If issuers do not implement the conversion, then the conversion will be done by the centralized system management entity (Interbolsa) or the financial intermediary, depending on whether the securities are integrated in the centralized securities system or registered on a single financial intermediary.
The lack of conversion determines that:
• Transfer of bearer form securities is prohibited;
• Rights to participate in distributions are suspended.
Holders of securities not duly converted may only apply for registration in their favour or request the update or replacement of the securities’ certificates.
Amendments to the Portuguese Companies Code and to the Portuguese Securities Code
Law no. 15/2017 amended both the Portuguese Companies Code and the Securities Code.
As for the first, it clarified that bearer shares are not permitted and that their registered form shall be included in the by-laws of companies.
As for the last, it determined that all securities should be registered, and that certificates should include the holder’s identification, the serial number and the titles represented, as well as an aggregate nominal value, if applicable.
In addition, the same law revoked articles 101 and 104/1 of the Portuguese Securities Code, with immediate effect, leaving the bearer securities still pending conversion without a complete regime.
Against this background, article 9 of Decree-Law no. 123/2017 restored those articles, which therefore will only be revoked at the end of the transitional period. As a matter of fact, the transfer prohibition and the suspension of rights, will only operate after the six months’ transitional period and if the conversion does not take place.
Bearer securities issued by foreign law entities?
The above referred legislation (Law no. 15/2017 and Decree-Law no. 123/2017) did not establish its territorial scope. There is the question of whether the prohibition and mandatory conversion are only applicable to stocks, bonds and other securities issued by Portuguese law entities or to securities issued by foreign law entities as well, such as those that circulate in the Portuguese territory, namely because they are admitted to trading on a regulated market.
On one hand, the prohibition seems to cover only Portuguese law entities, considering the corporate content of certain provisions of Decree-Law 123/2017, such as those relating to the by-laws and the commercial register of companies. However, on the other hand, general references to securities admitted to trading on a regulated market and to the conversion by the centralized system management entity or financial intermediaries could indicate otherwise.
The existence of an eventual public interest in having (easier) access to the holder’s identification of securities circulating in Portugal would also support an extraterritorial application. Indeed, the concerns behind Law 15/2017 seem part of the recent trend towards transparency, of which are also examples the legislation to combat money laundering and terrorist financing, or the beneficial owner registration regime, approved by Law no. 89/2017, of August 21st.
Nevertheless, the question does not appear to have been the subject of attention by the legislator.
On September 25th, Decree-Law No. 123/2017, developed the mandatory conversion process of bearer form securities.