Ownerless shares: Legal Aspects

Ospankulova Karlygash

In recent years in a number of joint stock companies of the republic there is a problematic situation related to the company management and corporate decision-making. The most frequent problems faced by joint-stock companies during the General Meeting of shareholders - the lack of needed number of votes to make decisions and dividend payment.

Causes of this problem, as a rule, are as follows: (a) the shareholders of both physical and legal persons abandon their shares because of their low liquidity (lack of dividends, etc.), (b) shares are not claimed by the heirs of deceased shareholders, because the procedure of entry into ownership of the shares is very costly and economically unreasonable.

How to solve this problem? This question is asked by the leaders of joint-stock companies and lawyers. The leaders of some joint-stock companies are trying to solve the problem by judicial recognition of shares of such shareholders as ownerless property.

Below we consider certain legal aspects of the recognition of shares as ownerless or escheat.

Entering into the rights on ownerless shares

The Civil Code of Kyrgyz Republic (the “CC”) as a basic legal act regulating the civil legal relationships contains provisions both in terms of shares management legal relationships regulation, and in terms of coming into ownership of movable and immovable property.

As a rule, grounds for the origins of property rights are: (a) ownership of the property by law or by the State body act, court decision on the recognition of thing as ownerless, etc.; (b) succession, i.e. the transfer of rights and duties of one owner to another in the reorganization of legal entity, the sale, gift, exchange, inheritance, etc.; (c) the lawful possession of the newly created thing for himself.

The CC  establishes the following grounds to acquire ownership: (a) lost thing finding; (b) the discovery of treasure; (c) entry into the rights on stray animals; (d) entry into ownership of ownerless movable thing in order of acquisitive prescription.

According to the CC, a share is immovable thing . In accordance with the Law of Kyrgyz Republic “On Joint-Stock Companies”  shares are issued only in
undocumented form and are registered securities account of which maintained by the registry system – by records in the personal accounts of the registry holder. Therefore, the most applicable grounds of entry into ownership of the shares will be entering into the ownership of ownerless movable things in order of acquisitive prescription.

In accordance with paragraph 1, Article 265 of the CC, a citizen or a legal person other than the owner of the property, but honestly, openly and continuously in possession of real property as his own for fifteen years, or other property within five years, acquires title to the property (acquisitive prescription). Thus, a person other than the owner of the shares, but honestly, openly and continuously in possession of over five years, have the right to enter into the ownership of such shares.

At first it seems that there is nothing unnatural in the possession of shares by someone other than the owner. Meanwhile, the Kyrgyz legislation regulating the securities market, and in particular its provisions governing the accounting, securities safekeeping and transfer of rights to securities, allows for such a possibility only in respect of the shares trustee.

Institute of entrusted administration of shares regulated by Chapter 43 provisions of CC. Under the contract of entrusted administration of property one party (the Trustor) transfers to other party (the Trustee) for a fixed term property in entrusted administration, and the other party is obligated to manage this property for the benefit of the Trustor or designated by him person (the Beneficiary) .

As the Trustee in accordance with the Regulations on keeping the register of holders of registered securities in Kyrgyz Republic (the “Regulations on keeping the register”) , recognized the professional securities market participant performing entrusted administration of securities transferred to his possession for a certain period and belonging to another person. In this case, a professional party acting on behalf of the trustor or a third party specified by the trustor. Furthermore, the Regulations on entrusted administration of securities (the “Regulations on entrusted administration”)  prohibits the trustee to enter into proprietary rights on shares held by him in trust. Thus, we may conclude that own shares may only be the owner of the shares or the trustee.

As already stated above, the proposals to recognize shares as ownerless come from the heads of joint-stock companies. However, it should be noted that the joint-stock company cannot enter into the right on shares issued by them in order of acquisitive prescriptions, if in the shareholder register shown a specific owner, even if the owner fails to fulfill his rights and duties (does not attend shareholders meeting, does not require accrued dividends on his shares, etc.).

The Regulations on keeping the register sets the list of grounds on which transfer of ownership of securities is registered. These grounds include: the execution of transactions on alienations of shares, entering into the right on shares in the inheritance and universal succession, by the court. Thus, the entry into the right on ownerless shares is possible only by court decision.

The cases on recognition of shares ownerless property already have been considered in the courts of Kyrgyz Republic. As a rule, the plaintiffs were joint-stock companies. The arguments indicated by companies for the recognition of stocks as ownerless property stock: (a) the shareholder was absent during the last five years, (b) the shareholder did not use his property and non-property rights. All claims have been satisfied in favor of plaintiffs with justification, that joint-stock company owns shares recognized as ownerless.

However, in accordance with Chapter 34 of the Civil Procedural Code of Kyrgyz Republic (the “CPC”), the main condition for the adjudication of applications for recognition of movable thing as ownerless is the presentation to court evidences to demonstrate the abandonment of things by the owner without the intention to preserve the ownership right on it, and evidences of the applicant's entry into the possession of the thing. The applicant can provide evidence that the shareholder was not present at a general meeting and did not addressed to the company to obtaining dividends , but there will be difficulties in providing evidences of his entry into the ownership of shares. It is important to keep in mind that the main requirement of the CC - person when entering into the right on ownerless property (in this case shares) should own the property as his own property. In other words (a) the holder of such shares shall have ownership rights in respect of the shares, and (b) these rights must not be challenged by a third party.

Escheat

In the register of securities owners of most large joint-stock companies there are shares registered by the shareholders, which, cannot exercise their rights by reason of death. Joint-stock companies, to the possible extent, make every effort to ensure the entry of shareholder heirs into the rights on shares on the basis of the certificate of inheritance. However, in practice, the heirs are not in a hurry to claim their rights to shares. This is mainly due to lack of funds, not liquidity of the shares or basic ignorance of the existence of such property.

The CC states that if there are no heirs either by law or by will or none of the heirs not entitled to inherit, or they refused the inheritance, property is recognized as escheat . Inherited property is recognized as escheated by the court decision based on claim of the State bodies or local self-government bodies on its location. Shares can be recognized as escheat only after one year from the date of opening the inheritance.

However, it should be noted that the State bodies and local self-government bodies tend to show interest in the shares only if they are liquid. Moreover, there is no mechanism for the initiation and conduction of activities on entering of the State bodies and local self-government bodies into the ownership of shares.

Conclusions

Based on the above stated, we understand that the legislation of Kyrgyz Republic on the recognition of shares as ownerless or escheat does not contain a mechanism for the recognition of shares as such.

In this regard, in our view, it is necessary to amend the legislation in terms of establishing a detailed procedure (mechanism) of the recognition of shares as escheat and ownerless property. Thus, the recognition procedure should at least: (a) provide the grounds on which shares should be considered as ownerless and escheat, (b) determine the attributes of shares as “abandoned property”, (c) contain a procedure for registration of ownership transfer of an independent Registrar for recognition of stock as ownerless or escheat.

Establishing clear rules will allow public joint-stock companies to solve the problems briefly discussed in this article.

(The article published on the website of
the “International Business Council”:
www.ibc.kg in the “Analysis” section,
 February 2009)