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The B.S. Behind Nevada Bearer Shares

By Rob Lambert - Email Editor

Date: April 20, 2006

One of the hot topics on the Asset Protection Corporation bulletin board (Click Here) is the heavily marketed Nevada Corporation. A lawyer from Nevada named Randall Edwards did a great post totally exposing the B.S. behind the bearer share scam. I asked him to turn his post into a newsletter, and here it is.

THE B.S. BEHIND NEVADA BEARER SHARES

Spend about an hour listening to talk radio and you can't miss it – that radio ad touting Nevada corporations as the bulletproof Asset Protection shelter that can keep you from getting sued and losing your fortune to those greedy personal injury lawyers who are laying in wait to put your name on the defendant line of a meritless lawsuit.

There's no question that Asset Protection is a good idea – just as you'd be irresponsible to drive your car without insurance, you'd be crazy not to shield yourself and your money from a lawsuit. But are Nevada corporations the one-size-fits-all answer? As a lawyer who has practiced in Nevada since 1983, I have to tell you that the answer is a resounding “no.”

The marketing of Nevada corporations takes many forms – from Internet sites promising to incorporate you cheap cheap cheap to a network of sales representatives pushing a Las Vegas-based program. Nonetheless, the legal theory behind the craze is always the same: Because Nevada is the only state that approves “bearer shares” – as negotiable and easy to transfer as cash – no one can really ever know who owns a corporation at any time, because at any time anyone might have the “bearer shares” in their pocket.

The theory appears to go something like this:

Because Nevada's corporate statute differs from the Revised Model Business Corporation Act as developed by the Committee on Corporate Laws of the American Bar Association in that NRS does not require that a stock certificate state the name of the person to whom the stock is issued, somehow the stock certificate can be made out simply to “bearer” and thus, just like cash, whoever happens to be hanging onto the shares at any given time is the “owner” for Asset Protection purposes. Thus, when a creditor hauls the person who has been running the corporation up until the morning of his testimony into court, that person can look the judge in the eye and state truthfully, “Gee, I don't know who owns the corporation, sir, since I just don't know where the ‘bearer' shares are right now, or who's got ‘em today. And whoever's got ‘em is the owner – at least right now.”

Accordingly, the judge will shrug his shoulders, throw his hands in the air and confess, “Well, I guess that's the end of that. We just can't figure it out, so … CASE DISMISSED! Next?”

The debtor then scurries home, where his grandma, or whoever happens to be holding the stock certificates, says, “Welcome home, Sonny … here are those pesky papers you gave me this morning,” after which life goes on unabated, since the debtor now has the stock (and thus ownership of the corporation) back in his hands, with the frustrated creditor stamping his feet in the background, muttering, “Curses! Foiled again by that darned Nevada ‘bearer shares' law!”

That's the theory, at least. Unfortunately, this structure appears to be built on a pretty shaky foundation. Here's why:

First, there is no statutory or case authority that stands for the proposition that such a thing as “bearer shares” exists in Nevada - at least not in the form pushed by the “Asset Protection” promoters. There are no Supreme Court opinions dealing with the concept, no Attorney General's opinions, no federal cases and, as far as I've been able to ascertain, no district court opinions upholding such a concept.

In fact, the whole “bearer share” idea stems from this language, in NRS 78.235(1):

“Except as otherwise provided in subsection 4, every stockholder is entitled to have a certificate, signed by officers or agents designated by the corporation for the purpose, certifying the number of shares owned by him in the corporation.” That's it. There's not a word in Nevada statute that says “bearer,” no indication that the owner of a corporation can scam a creditor by claiming that he doesn't know who owns the corporation, and no provision that entitlement to a certificate equates to entitlement to hide from a valid debt.

In fact, Nevada case law appears to stand for just the opposite conclusion. As far back as 1942, the Nevada Supreme Court held that “a transfer of stock between individuals, in order to receive recognition by the corporation, must be registered upon its books.” See Petition of Simrak , 61 Nev. 431, 132 P.2d 605. This concept has been upheld as recently as 1986, in the case of Schwabacher v. Zobrist, 102 Nev. 55, 714 P.2d 1003, which again confirmed that an ownership interest in a corporation is not valid as to the corporation until that interest is registered with the corporation. In fact, the case went on to say that when a stock transfer isn't registered on the corporate books, the person transferring the stock stands as a trustee for the person receiving the stock. Doesn't sound much like the idea that there somehow exists a provision under Nevada law that authorizes “bearer shares” that can be transferred like cash. To the contrary, it appears that Nevada case law stands for just the opposite proposition.

Second, under Nevada law, the holding of the stock certificate doesn't necessarily mean anything. In 1921, the Nevada Attorney General's Office issued an opinion that the stock certificate does not equate to the stock itself, but is merely a piece of paper evidencing ownership. See AGO 38 (6-7-1921). In all the intervening years, the Attorney General's Office has never modified or rescinded this opinion. In fact, because Nevada does not necessarily require that corporations issue certificates at all, it makes no sense to assume that possession of a stock certificate equals ownership of the shares anyway.

Along that same line, Nevada law provides that stock shares are personal property. NRS 78.240. All rules, regulations and taxes that would otherwise apply to transfers of personal property would also apply to transfers of “bearer shares,” if indeed such an animal exists. For example, my car is also my personal property. Handing my buddy the keys until I got back from court wouldn't equate to transferring ownership, nor could I get away with telling a judge, “Gosh, your honor, I don't know who's driving the jalopy right now, so I couldn't really tell you who owns the old clunker.”

Thus, even if such a concept as “bearer shares” did somehow exist under Nevada law, and even if the transfer of ownership of a corporation could somehow be accomplished with such ease, there would still be all sorts of estate, gift and capital gains tax issues. Furthermore, there is also the possibility that the transferee of the bearer shares would also be hit with any judgment that had been levied against the transferor since, as the Schwabacher case stated, when an unregistered transfer of stock has occurred, the transferee of that stock is “responsible for the burdens and liabilities growing out of its ownership,” at least as against the transferor of the stock. Presumably, this would carry with it any court order relative to the stock arising from the transferor's liabilities.

Finally, does anyone seriously believe that any judge would fall for this sham? I've been practicing law in Nevada since 1983, and I know or have practiced before an awful lot of the judges on the Nevada bench, including the Nevada Supreme Court. Now, even granting that not everyone who's ever been appointed or elected to the bench (that's right, in Nevada, judges are elected) is the brightest lamp on the casino marquee, I don't believe that even the dimmest of Nevada's legal luminaries would fall for the idea that a corporate ledger book that makes out the owner of stock shares to “Bearer,” coupled with a befuddled-looking debtor defendant smugly saying, “Yup, I think I might've had some of them stock certificates, but I don't have any now,” would somehow leave the judge without any ability to fashion a legal remedy other than dismissal of a case against a debtor.

I think that the most tame thing that a judge would do under such circumstances would be to declare the debtor to be in constructive, if not actual, ownership of the shares and order the corporation to be liquidated to satisfy a creditor's claim. Most of the judges I know wouldn't sit still for just that, though; somehow, the phrase “contempt of court” keeps springing to mind.

So, when you hear that radio ad that promises untold Asset Protection by merely filing articles of incorporation in Nevada, I have this word of advice: RUN! Actually, a few more words: AS FAST AS YOU CAN. THE OTHER WAY!

This is Rob again. What a great bit of research. Thank you Randall. Mr. Edwards practices law in California, Nevada, Arizona and Utah with his primary office in Salt Lake City. In addition to being smart, he is also a good guy.

Now, go have a healthy and protected week….and don't forget to stay away from phony Nevada Corporation Asset Protection schemes. Man Oh Man, we keep beating this scam to death, but it refuses to die.

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