WHILST THE BRITISH VIRGIN ISLANDS (BVI) HAS ALWAYS been regarded as an exceptionally safe, secure and stable environment from which companies and individuals can manage their worldwide financial concerns, the BVI found itself at the centre of a 'perfect storm' in recent years.
The Overseas Territories and Crown Dependencies of the United Kingdom (and the BVI in particular) were swept into a wave of negative publicity generated by media, major governments and nongovernmental organisations (NGOs) because of their 'off shore' status and the financial sector behind it. With this as a backdrop, British Prime Minister David Cameron announced the agenda for the 2013 G8 Summit titled 'Tax, Transparency and Trade'.
British Virgin Islands (BVI) companies have played a significant role for corporates and high net worth individuals in Asia for almost 30 years and the jurisdiction's recent anniversary celebrations for the introduction of the International Business Companies Act (IBC Act) (introduced in 1984) paid a fitting tribute to the important role in both inbound and outbound transactions that the BVI now plays in the region. The BVI's decision to open a representative office here in Hong Kong (in 2013) is further evidence of both Asia's importance to the BVI and the BVI's current position as a conduit for international business in the region.
From the date of the introduction of the IBC Act to now, the use of the jurisdiction and its "product" offerings have become increasingly sophisticated, reflecting the ongoing growth and development of the Chinese and other Asian economies. The BVI has moved away from just being a holding company adjunct to personal and corporate structures to being a key component. This article will take a look at some of the current uses in Asia of BVI companies and other related jurisdictional offerings.
BVI Companies
The BVI is the world's largest off shore domicile for companies with over half a million active companies currently on its companies registry. It is estimated that almost half of those companies are owned and operated from Asia and, in particular, from China. The advantages afforded to companies under BVI corporate law and the availability of BVI incorporation, administrative and legal service providers within the Asian time zone have been key in the growth and development of BVI business in Asia. Some of the key advantages in the Asian market for BVI companies include the following:
(a) They are relatively low maintenance companies which can be incorporated within 24 hours with a Chinese character name forming part of the registered name of the company and which can have a sole shareholder and sole director (which can be the same individual).
(b) Ease of repurchase of shares/ distributions of shareholders – the BVI has abolished the concept of share "capital". Repurchases and distributions by a company require satisfaction of a statutory solvency test.
(c) Scalability of corporate governance requirements – the constitution of a BVI company, its memorandum and articles, can be bespoked to provide for minimal recourse to shareholders on decision making or can be drafted to incorporate the checks and balances required of a listed company.
(d) Stability/rule of law – the recognition of foreign judgments by the BVI courts and the approach taken by the BVI's Commercial Court provides investors across the region with comfort as to the robustness of the jurisdiction's legal framework.
(e) Statutory protection for minority shareholders.
(f) Director duties in joint venture/pre-IPO context – directors of a BVI company can act in the best interests of the shareholder who appoints them (as opposed to the best interests of the BVI company of which they are a director).
The BVI and Asian Entrepreneurs
The above advantages have helped the BVI to develop a significant market share in the pre-IPO/private equity space where Asian entrepreneurs have, with both domestic and international investors, used BVI companies as the conduit through which to fund and invest in businesses across the region. Typically, the BVI company's memorandum and articles will be drafted to dovetail with the contractual shareholder arrangements agreed between the parties to a transaction and will detail the way in which the business of the BVI company is to be funded, the matters on which the parties, in their capacity as shareholders of the BVI company will be consulted, the way in which the board of the company is to be populated, etc.
As an aside, in the context of fund raising for business purposes, the BVI's public security registration system, its recognition of foreign law remedies for security interests created over the shares of a BVI company and its creditor friendly insolvency regime, have provided comfort to banks and other financial institutions when lending monies to BVI company owned businesses. In addition, many listed companies in Asia utilise BVI companies (as issuers) when looking to raise debt financing via bond issuances.
Ultimately, many of the pre-IPO structures described above result in either a trade sale (and exit for investors) or with a listing of the BVI company on an international stock exchange. There are BVI companies listed on all major international stock exchanges including Hong Kong, NASDAQ and AIM.
For the entrepreneurs who founded these businesses, their own personal wealth and the complexity of their affairs are likely to increase over the lifetime of the business. In an IPO context, we and many other off shore providers have seen a dramatic increase in the number of 'founder' trusts being structured by entrepreneurs in the run up to the listing of their businesses. Many entrepreneurs when deciding how and where to structure their trusts, are taking advantage of two BVI offerings in the private client arena: VISTA trusts and PTCs.
VISTA
The Virgin Islands Special Trusts Act 2003 (VISTA) came into force on 1 March 2004. Th e overall purpose of VISTA is to enable an individual to establish a trust over the shares of his BVI company that disengages the trustee from management responsibility (for the BVI company) and permits the BVI company and its business to be retained for as long as the directors of the BVI company think fi t. In broad terms, this is achieved by:
(a) authorising the entire removal of the trustee's monitoring and intervention obligations;
(b) permitting the entrepreneur settlor to give the trustee a role more suited to the trustee's abilities, namely a duty to intervene to resolve specific problems (eg a deadlocked board);
(c) allowing trust instruments to lay down rules for the appointment and removal of directors (so reducing the trustee's ability to intervene in management by appointing directors of their own choosing);
(d) giving both beneficiaries and directors the right to apply to the court if trustees fail to comply with the requirements for non-intervention or the requirements for director appointment and removal; and
(e) prohibiting the sale of shares without directors' approval.
VISTA was designed with succession planning for family businesses in mind and is particularly well suited to a situation in which the settlor wishes to plan for the succession of his business but does not want the trustees to have responsibility for running the business. The big attraction of VISTA to high net worth clients in Asia is this ability that VISTA provides for the client to retain control of his underlying business by virtue of the trustee of the VISTA trust not being involved in the management of the BVI company's business; the trustee's responsibility is to retain ownership of the shares in the BVI company only.
VISTA allows the shares in the BVI company to be held (by the trustee) for the benefit of one spouse while the BVI company continues to be run by the entrepreneurial spouse without fear of interference from the trustee. The beneficiary spouse can still benefi t from the dividends from the BVI company but neither that spouse nor the children will be able to exert any pressure on the trustees to be appointed as directors in the future. Legal ownership of the shares in the BVI company residing with the trustee provides advantages from a succession planning perspective; on the death of the settlor, the legal title to the shares in the BVI company can be transferred by the trustee to the beneficiaries of the trust, thereby avoiding any probate issues arising from the death of the settlor.
PTCs
Private trust companies, or PTCs are gaining in popularity in Asia. One of the great advantages to an entrepreneur settlor of a PTC is that by using a BVI company as the trustee of his trust, the settlor does not need to outsource the trustee function to a professional intermediary. Instead he retains a large element of control over the identity and composition of the board of directors of the PTC that will be the trustee to the underlying assets. In addition, a PTC avoids the need to obtain a trust licence if it only carries out unremunerated or related trust business – each as defined in the relevant BVI registration. PTCs are being used both to structure the shareholdings of founders in successful businesses but also to structure employee share incentive schemes in those same businesses where there is a need to reward and/or incentivise the management team.
Whilst the Asian economies continue to change, grow and prosper, we are likely to see the continued use of the BVI by businesses and business owners in the region. The BVI is not resting on its laurels and is working hard from BVI House Asia in Hong Kong to promote the diversity of its jurisdictional offering which, in addition to the offerings described above, includes a healthy funds industry and the beginnings of its entry into the world of arbitration. The jurisdiction is currently in the midst of a management consultant led review of its financial services business with a view to compiling a roadmap to prepare the BVI for the future and the next phase of international development - a future that will undoubtedly continue to involve Asia.
This article first appeared in the IFC Caribbean 2015, published by IFC Review in December 2014.