British Virgin Islands: Takeovers And Director’s Duties: British Virgin Islands

The absence of any Takeover Code has sometimes made it difficult for directors of British Virgin Islands (BVI) companies and their advisers to determine what are the applicable rules when a BVI company is faced by a takeover offer. In basic terms, a takeover can be described as the acquisition by a person of all of the shares in a company save for those held by the offeror. Unlike English law ¹, the term is not defined in BVI law. So what is a person to do where he finds himself a director2 of a BVI company and that company is the subject of what looks and feels like a takeover offer or an offer made directly to the shareholders - a hostile offer? What are his duties? Given the BVI Business Companies Act, 2004 of the laws of the BVI (BVIBCA) which came into force on 1 January 2005; this is an appropriate juncture to consider the various issues. Until 1 January 2007 it will coexist with the International Business Companies Act, Cap. 291 (IBCA) and the Companies Act, Cap. 285 of the laws of the BVI but from 1 January 2006, new companies may only be formed under the BVIBCA. As mentioned above, there is no equivalent of the City Code on Takeover and Mergers (UK) (the ‘City Code’) in the BVI, no securities legislation, and no Stock Exchange. Regarding the two main pieces of corporate legislation (IBCA and BVIBCA) there is also no distinction between private and public companies and accordingly, in contrast to the position in England3, BVI law as it currently stands applies to all such companies. Takeovers (hostile or recommended) or similar matters, and directors’ duties in that context and generally, are governed by:

• The common law;

• Section 54 of the IBCA;

• Sections 120 - 122 of the BVIBCA;

• Section 81 of the IBCA;

• Section 176 of the BVIBCA;

• Section 82 of the IBCA; and

• Section 177 of the BVIBCA.

I should briefly mention as a separate matter, that statutory mergers are permitted under the IBCA4 and the VIBCA5 whereby two or more constituent companies, that is companies actually participating in the merger, enter into a Plan of Merger and Articles of Merger pursuant to which the two companies merge into one of the constituent companies. Essentially, one company survives and the other does not. The assets and inabilities of both companies become the assets and liabilities of the surviving company and it all happens by operation of law. I will also not discuss companies incorporated under the Companies Act, Cap. 285 (where there is a distinction between private and public companies) as these are, relatively speaking, few in number.

A director is subject to certain duties from the moment he takes office. Those duties do

not necessarily come to an end when the director leaves office, particularly if resignation is with a view to exploiting opportunities that were open to the company. The duty not to exceed the powers given to them is one that requires the directors to act within their powers as set out in the company’s constitution and not enter into transactions that contravene the common law or statute. A director who is in breach may be liable for losses that are incurred by the company as a result. Investment opportunities in which the Company may participate should be exploited for the Company, not by the director for his personal gain for example by forming a new company to which such a business opportunity is diverted7. Directors are required to account to the company for any unauthorised profits made by them regardless of whether the company could have availed itself of the opportunity. In certain circumstances where a director has realised a profit he may keep the same if ratified by the shareholders and in other cases he may not. The general rule is that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest conflict. In terms of being a director of two competing companies, in the absence of a contractual restriction, there is no specific rule that prohibits a director of a company from so acting12. It is however thought that this may be a limited principle and accordingly caution is best exercised. The directors of a company owe a fiduciary duty to act bona fide in what they consider to be the best interests of the company and not for any collateral purpose. The test is subjective being directed at the director’s state of mind. Did the director act honestly believing his actions to be for the benefit of the Company? The directors should also have regard to the interests of the creditors generally. The standard of care and skill to be applied to directors at common law is as stated in the Insolvency Act 2003 (BVI). The facts that a director ought to know or ascertain, the conclusions which he ought to reach and the steps reasonably open to him which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company; and (b) the general knowledge skill and experience that that director actually has. It appears to be both an objective and a subjective standard. It has long been the position that a director must not act for an improper purpose, as this is in conflict with his duty to act in the best interests of the company. It was held in Hogg v Cramphorn that where the directors use their fiduciary power over the shares in the company purely for the purpose of destroying an existing majority or for creating a new majority which did not previously exist, that that was an abuse of their powers.

The IBCA16 requires every director to act honestly and in good faith with a view to the best interests of the company and exercise the care diligence and skill that a reasonably prudent person would exercise in comparable circumstances. It is a codification of the existing common law principles that directors owe fiduciary duties to the company and the duty to exercise due care and skill in the exercise of their powers and duties but there is nothing further about directors’ duties in the IBCA. Thus, the courts would thereafter rely heavily upon principles of English common law.

In addition to the duties at common law, directors of a company incorporated under the BVIBCA are subject to certain statutory duties under that Act:

• Directors must act honestly and in good faith in the best interests of the Company.

• The exercise of the director’s powers must be for a proper purpose.

• A director must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances. Once again, the principles here are effectively a codification of existing common law principles.

It would seem obvious but the one main duty is to be honest and not mislead the shareholders. In that case while the court held that the directors of an offeree company have a duty towards their own shareholders which clearly includes a duty to be honest and a duty not to mislead, they did not grant the injunction to prevent the offeror company from declaring the offer unconditional because there was no bad faith or conduct so unreasonable as to approach bad faith and having considered the evidence as a whole, it was clear that the offeree board honestly believed that an offer of £200. for £100. Of the shares of their company was advantageous and ought to be recommended to the stockholders. The court went further and declared that, on considering the figures it was also clear that a director could reasonably hold that belief. The courts maintain that the primary duty of directors is to the Company but that there may also be a fiduciary duty to the shareholders as a whole in certain circumstances20 and it is thought in rare instances even to individual shareholders. In a takeover, directors have a duty to consider the interests of shareholders in the discharge of their duty to the company but do not per se owe a fiduciary duty to shareholders as sellers of shares. Where directors decide to advise shareholders on the merits of a bid they must provide sufficient information and advice to enable shareholders to reach an informed decision and must refrain from giving misleading advice or exercising their fiduciary powers in ways that would prevent shareholders from being able to make an uninhibited choice. In my experience it is prudent, upon receipt of a takeover offer for the board to:

• Take independent advice and communicate that to the shareholders in a timely manner.

• Insist that the directors of the offeree company, or for that matter a person who has access to relevant confidential information, should during the offer period cease or disclose fully any dealings with the shares.

• Ensure that information in connection with the offer that is meant to be communicated to others is accurate in all respects and not misleading. The bidders duty is essentially not to misuse confidential information. Notwithstanding that the City Code does not apply in the BVI there are several aspects of it that the management of a BVI company would do well to observe. Bidders and perhaps directors of the target can take advantage of the absence of a Takeover Code, as happened in the UK in the 1950s and 1960s25, but for the directors of a BVI company typically engaged in international cross border mergers and takeovers, the better approach involves not only complying with the requirements of law as they are in the BVI but also generally accepted practice in more developed markets. I will not summarise here the requirements of the City Code in terms of making a bid but I will say that taking BVI law advice and, for example, English or New York law advice (depending on the context) would be prudent. In that way actions taken by directors of the target or the bidder will be better able to withstand scrutiny. This is not to say that all BVI companies should be subject to a Takeover Code. Not at all. It is not the case in the UK and other countries and there is no reason why it should be the case in the BVI. In terms of how the rules/legislation develops in the BVI, it requires further thought but perhaps any Takeover Code could be restricted to public or listed companies not including listed companies that are already subject to a Takeover Code in another country, companies already regulated in the BVI, or private/closely held unregulated companies). Break fees should be carefully considered in line with directors’ duties. The key legal points are duties and whether the break fee could be construed as a penalty.

Out of an abundance of caution, and subject to the need to act in the best interests of the company and observe the duty to act for a proper purpose, the starting point must be that any measures to be put in place must happen well in advance of a takeover offer so that the directors avoid the criticism that they are exercising their powers for an improper purpose26. There is a danger of a conflict between the duty of the board to act in the best interests of the company having regard to the position of the shareholders and their own position, as there is a real chance that they could lose their job! Directors thus need to be careful in this regard. In Hogg a takeover offer having been made, the directors devised a scheme, the primary purpose of which was to ensure control of the company by the directors. The board of the offeree company also advised the offeror that they did not intend to put their offer before the shareholders. It was held that as the power to issue shares was a fiduciary power, if it is exercised for an improper motive the issue was liable to be set aside – it being immaterial that the issue was made in the bona fide belief that it was in the interests of the company. In Stena however the shareholder rights plan which was adopted in anticipation of a takeover offer in the future, was held to have been lawfully adopted in accordance with the company’s constitution, exercised equitably amongst all shareholders, and there was no improper purpose. Some of the preferred defences or ‘poison pills’ are:

• An issue of unissued shares. The typical scenario involves an offer for a certain percentage of the offeree company or there is an announcement of the intended acquisition. If a ‘poison pill’ (which usually meant to address an unwanted offer) is in place, the result is that the issue of a large number of shares (which under BVI law may be issued without shareholder approval) or the right (usually a warrant, option or similar security) to acquire a large number of shares in the capital of the offeree is triggered (ie the company makes itself an unattractive target - hence ‘poison pill’) and the offeror’s holding in the target is thereby usually significantly diluted. Based on Stena, a Bermuda decision, there would seem to be no objection to the adoption of a poison pill by a BVI company in the right circumstances. For the purpose of BVI law if the poison pill took the form of a dividend of shares, the company would have to have a sufficient surplus effectively net distributable reserves) to enable the company to declare and pay the same. Otherwise it would merely be a contractual matter and all the requirements of a valid contract would have to be present.

• Alteration of voting rights of a class27. In Rights v. Stylo certain resolutions were passed to double the voting rights of the management shares. The holders of the management shares did not vote at the class meeting or the company meeting. The holders of some of the ordinary shares who voted against the resolutions brought a motion to restrain the company from acting on those resolutions on the ground that they were oppressive. It was held that since all necessary steps and approvals in law or under the company’s constitution had been taken and the resolution was passed in good faith for the benefit of the company as a whole it could not then be said to be oppressive. As a matter of BVI law there is no objection to such a step.

Pursuant to section 81 of the IBCA, members holding ninety percent of the votes of the outstanding shares and members holding ninety percent of the votes of the outstanding shares of each class and series of shares, in each case, where they are entitled to vote on a merger or consolidation may give a written instruction to the company in which the shares are held directing the company to redeem the remaining ten percent of shares. Section 176 of the BVIBCA, while not exactly the same, is a very similar provision. In addition, section 82 of the IBCA (and section 177 of the BVIBCA) permits arrangements that include statutory mergers (as mentioned above) or a disposition of shares in a company for other property, and this is a procedure whereby the directors approve a plan of arrangement and thereafter make an application to the court for its approval. A company may take one or more actions under that section without those actions being regarded as an arrangement but the attraction of this procedure is that it has the blessing of the court.

In the final analysis, given that cross border activity is normal for BVI companies it is important that the directors of BVI public or publicly listed companies are seen to approach takeovers from a ‘market practice’ perspective. Simply complying with BVI law will ensure that the essential legal requirements are met but should the actions of the board come under scrutiny it will be in their best interests to be able to demonstrate that they have gone beyond what is required of them and have considered and, if necessary, implemented the practice in the market in which they do business.

^{1 Section 428(1) Companies Act 1985 (UK)}