Businesses conducting cross-border transactions face the challenge of creating structures to help mitigate the increasingly complicated global framework of tax, regulation and securities law in a cost effective way. British Virgin Islands ("BVI") business companies are often used as special purpose investment vehicles as part of this structuring.
With over one million incorporations since 1984 and with thousands of new business companies registered every month by stakeholders globally, approximately half of all BVI companies appearing on the companies register are owned and operated from Asia, most notably in China, Hong Kong, Singapore and Japan.
In this article, we provide an overview of some of the advantages to using BVI vehicles in these structures.
The BVI Advantage
Sophistication as a Jurisdiction
The substantive law of the BVI is based on English common law which means that it has well-recognised legal concepts (including limited liability and separate corporate personality) which underpin the BVI corporate vehicle. The BVI's insolvency regime and the principles governing the taking of security over the assets of a BVI company are creditor friendly.
The BVI Court is well respected and a source of comfort for investors and counterparties. The BVI Court is also accessible and flexible especially during these unusual times. In response to the pandemic, COVID-19 Emergency Measures were swiftly brought into effect by the Chief Justice to provide for trials to be conducted via remote means. In fact, Maples and Calder, the Maples Group's law firm, acted in a trial earlier this year over a four week period before the BVI Commercial Court where the hearing was conducted using video and audio conferencing platform Zoom, allowing practitioners based in the BVI, Hong Kong, England and Singapore to attend Court. This was the first of its kind in the BVI.
Commitment to Transparency
The BVI also upholds international compliance standards. The BVI was an early adopter of the Foreign Account Tax Compliance act ("FATCA") and the OECD's Common Reporting Standards ("CRS"), so that tax information on investors is now exchanged with over 100 other countries. The BVI has developed its beneficial ownership information regime and the recent introduction of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the "ES Act") further enhances transparency and demonstrates the BVI's commitment and adherence to global standards. The BVI is rated by the OECD as "largely compliant" regarding transparency and information exchange – the same rating as given to the UK, Germany and the US.
The BVI is a tax neutral domicile. There are no foreign exchange controls or corporate taxes in the BVI. The BVI is not a party to any double taxation treaties and so any taxes due in the jurisdictions in which the BVI company's money is made (such as capital gains tax on its investment gains, if applicable) and jurisdictions where the BVI company's investors are tax resident (such as capital gains tax or income tax on dividends) remain payable. The tax neutrality of a BVI company simply means that international transactions may be structured efficiently without an additional layer of tax in the jurisdiction where the vehicle combining the stakeholders' interests is located.
Simple and Flexible
The incorporation process for BVI companies is simple and straightforward which allows for same-day incorporations at a low cost. Minimal maintenance is required - there is no requirement to have resident directors, to convene annual general meetings, to appoint auditors or to prepare and file accounts (unless they are regulated entities). The BVI also does not impose a double layer of regulation. For example, there is no BVI takeover code or public filing requirement in the BVI applicable to a listed company. There are few prescriptive statutory requirements, which makes BVI companies more flexible in operation.
How Cross-Border Businesses Can Maximize Potential When Structured with BVI Companies
International Joint Ventures
Where two or more parties from different jurisdictions wish to form a joint venture, perhaps involving a business opportunity in a third country, the BVI provides the complete platform for the parties to achieve their common and individual goals, in particular:
(a) a stable and well-understood legal and judicial system that provides the parties with business certainty as well as neutrality between them and, when incorporated into a structure, can assist businesses compete for and service an international client base allowing international stakeholders to cooperate on a level playing field, without any one stakeholder taking the 'home field' advantage;
(b) a flexible vehicle that permits a range of solutions to suit the economic, structuring and corporate governance requirements of the parties, for example, the constitution of BVI companies can be tailored and adapted to give effect to investor protection requirements, such as bespoke share transfer arrangements (including pre-emption, drag-along and tag-along rights) and checks and balances on the directors (including deadlock resolution and reservation of additional matters for shareholder approval); and
(c) contributions may be financial, technological know-how, services or different combination of all of these and can be valued in multiple ways.
Multinational companies often enter into joint ventures with investors from many different jurisdictions using a BVI company to build a power generation plant, hospitals, roads or other infrastructure projects in developing countries. This can be of particular benefit especially to international investors seeking to invest in China or developing countries in Africa and other regions where facilitating inward private investment is critical to their economic development.
Private Equity Transactions
BVI companies are commonly used by venture capital and private equity investors for downstream acquisitions, joint ventures and pre-IPO convertible preference share financings. Banks, lenders and their counterparts are familiar with and therefore comfortable doing business with BVI companies. When venture capitalists or private equity funds want to exit through a private sale or an IPO, the BVI platform is well-known to potential buyers and stock exchanges, which allows them to routinely pass rigorous due diligence procedures.
Equity and Debt Capital Markets
An entrepreneur-led or PE-backed business often raises capital by way of an initial public share offering (IPO) and it is preferable to select a jurisdiction for the listing vehicle that maximises its appeal to a global investor basis. BVI companies are listed on most of the world's major stock exchanges including the NASDAQ, New York Stock Exchange, London Stock Exchange, International Securities Exchange and the Toronto Stock Exchange. When listing on the Hong Kong Stock Exchange, BVI companies enjoy access to a streamlined process – they do not face lengthy and burdensome restructuring requirements for their business or have to redomicile their place of incorporation, which significantly reduces the cost of a listing.
BVI vehicles are used in listing structures where founder shares can be held by a BVI trust, with a professional trustee managing the affairs of the trust. This protects the assets against forced heirship rules or creditor action against the founders or the listing vehicle. BVI vehicles can also be used as a platform for holding shares issued pursuant to employee stock option plans. This allows the entry and exit of executives / employees in the scheme without the administrative work associated with a direct shareholding in the listing vehicle.
BVI companies are also often used to issue notes or bonds to investors in different jurisdictions through international capital markets, allowing businesses to access new sources of capital while at the same time providing international investors with new investment opportunities with diversified risk profiles.
Mergers and Acquisitions
The BVI Business Companies Act (as amended) provides for the merger or consolidation of one or more BVI companies and one or more non-BVI companies (provided the proposed merger or consolidation is permitted by the laws of the jurisdiction in which the companies are incorporated).
Statutory merger is a common method of structuring a more complex acquisition or business combination. When a takeover occurs through a merger or consolidation, shareholders who object to the merger or consolidation will be able to exercise dissenter rights. Compared to many jurisdictions, the dissent process is quick and finite. Upon giving formal notice of their intention to dissent, shareholders cease to have any shareholder rights, save for the right to be paid the fair value for their shares by the company. Most importantly, provided that the requisite consent is obtained from shareholders, dissenters will not be able to block the merger or consolidation and will not hold onto their shares following the merger or consolidation coming into effect.
In addition to the statutory merger process, the BVI has a range of other options for a takeover. In particular, plans of arrangement and schemes of arrangement (which benefit from more than 200 years of common law in England and other Commonwealth jurisdictions) remain useful in a number of situations and provide the potential additional benefit of a Court sanction.
It is true that no business venture is launched without the expectation of success. However, it is business reality that, at particular points during its life, a business may come under financial strain. In determining the domicile of a particular structure, it is therefore critical that shareholders, management and other stakeholders, including lenders, have the greatest possible certainty as to their rights and obligations at such times, and the greatest opportunity to realise a positive outcome for all concerned.
The BVI has the tools necessary to enable a company to successfully restructure its debts and these tools can be employed effectively in the context of complex multinational structures. That can be the case even where not all of the entities are incorporated in the BVI, and where the debts are not governed by BVI law. BVI law includes one of the preeminent debt structuring mechanisms – the scheme of arrangement. A scheme of arrangement is a Court-based procedure which can be used where a consensual deal cannot be agreed between the company and its creditors. A scheme of arrangement is essentially a commercial deal between the company's creditors and / or members and, accordingly, the terms of the scheme will vary from case to case. One of the benefits of a scheme is that, once approved by the relevant majorities and the BVI Court, the scheme will become binding on all affected parties, regardless of whether and how they voted at the scheme meetings.
The myriad of advantages and examples of the uses of BVI vehicles in cross-border structures set out above means that market participants will continue to look to the BVI as a jurisdiction of choice for structures across a wide range of sectors. The commitment in the BVI to keeping pace with global regulatory standards, coupled with its strong track record in Asia, ensures that the jurisdiction is well placed to adhere to today's legal and global regulatory challenges and to continue to participate in the growth of the Asian economy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.