The British Virgin Islands ("BVI") has long been a world renowned international financial centre, with more than 380,000 active companies registered there1. Sophisticated and professional investors are drawn to the BVI by its numerous benefits, including its combination of political and economic stability, progressive corporate law framework, robust but appropriate corporate governance and regulation, favourable taxation, and highly-skilled and comprehensive service providers. Such benefits provide many advantages for corporate holding structures established in the BVI, which have resulted in BVI companies being active throughout the global economy and holding assets and undertaking business activities across multitudinous industries and sectors.
Whilst the global market for mergers and acquisitions ("M&A") has, undoubtedly, been impacted by the COVID-19 pandemic, there are signs of a recovery, not least a global vaccination drive, and this, coupled with widespread reports of "dry powder" capital ready to be deployed, lends weight to expectations of an impending increase in global M&A activity. Furthermore, it is anticipated that such recovery in the global M&A market will be aided by, among other things, joint ventures and corporate reorganisations and restructurings, as well as mergers and consolidations.
Given the important role that is played by BVI companies in corporate holding structures across the globe, it is expected that any increase in global M&A activity will also see increased M&A activity involving BVI companies, and this note is intended to provide some practical guidance for purchasers, sellers and other stakeholders in relation to M&A activity involving a privately-held (non-regulated2) BVI business company (a "company").
Transferability of shares
Subject to any limitations or restrictions on the transfer of shares contained in the memorandum or articles of association of a company, a share in a company is transferable. As such, any party involved in a transfer of shares in a company should first check the company's memorandum and articles of association to determine, among other things, whether there are any limitations or restrictions on a transfer of shares in the company, or any constitutional procedures which must be followed in order to effect such a transfer. We consider certain common limitations and restrictions on transfers of shares further below.
It is worth noting that, helpfully, copies of a company's memorandum and articles of association are available through a search of the public records in respect of the company maintained at the offices of the Registrar of Corporate Affairs in the BVI (the "Registrar"). Accordingly, they can be obtained, independently, by a prospective purchaser of shares in the company.
Transfers of shares
Registered shares are transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee. The instrument of transfer must also be signed by the transferee if registration as a holder of the share will impose a liability to the company on the transferee (e.g. if the shares being acquired are only partly paid up).
An important point to note, however, is that a transfer of a registered share in a company only becomes effective under BVI law when the name of the transferee is entered in the company's register of members.
Evidence of shareholdings
The entry of the name of a person in the register of members of a company as a holder of a share in the company is prima facie evidence that legal title in the share vests in that person.
The register of members of a company is a "private" register and is not generally available to the public through a search of the records in respect of a company maintained at the offices of the Registrar.
A company may, however, voluntarily elect to file a copy of its register of members with the Registrar, meaning that it would be possible to obtain a copy of the company's filed register of members through such a search of the records in respect of the company maintained at the offices of the Registrar. Where a company has voluntarily elected to register a copy of its register of members with the Registrar, the company is then bound by the contents of the copy of its register of members so registered until such time as it elects to cease registration.
One reasonably common circumstance in which a company may elect to file a copy of its register of members with the Registrar is where the company is obliged to do so in connection with the granting of security over its shares (e.g. pursuant to a mortgage or charge over its shares). In such circumstance, the filed register will usually contain an annotation describing the particulars of that mortgage or charge.
Accordingly, a prospective purchaser of shares in a company should undertake a search of the public records in respect of the company maintained at the offices of the Registrar to check if the company's register of members has been so voluntarily registered and, if so, whether details of any relevant share security are shown on it.
Limitations or restrictions on transfers of shares
A company's memorandum and articles of association may contain limitations or restrictions on transfers of shares in the company. For example, such limitations or restrictions may include general prohibitions on the transferability of shares or a particular class of share in the company, drag-along or tag-along rights which are triggered by a proposed transfer of shares in the company, permitted transferee rights which restrict transfers of shares in the company to particular persons or categories of persons, or reserved matters requiring shareholder or other special consents to a transfer of shares in the company.
However, in our experience, the most common restrictions on transfers of shares in a company's memorandum and articles of association are as follows:
- whilst particulars of a mortgage or charge over shares in a company are entered in the register of members of the company, no transfer of any share the subject of those particulars shall be effected without the prior written consent of the relevant mortgagee or chargee; and
- the directors of the company may resolve to refuse or delay the registration of a transfer of shares in the company at their discretion.
Accordingly, it is important to engage BVI law counsel early in the transaction timeline as the company's memorandum and articles of association should be reviewed carefully at the outset of a proposed transaction to ensure that they do not contain any applicable limitations or restrictions on transfers of shares in the company.
In addition, a company may be party to other contracts, agreements or instruments (e.g. a joint venture or shareholders' agreement, whether or not the same is governed by BVI law or otherwise) which impact upon dispositions of shares in the company, the provisions of which should also be carefully reviewed as part of any due diligence exercise in respect of the company.
BVI Financial Services Commission
Under BVI regulatory legislation, the carrying on by a company of certain types of business or activity (e.g. banking, insurance, trust company, or investment business) requires the company to be licensed by the BVI Financial Services Commission (the "FSC"); and, for such companies, there are special change of control provisions applicable under BVI law. These change of control provisions generally require the FSC's approval in advance of any change of control in the company's ownership chain, whether in relation to a direct or indirect parent company.
Accordingly, where there is a proposed change of control of an FSC-regulated BVI company within the scope of the relevant BVI legislation (including of a direct or indirect parent company), it is prudent to engage BVI law counsel early in the transaction process to assist with any change of control advice and any necessary application to the FSC.
Share transfer deliverables
The terms and conditions of a sale and purchase of shares in a company are usually set out in a share purchase agreement. Such share purchase agreement should include certain key deliverables required to be provided to the purchaser of the shares, upon closing of the transaction, in order to evidence the approval and authorisation of the transaction and to give effect to it.
In addition to any specific deliverables and conditions precedent that the particular circumstances of the transaction require, such key deliverables should generally include the following:
- a duly executed share transfer form, in the appropriate form, in respect of all of the shares in the company that the purchaser is acquiring from the seller (the "Sale Shares");
- if there are any particulars of a mortgage or charge over the Sale Shares entered in the company's register of members, either evidence of the release or discharge of that mortgage or charge (and removal of the particulars from the company's register of members - including, if applicable, from the public copy of the register of members filed with the Registrar) or written consent from the relevant mortgagee or chargee to the transfer of the Sale Shares;
- duly adopted resolutions of the board of directors of the company and, if required, duly adopted resolutions of the members of the company, in each case approving, among other customary matters, the transfer of the Sale Shares, the registration of the transfer of the Sale Shares, and the updating of the company's register of members to show the purchaser as the holder of the Sale Shares;
- an updated register of members of the company showing the purchaser as the holder of the Sale Shares (including, if applicable, evidence of the public registration of the updated register of members (or a cessation of its registration) with the Registrar);
- (if the purchaser requires a share certificate) a new share certificate in respect of the Sale Shares issued in the purchaser's name (and the cancellation of any previous share certificate(s) in respect of the Sale Shares); and
- the certificate of incorporation (and any change of name certificate(s)) of the company, the memorandum and articles of association of the company, the statutory registers and books and records (including minute books) of the company, and all books of account, financial and accounting records, correspondence, documents, files, memoranda and other papers relating to the company.
Of course, a company's memorandum and articles of association may prescribe additional requirements relating to a transfer of shares in the company, or the company may be party to other contracts, agreements or instruments which impose applicable additional requirements - all of which should be carefully considered as part of the particular circumstances of the transaction.
In addition, parties will often agree to undertake certain other key actions as part of the closing process – e.g. changing the directors of the company, or changing the company's BVI-based registered agent and registered office address, each of which (including any related deliverables) should be effected as part of the transaction and undertaken at closing (as applicable).
Representations and warranties
As is customary in any private M&A transaction, a purchaser should obtain appropriate representations and warranties in relation to the target company and the Sale Shares (among other things) so as to give the purchaser adequate protection and certainty in its acquisition of the Sale Shares, and to provide the purchaser with a basis for recourse against the seller should any such representation prove to be inaccurate or if any such warranty is breached.
In addition to any representations and warranties required by the particular circumstances of the transaction, we would generally expect to see appropriate representations and warranties (as applicable) given by the seller of the Sale Shares as to, among other things:
- the due incorporation and registration, valid existence and good standing of the company;
- the assets and business of the company, and the power of the company to own such assets and carry on such business as it is being conducted;
- its legal and beneficial ownership of the Sale Shares;
- the due authorisation and valid issuance of the Sale Shares, and the Sale Shares being fully paid up, non-assessable and freely transferable;
- whether or not any of the Sale Shares are subject to any encumbrances, mortgages, charges, commitments, agreements and/or claims;
- compliance by the company with the provisions of the BVI Business Companies Act, 2004 (as amended) and all other applicable laws and regulations (including, but not limited to, with respect to the keeping of the books and records of the company);
- the company's solvency;
- any litigation or arbitration proceedings involving the company;
- whether the company has an interest in land located in the BVI, or has had any employees or subsidiaries;
- compliance by the company with the provisions of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (as amended), including but not limited to in relation to filings required by such legislation; and
- the contracts, agreements or instruments to which the company is a party.
Anti-money laundering and anti-terrorist financing obligations
A company must at all times have a registered agent in the BVI. The registered agent performs certain administrative functions for the company. The registered agent may (and typically does) provide a registered office address for the company in the BVI and will also usually maintain the company's original statutory registers.
The promotion of robust anti-money laundering and anti-terrorist financing systems forms a central pillar of BVI regulation, and a registered agent is required to take reasonable steps to identify the beneficial owners of each company for which it acts.
In the context of a private M&A transaction, this will invariably mean that the target company's registered agent will need to be provided with such information and documentation ("KYC") regarding the proposed new shareholders and/or directors of the company as is necessary to enable it to discharge its regulatory obligations prior to the registered agent updating the statutory registers of the company to show such new shareholders and/or directors.
As such, all required KYC should be provided to the registered agent as early as possible - and, in any case, prior to closing - to avoid any unnecessary delays in the registration of the transfer of the shares in the company and/or the registration of the appointment of any new directors of the company.
1. See BVI FSC Statistical Bulletin Q3 2020, Vol. 60/September 2020 (published January 2021).
2. Details regarding BVI-regulated companies are set out under the heading 'BVI Financial Services Commission' below.
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.