By Clinton Hempel and Matthew Gilbert, Maples and Calder -- The public equity market has entered 2010 with renewed vigor, and the British Virgin Islands is poised to play an increasingly important role.
The BVI is a popular locale for private equity investors to set up vehicles for investing worldwide. Characteristics such as familiar legal and judicial systems based on English common law, internationally compliant securities regulations and tax neutrality make it an especially attractive jurisdiction for pooling capital globally and investing it in markets where legal barriers or political risks would otherwise deter investment directly into host-country businesses.
Recent developments have further enhanced BVI's attractiveness. Perhaps most importantly, securities regulators in Hong Kong have recently agreed to let BVI-domiciled companies list their shares on the local stock exchange. This regulatory decision has opened a major route for private equity investors worldwide to exit their holdings in China. What's more, the warming market for IPOs has prompted many PE fund managers to resuscitate plans to exit investments through public listings, which could lead to a flurry of IPOs of BVI-domiciled companies with holdings in emerging markets and, in particular, China. This trend is also likely to encourage more PE investors to form investment vehicles in the BVI as they are better able to plan their exits.
Maples and Calder's BVI office is beginning to see some clients go public after putting off earlier plans. Maples recently advised on the AIM listing of metallurgical engineering firm MDM Engineering; and the NASDAQ listing of the Chinese-based hybrid-seed company Origin Agritech Ltd. Today, BVI companies are used across a broad range of sectors from mining and natural resources to cable television and technology. Maples recently advised on the business combination by NASDAQ listed special purpose acquisition company DJSP Enterprises, Inc, which provides non-legal services supporting residential real estate legal actions, and lender-owned real estate services in the United States.
Generally, the first step in an IPO through a BVI vehicle is to carry out a share swap so that the BVI vehicle becomes the holding company. That simplifies the need for the company to migrate to the BVI or to perform a costlier restructuring pre-IPO. Several of Maples' clients in the People's Republic of China are now looking to go public in the United States via a reverse merger with an existing U.S. public company. Others, particularly SPACs, have incorporated as BVI companies in preparation for a public listing.
Benefits of BVI Incorporation
Investors have always been attracted to BVI for its familiar legal principles, administrative simplicity and the ability to ring-fence liabilities. Also, BVI securities regulations are recognized by regulators worldwide, enabling fund managers to exit investments through a private sale or a listing on major stock exchanges. BVI companies can list shares on worldwide stock exchanges including the London Stock Exchange, LSE’s AIM exchange, the New York Stock Exchange, NASDAQ, the International Securities Exchange and the Toronto Stock Exchange. Since December 2009, BVI companies have been eligible to list on the Hong Kong Stock Exchange.
A BVI company can merge with one or more BVI companies, or foreign companies, and the surviving company may be in a foreign jurisdiction. This provides great flexibility for structuring mergers and acquisitions by listed BVI companies.
BVI investment funds and companies do not add extra layers of foreign taxation on top of those that investors pay in their home country. This tax neutrality creates a level playing field for investors from all jurisdictions. Also, the Organisation for Economic Cooperation and Development recently placed BVI on its "white list" on a par with other leading jurisdictions (offshore and onshore) in meeting internationally agreed tax standards, in turn enhancing client and investor confidence in the BVI vehicle.
What is more, the BVI does not impose a double layer of regulation on a listed BVI company. For example, there is no BVI takeover code or public filing requirement. BVI companies are extremely flexible in their structure and handling, unlike companies from other jurisdictions which need to adhere to strict statutory requirements. Ultimately, a BVI company will be more flexible on the operational side, particularly if the company needs to raise equity finance for working capital purposes. Whilst the constitution of the BVI-listed company can be easily amended to reflect the desired shareholder protective provisions (for example disclosure of director interests, authority for issuance of shares, independent valuation for issuance of shares for non-cash consideration and retirement of the directors by rotation) these are not required as a matter of BVI law and can be tailored to suit the client and target investor base.
The fact there is no additional layer of tax and regulation ensures that the incorporation and ongoing costs in using a BVI company are low, whilst high standards are maintained as required by the International Organization of Securities Commissions, of which BVI is a member.
Here are some additional benefits of BVI incorporation:
Directors' Powers and Corporate Governance: Listed BVI companies can model their corporate governance to suit the company; the BVI imposes no additional mandatory corporate governance requirements. Directors' fiduciary duties are based on well understood English common law principles but have been clearly codified into statute in the BVI which offers certainty to investors. The board of directors is free to manage the company without the need for shareholder approval. This is particularly relevant following admission, as management will be keen to run the operating business without, or with limited, shareholder intervention. For example, the board has freedom to amend the memorandum and articles to increase the authorised number of shares in order to raise capital. BVI law permits the creation of multiple levels of voting majorities for approving corporate matters and is not restricted by having defined statutory terms such as special resolutions (although such terms can be incorporated into the articles of association, if desired).
Members' Remedies: BVI law has codified the traditional English basis for members' remedies. BVI law therefore offers certainty to minority shareholders as to their rights. In fact, BVI company law goes further and provides statutory dissent and appraisal rights for shareholders who object to certain corporate actions, such as in the case of a merger, compulsory acquisition, or disposition of major assets. This enables a shareholder to exit the company at fair value without bringing court action to halt the transaction.
Share Capital: BVI law no longer has the concept of share capital which allows greater flexibility when a company proposes to declare distributions, carry out reverse share splits, change the par value of its shares and/or effect redemptions.
It is for good reason that the BVI business company has never been a more popular vehicle for public equity transactions.
Clinton HempelClinton Hempel is a partner at law firm Maples and Calder. He advises on a range of corporate and commercial transactions, financings and investment structures including takeovers, joint ventures, mergers and acquisitions and public and private equity transactions. He is a member of the British Virgin Islands Bar Association and the English Law Society.
Matthew GilbertMatthew Gilbert is an associate at law firm Maples and Calder. He is a widely experienced corporate lawyer, and specialises in public and private mergers and acquisitions, partnerships and joint ventures, debt and equity financings, and general corporate law matters.