In recent times there has been much discussion about the BRIC economies – Brazil, Russia, India and China, in some cases referred to as TRIC where Turkey replaces Brazil. That semantic aside, venture capital in such contexts requires a structure that answers the constraints of their evolving corporate environment. In several of the emerging markets, the commercial environment as a whole and company law in particular tends to be more restrictive than that of more developed economies, and private equity transactions require flexibility. How can offshore structures assist in this environment? They must achieve two things. They must create a more flexible corporate environment for getting funds into or out of a vehicle and in structuring the rights of the shareholders into different classes of shares but with few constraints on what form that structure takes. They must also be able to address corporate governance issues as robustly or lightly as the shareholders see fit.

A relatively common structure involves a British Virgin Islands (BVI) holding company, a Cyprus or Mauritius intermediary and an operating company in the onshore jurisdiction. One example is the TNK-BP Limited structure. From an investor's perspective, the main areas in which BVI law demonstrates its ability to address the limitations mentioned above are in making a range of vehicles available, with wide objects and powers. Furthermore, BVI law provides flexibility regarding the structuring of share classes and issuing shares and share transfers, distributions, financial assistance, corporate governance, and security over shares and suitability for equity capital markets.

Seven different types of company may be formed – companies limited by shares, those limited by guarantee that are not authorised to issue shares, those limited by guarantee that are authorised to issue shares, unlimited liability companies that are not authorised to issue shares, unlimited liability companies that are authorised to issue shares, restricted purpose companies and segregated portfolio companies. For corporate and finance transactions of all kinds including IPO's, joint ventures, securitisations, tax and estate planning and investment funds, the result is increased flexibility and scope.

Objects and powers et al

In the BVI, the effect of the doctrine of ultra vires has been reduced in scope and intensity – companies incorporated under The BVI Business Companies Act are not required to specify their objects or powers in their memorandum, their articles or anywhere else. They have full capacity to carry on or undertake any business or activity (irrespective of corporate benefit), conduct any act or enter into any transaction. However, it is possible to restrict the types of business a company formed under the Act may carry out. This will assist parties seeking to form bankruptcy-remote vehicles for securitisations and other similar special purpose companies. The Act also gives companies full rights, powers and privileges in entering into transactions. Transactions entered into by companies incorporated under the Act are not invalid by reason only that the company lacks capacity. Except in relation to charges registered in the Register of Registered Charges (for registering a security interest created by a company under the Act and kept by the Registrar of Corporate Affairs), constructive notice and knowledge of documents, including the company's memorandum and articles, filed at the Registry of Corporate Affairs or available for inspection at a company's registered office, are abolished.

A company incorporated under the Act has the power to give financial assistance to any person in connection with the acquisition of its own shares. Several jurisdictions still use what is known as a white-wash procedure, which addresses the issue to some extent. But BVI statute obviates the need to consider this issue at all.

There is no concept of "authorised capital" or "share capital" under the Act. Shares are effectively no par value shares. They now represent an entitlement to vote or dividends or surplus assets on liquidation, rather than a fractional part of the capital of the company. The Act requires a company to state in its memorandum the maximum number of shares that it is authorised to issue, the classes of shares that it is authorised to issue, and where there are two or more classes, then the rights attaching to each class. Beyond this, the rights of the shares can be structured as the shareholders see fit. Shares can be issued for any amount of consideration and for almost any form of real or personal property. In addition, share transfers can be subject to as many or as few restrictions as thought appropriate.

A distribution by the company to a shareholder must be made (subject to certain exceptions), only after the directors of the company have satisfied themselves on reasonable grounds that the company will meet the statutory solvency test immediately after the distribution. A company satisfies the solvency test if the value of its assets exceeds its liabilities, and it is able to pay its debts as they fall due. The provisions in the Act relate not merely to dividends but catch any distribution to a member. There are no further constraints on paying dividends or redeeming shares.

Redemption, purchase and acquisition

Similarly, when shares are redeemed, purchased or otherwise acquired, either under the statutory regime under the Act or, as permitted by the Act, under the company's memorandum and articles, the directors must satisfy themselves on reasonable grounds that the company will meet the solvency test for distributions in this context. The company satisfies the test as mentioned above. The ability to redeem shares in accordance with the company's constitution to the exclusion of the statutory regime means flexibility. It will be attractive to promoters of and investors in open or closed-ended investment funds.

Corporate governance and directors' duties

In keeping with most common law jurisdictions, directors manage the business and affairs of the company. BVI law permits that position to be "subject to any modifications or limitations in the memorandum or articles". The ability to give the shareholders as much or as little control over the affairs of the company as is desired is an established feature of private equity (in particular venture capital) structures. To complement this there are a wide range of statutory devices, in addition to the common law, that protect shareholders.

In addition to the need to act honestly and in good faith with a view to the best interests of the company, directors have a duty of skill and care which, under the Act, has been given a statutory basis. Furthermore, in a departure from the common law position, the Act recognises the commercial realities of joint ventures, holding company and similar structures, and has created provisions that permit a director of a wholly-owned subsidiary to act in the interests of its holding company even if not in the best interests of the subsidiary. When the subsidiary is not wholly-owned but all shareholders (except the holding company) agree, the director may similarly act in the interests of the holding company. Finally, in the context of a joint venture, a director may act in the interests of a member or members even if not in the best interests of the company. The above only applies if the memorandum and articles expressly permit it.

Listings

No stock exchange or securities laws exist in the BVI. There is also no equivalent of the City Code on Takeovers (UK). The result is that most BVI companies listed on metropolitan stock exchanges merely need to comply with the requirements of the exchange on which they will be listed and the requirements of BVI company law under the Act, and common law. The flexibility of the BVI vehicle is evident from the fact that while there is no equivalent City Code in the BVI, many BVI companies have successfully adopted aspects of the Code into their memorandum and articles.

That offshore structures have a meaningful role to play in emerging markets is self-evident. They facilitate transactions that would otherwise be difficult to consummate and thus keep commerce going. But their usefulness and popularity may be seen as a threat by emerging markets, which tend to be restrictive. So as to avoid a reaction, which potentially stifles the growth of capital markets, a dialogue between small offshore jurisdictions and the aforementioned emerging markets is needed to arrive at a middle ground.

leonard.birmingham@harneys.com
+44 20 7332 5622