As the offshore corporate domicile of choice, the British Virgin Islands (BVI) has, since 1984, been home to nearly 700,000 companies and, like most offshore jurisdictions, the BVI has already taken constructive steps (in partnership with various international bodies) to achieve a tighter regulatory regime. It is probably fair to say that a more robust but sensible system in relation to corporate governance is a natural development on that theme as the BVI and other offshore jurisdictions recognize more fully the continuing importance of reputation, and attempt to put measures in place to avoid corporate scandals such as Enron. Is there a mechanism or a combination of things that can be put in place to ensure that directors manage a company for the benefit of shareholders (whose main interest is profit but who generally do not have the experience in running a company) and not themselves? Should all companies be treated in the same manner? It will be difficult for the BVI to adopt a type of Sarbanes-Oxley approach because of the nature of the BVI's corporate regime but, that notwithstanding, the questions remain.

Over the course of the next 18 months, the very successful International Business Companies Act (IBCA) will give way to the BVI Business Companies Act 2004 (BVIBCA). This is an appropriate juncture to juxtapose the two statutes and consider what changes, if any, have been made in relation to corporate governance.

International business companies

Appointment and removal of directors

Directors of a BVI company may be either individuals or companies and must be appointed initially by the subscriber to the memorandum and articles of association within 30 days of the company's incorporation. Thereafter, directors are appointed by the company's members or, if the memorandum or articles of association permit, by the directors of the company. They need not be resident in the BVI and there is no share qualification requirement to be a director. Sole directors are permitted save for certain regulated entities (mutual funds, banks, insurance companies and trust companies) that are not treated in this article.

Vacancies in the board may be filled (subject to any limitations in the memorandum or articles) by a resolution of members or by a majority of the remaining directors.

Subject to limitations in the memorandum or articles, a director may be removed from office by a resolution of directors or a resolution of members.

Directors hold office until their successor takes office or until their earlier death, resignation or removal. Accordingly, unlike several other countries, the fact that a director is bankrupt or 100 years old is not necessarily a bar to their being a director of a BVI company. It is, however, possible to place limitations on the term of office of a director, and on who may hold office, in the memorandum or articles.

There is no requirement for non-executive or independent directors to be appointed to any board but the memorandum or articles can accommodate such concepts.

Remuneration of directors

Directors may, by resolution of directors (and subject to any limitations in the memorandum or articles), fix the remuneration of directors in respect of services to be rendered in any capacity to the company and there is no statutory requirement that this be approved by the members or disclosed to anyone.

Number of directors

The articles of association must fix the number of directors that the company may have.

Amendments to the memorandum and articles of association

A company may amend its memorandum or articles by a resolution of members or, where permitted by its memorandum or articles, by a resolution of directors. It is possible therefore, subject to the need for shareholder approval in relation to a variation of class rights, for the directors to be given full power to amend the company's constitution. The terms resolution of members and resolution of directors when used in the memorandum or articles take their statutory meaning unless otherwise defined in the company's memorandum and articles.

Duties and liabilities of directors

Duties fall into two broad categories: 1) statutory duties; and 2) duties at common law - fiduciary duties and duty of skill and care.

The statute requires the directors, officers, agents and liquidators of the company 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.

Section 54 (1) 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 using their powers and in carrying out their duties but the IBCA says nothing further about directors' duties. Subsection (2) does not seek to prevent a director being indemnified (subject to meeting the statutory requirements for indemnification) nor from taking out insurance in relation thereto but it does seek to ensure that a director remains bound by their duties and personally liable in relation to management of the business. The practical result is that the company may only indemnify the director if they have acted honestly and in good faith and in the case of criminal proceedings has no reason to believe that their conduct is unlawful.

At common law, the duties imposed are:

• not to exceed powers;
• not to make a personal profit;
• not to usurp a corporate opportunity;
• not to compete;
• to act bona fide;
• not to act for any collateral purpose;
• skill and care; and
• to act for a proper purpose.

Directors owe a primary duty to the company. They also, it is thought, in some circumstances owe a duty to the company's shareholders as a whole and must have regard to the interests of the creditors if the company is insolvent or of doubtful solvency or on the verge of insolvency. The duty is to minimize loss to the creditors.

Director's liabilities arise from several sources:

• Pursuant to section 7 of the IBCA and subject to section 74, a director is not liable for any debt, obligation or default of the company except in so far as they might be liable for their own conduct or acts.
• Provided that directors do not exceed their powers or the company's, they incur no personal liability unless there is negligence or breach of duty.
• The use of company's property in a manner that is beyond its powers gives rise to a liability on the directors to recover any loss. Furthermore, if through their negligence the directors cause damage to the company, they might incur liability to the extent of the loss.
• A disposal of the company's property contrary to their fiduciary duties might cause the directors to be treated as having committed a breach of trust and a director who takes the assets would be deemed to hold the same on trust for the company.
• The transfer by a director, without the company's authority, of the company's property to another company of which they are also a director, might result in a breach of duty in that they exercised their powers for an improper purpose. They might thus be liable to the company for the loss suffered.
• Where loss has been suffered by a company that has been compelled to carry out an illegal act and has suffered loss as a result, it may sue the directors for conspiracy.
• Creditors, not including secured creditors, have no remedy against a director of a company for negligence in carrying on its business or for the company's breach of contract save in rare instances in which pursuant to the memorandum of a given company, there is no limit on the liability of the directors.
• While the rule that directors are liable for ultra vires acts does not mean that the creditors are entitled to an injunction against the directors or the company, the practical consequence of this rule is preservation of the capital of the company for the satisfaction of creditors' claims.
• Liability to creditors might also be incurred as a result of breach of warranty of authority or if a contract is not entered into in the company's name or on its behalf. Similarly, there will be no liability in negligence to creditors unless certain circumstances exist, for example, by way of contract or guarantee.
• Unless directed or procured by the directors, they are not liable for the commission of tortious acts. Personal liability might be incurred in relation to a tort and any loss caused by it if the director expressly directed the company to commit the tortious act.
• The misapplication of any property of the company is treated as a breach of trust and the misapplied property and any gains that have been made must be repaid.
• Misrepresentations of fact to subscribers for the company's securities and false reports made to the company for the purpose of attracting investors might also give rise to liability.
• Pursuant to the Insolvency Act 2003 (BVI), a director can be liable for fraudulent trading, insolvent trading (known as wrongful trading in the UK), or if they have been disqualified.

Disclosure of information

The books, records and minutes of the company are open to inspection by a member during normal business hours in furtherance of a proper purpose, which is a purpose reasonably related to a member's interest as a member. The company may refuse the request whereupon, within a stipulated time, the member may apply to the court for an order allowing inspection. However, in relation to accounts and records, the company is only required to keep such accounts and records as the directors consider necessary to reflect the financial position of the company. This is, of course, open to abuse.

Committees

The board of directors may appoint a committee of directors and such a committee may consist of one or more directors. It may have delegated to it such power and authority as the board sees fit, save that no committee has any power or authority with respect to the election or removal of directors or the appointment or removal of officers or agents.

Officers

There is no restriction on a director holding any office or more than one office in the company and officers are appointed by board resolution. They have such power and authority as is set out in the company's articles or in the resolution of directors appointing them, save that they have no power or authority with respect to matters that require a resolution of directors pursuant to the IBCA. A company is not required to have any officers.

Conflict of interest

Subject to any limitations in the company's memorandum or articles, no agreement or transaction between the company and one or more of its directors or between the company and any person in which a director of the company has a financial interest or to whom a director is related, is void or voidable for this reason only. For the transaction to be valid, subject to the company's memorandum and articles, the director must however disclose their interest in good faith and either they must not vote, or all disinterested directors must vote, to approve the transaction. If all directors are interested, shareholder approval is required. Lastly, if any shareholder who has not voted in favour of the transaction can show unfair prejudice, that shareholder may impugn the transaction.

Rights of shareholders

These are derived from three main sources: the company's memorandum and articles; the IBCA; and the common law.

Statutory rights can be summed up briefly as follows:

• To approve a disposition of more than 50% of the company's assets otherwise than in the usual course of the company's business.
• To impugn a transaction where one or more directors has a conflict of interest and a shareholder who has not voted in favour of the transaction can show unfair prejudice.
• To plead lack of capacity on the company's part in proceedings to prohibit the performance of any act or transfer of real or personal property by or to the company.
• To amend the company's constitution.
• To obtain from the company a copy of its memorandum and articles.
• To have a shareholder's name entered in the company's share register.
• To apply to the court for rectification of the share register.
• To elect and (subject to the memorandum and articles) remove directors of the company
• To require the directors to convene a meeting of members.
• To receive notice of meetings of members.
• To one vote a share (subject to the terms of the memorandum and articles).
• To approve certain mergers
• Dissenter's rights and rights of appraisal in relation to certain types of transactions.

Shareholder rights at common law include the right, if the shareholder has been induced to take shares by misrepresentation, to recover damages for misrepresentation if fraudulent or negligent or to obtain a rescission of their contract to take shares and rectification of the share register together with a return of money paid on the shares, or to restrain directors from acting ultra vires the company or their own powers or acting unfairly to the shareholders.

Minority shareholder rights, as summed up in Foss v Harbottle, apply.

Shareholder meetings

Annual general meetings are not a requirement of the IBCA and, subject to any limitations in the company's memorandum or articles, the directors are authorized and empowered by law to convene meetings of the members at such times and in such manner and places within or outside the BVI as the directors see fit. However, subject to a provision in the memorandum or articles for a lesser percentage, upon the written request of members holding more than 50% of the votes of the issued shares in the company the directors are required to convene a meeting of members.

BVI business companies

Appointment and removal of directors

The BVIBCA differs from the IBCA in that one cannot be a director of a company unless the person consents in writing and is over age 18, is not a disqualified person within the meaning of section 260(4) of the Insolvency Act, is not a restricted person within the meaning of section 409 of the Insolvency Act, is not an undischarged bankrupt and is not by the constitution of a company disqualified from being a director. If a person acts as a director while disqualified they are nonetheless deemed to be a director for the purpose of duties and obligations.

Remuneration and number of directors

The requirements here do not differ materially from the IBCA.

Amendments to the memorandum and articles of association

So far as corporate governance is concerned there are no big changes here, save that there is an express provision to the effect that directors will not have the power to amend the memorandum and articles: (a) to restrict the rights or powers of the members to amend the same, (b) to change the percentage of members required to pass a resolution to amend the same; and (c) in circumstances where the memorandum or articles cannot be amended by the members.

Duties and liabilities of directors

The main areas of difference are:

A director of a company that is a wholly owned subsidiary may, if expressly permitted to do so by the memorandum or articles, act in a manner that they believe is in the best interests of the company's holding company, even though it may not be in the best interests of the company.

A director of a company that is a subsidiary but not a wholly owned subsidiary may, if expressly permitted to do so by the memorandum or articles and with the prior agreement of the shareholders other than its holding company, act in a manner that they believe is in the best interests of that company's holding company even though its not in the best interests of the company.

A director of a company that is a joint venture between the shareholders may, if expressly permitted to do so by the memorandum or articles of the company, act in a manner that they believe is in the best interests of a member or members even though it is not in the company's best interest.

The company is in several instances subject to fines, and the situations in which a director is liable have been increased and fines have been stipulated.

Directors might be personally liable for their own conduct or acts. Otherwise the position of a director under either statute in terms of liabilities is similar.

Disclosure of information

Copies of the company's register of directors, register of members, memorandum and articles, and all notices and other documents publicly filed by the company in the previous 10 years must be kept at the office of its registered agent in the BVI. Within 15 days of any change in either of the registers the company must notify its BVI-based registered agent and provide the registered agent with a written record of the physical address of the place or places at which the original registers are kept. The company could be fined for non-compliance.

In relation to accounts, a company must keep records that: (a) are enough to show and explain the company's transactions; and (b) will at any time enable the company's financial position to be determined with reasonable accuracy. The company is liable to a fine of $10,000 for non-compliance.

A member is entitled to inspect the documents and records of the company.

Committees

The list of activities that may not be delegated to a committee has been extended to include: (a) amendment to the memorandum and articles; (b) approval of a plan of merger, consolidation or arrangement; and (c) making a declaration of solvency or approving a liquidation plan. Otherwise there are no material differences.

Officers

No provisions deal specifically with the appointment, removal, power and authority of officers. The BVIBCA deals with this by treating all such persons as agents and there is no material distinction between those provisions and the provisions in the IBCA that deal with officers.

Conflict of interest

A failure by a director to disclose their interest in a transaction to every member of the board might result in a fine of $10,000. Additionally, the transaction might, subject to certain caveats, be voidable. Otherwise there are no material differences between the BVIBCA and the IBCA in relation to corporate governance.

Rights of shareholders

A shareholder may in certain circumstances retain a distribution even if the company has, immediately after the distribution, failed to satisfy the solvency test. There are no other salient differences when one compares the position of a shareholder of a company incorporated pursuant to the IBCA.

Shareholder meetings

Any person, including a director, may be authorized by the memorandum and articles to convene a meeting of members. A court may also order a meeting to be held if it believes that it is in the best interest of the members. The two statutes are otherwise very similar.

A sensible balance

There has undoubtedly been some movement towards more responsible corporate governance under the BVIBCA but, although this is to be encouraged, one of the better features of BVI corporate legislation (both old or new) is that it permits real flexibility. The result is that one can in any given case structure the company with as many or as few checks and balances as the shareholders see fit. It is, after all, their company. That flexibility works extremely well for closely held companies with sophisticated investors (whether such companies are involved in aircraft finance in London, an oil company in Russia, a hotel resort in south-east Asia or a fashion house in New York) but there is a fairly strong argument for more to be done in relation to corporate governance and public companies, whether listed or not. Leo Strine, vice chancellor of the Court of Chancery in Delaware, in discussing the corporate regime in Delaware, was recently quoted by the Financial Times (6 July 2005) as saying that:

"We do not tie down all boards with a prescriptive set of procedural mandates. We do not create a thousand boxes to check. Instead we give managers broad flexibility to chart the course they believe best for their corporations, using the stockholder franchise and fiduciary duty review to ensure managerial fidelity. ... What investors do not need however, is for the federal government to undercut the valuable space for innovation and flexibility that Delaware's approach to corporation law creates. Our approach recognizes that boards might perform more effectively if they contained a mix of not only independent directors, but also directors who might have industry-specific knowledge that would be useful in crafting a business strategy. ... The goal of companies, after all is to create wealth for society. Corporate governance is a means, not an end. ... Congress needs to avoid stifling the wealth-creating potential of companies through costly mandates that not only do little to protect investors, but also distract boards from their fundamental duties to develop and oversee the implementation of an effective corporate strategy, to select excellent managers and to monitor the corporation's compliance with its legal and ethical responsibilities."

The BVI has taken steps to "ensure managerial fidelity" but there may have to be a distinction in the approach taken in relation to public as against private companies. However the law in relation to corporate governance develops over the next few years, a sensible balance is what is required to ensure that reputation remains at the top of the agenda without losing sight of what Strine refers to as the goal of companies – the creation of wealth for society.

Author biography

Leonard A Birmingham Harney Westwood & Riegels Leonard Birmingham is a partner of Harney Westwood & Riegels (Harneys) and is head of its London office. He specializes in all aspects of British Virgin Islands and Anguillan corporate, commercial and banking law. Harneys is the oldest and largest law firm in the British Virgin Islands, with offices in the British Virgin Islands, Anguilla, London and Hong Kong.