The perfect vehicle?

Author: | Published: 1 Oct 2008
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Stock exchanges the world over have different listing requirements and vehicles seeking a listing must satisfy them in order to be listed and must continue to do so to maintain that listing. The chameleon-like nature of companies incorporated under the BVI Business Companies Act 2004 (as amended) (BVIBCA) means that a BVI business company is quite simply capable of transforming itself with the appropriate bespoke constitutional documents into a corporate vehicle that is able to meet and satisfy the needs of any corporate landscape (including that of a stock exchange) – it can be the perfect loan applicant, joint venture vehicle, property holding company or listing vehicle.

BVI companies have been very successful with respect to fulfilling the job specifications of the perfect listing vehicle. Historically, the choice of forum was NASDAQ or the New York Stock Exchange and even the Singapore Stock Exchange, but in recent times we have seen an increase in the listing of BVI companies on the Oslo Stock Exchange and, in particular, on London's Alternative Investment Market (AIM) where the BVI company has been making itself at home.

Listing on AIM

AIM was launched by the London Stock Exchange (LSE) in 1995 and it has grown in size and popularity at the expense of similarly placed US exchanges in part because of the introduction of the Sarbanes-Oxley laws in the US, which drove many companies that might previously have considered a US listing straight to AIM given its lighter (and more sensible) regulatory environment – in terms of its listing requirements and its continuing corporate governance requirements. It was created to offer smaller companies access to capital markets to assist with their growth and development, though it is thought that its popularity and the size of its recent listings might be pricing the very companies that it was trying to attract out of the market.

As a result, AIM, like the city in which the market is based, has become quite the melting pot as more and more companies incorporated all over the world are choosing the LSE's junior market. There are now more than 460 international companies registered on AIM. As of July 2008, BVI companies accounted for 10.5% of such companies. The honour of being the second largest listing to date on AIM (and on which Harneys acted as BVI counsel) has been claimed by the BVI company Renesola Ltd, a solar panel maker from China. It raised £588 million ($1.1 billion) on listing. It is also, as of July 2008 and in terms of value for most actively traded securities listings compiled by AIM, ranked seventeenth with Playtech, another BVI company being sixth and Dolphin Capital Investors being eighth. Playtech and Renesola are also third and ninth respectively on the most actively traded securities in terms of bargains.

Over the last eight years, there has been a steady increase in terms of the number of BVI companies listed on AIM; the jurisdiction has gone from its first listing of one BVI company in 2000 (and on which Harneys acted as BVI counsel) to six in 2005 and 15 in 2007. In 2007, of the 77 international companies listed on AIM, the British Virgin Islands (BVI) as a jurisdiction led the international contingent with its 15 listings, in addition to being responsible for two of the larger flotations in terms of value with Public Services Properties Investments and American Leisure Group Limited, each raising £75 million.

In the majority of these listings, one finds that the sectors/businesses of the companies involved have been classed as general mining, platinum, precious metals, financial services or real estate investment and development.

The statistics prove that BVI companies are continuing to be recognised and used as the listing vehicles of choice. The reason for their popularity lies squarely in their adaptable/flexible nature, their ability to be all things to all people.

Anatomy of a BVI company

A BVI company is easy to set up and maintain. Each company is required to appoint a local agent (the registered agent) domiciled in the territory to act as liaison with the relevant governmental bodies such as the Registry of Corporate Affairs (the registry) and the Financial Services Commission (FSC) and to deal with any other domicile-specific issues. The payment of an annual maintenance fee to the registry is all that is required to ensure that a company remains in good standing. There is no need to file an annual return with the registry or to have a local director or local accountant/auditor.

The BVI offers the simplest of tax regimes – that is to say, a zero-rated tax regime. Once a BVI company's business is operated outside of the BVI, it is not subject to any corporation or income tax as a matter of BVI law within the territory. There is no stamp duty payable in the BVI in respect of transfer of shares in a BVI company. Also, the holders of shares in a BVI company are not subject to tax in the BVI, nor are the distributions or dividends paid to such holder.

The BVIBCA provides that the management and running of a BVI company is in the hands of the directors, with little or no recourse to the shareholders unless the constitutional documents of the company provide otherwise. Depending on the market that a BVI company may be trying to court, the vesting of so much power and authority in the directors may not be appealing, and being able to redress the balance of power by, for example, providing that shareholder approval be obtained for key business decisions, is crucial.

The BVIBCA has abolished the concept of share capital. The abolition of this concept means that a company seeking to make a distribution to its shareholders does not have to worry about ensuring whether there are funds/monies set aside for the retention of capital from the pot available for the distribution. For a company with a large issued share figure, this is potentially a huge advantage.

Distributions to shareholders, which term covers and catches any payment made to shareholder and not just dividends, are required to be made (subject to certain exceptions) only after the directors of the company have satisfied themselves on reasonable grounds that the company will, immediately after the distribution, satisfy the two-limbed statutory solvency test. A company satisfies the solvency test if: (i) the value of its assets exceeds its liabilities; and (ii) it is able to pay its debts as they fall due.

There are no financial assistance issues with a BVI company. The BVIBCA provides that a company incorporated thereunder can financially assist any person in connection with the acquisition of its own shares. This is a clear advantage over the prohibition that obtains on a public company providing such assistance, for example, in the UK.

The BVI also has a favourable regulatory regime for BVI companies listed on exchanges such as AIM by having, in effect, none. There are no additional specific regulatory requirements that such a company has to satisfy or meet under BVI law before listing. For example, there is no need to submit the listing/admission documents to the FSC or the Registrar of Corporate Affairs for their approval before listing.

A BVI company has no minimum capitalisation requirements and can therefore be used as a money box company. As BVI companies carrying on business outside the jurisdiction are not liable for income tax in the BVI, such BVI companies are often used to hold group funds. These funds can then be used to either finance other group companies through injections of share capital or can be used to fund acquisitions by group members. Additionally, in many jurisdictions, the BVI company could sell a subsidiary without any tax charge arising on the sale.

The BVIBCA offers a flexible company law regime that, though innovative and different in some respects, is steeped in a sufficient number of core company law principles found in English company law to make it a more appealing regime to use. It also offers a BVI company the ability to adopt those provisions of foreign law and other regulatory requirements, to which it is not otherwise bound and which are not contrary to BVI law, and to include such provisions in its constitutional documents. This ability is one of the more influential advantages of using a BVI company as a listing vehicle. This affords the company the ability to choose and use the best bits of the onshore laws to its advantage.

The Code

In this regard, BVI companies can (and have), for example, included in their constitution provisions relating to the disclosure of interests in shares as contained in section 793 of the Companies Act, 2006 (UK) or elements of the Combined Code on Corporate Governance or certain provisions of the City Code on Takeovers and Mergers (the Code), for example Rule 9.

It is in relation to the Code that one finds that most BVI companies have tended to amend their constitutional documents to include certain provisions thereof in an effort to provide their shareholders with certain protections otherwise ordinarily provided by the Code. In addition to this, investors and shareholders are also provided with a sense of comfort that there are familiar provisions and concepts within the corporate governance of the foreign listing vehicle.

On May 20 2006, the Directive on Takeover Bids was implemented in England through interim regulations. The Panel on Takeovers and Mergers (the Panel), and the Code that it regulates, were finally placed on a statutory footing. Before that date, the Code and Panel did not have the force of law, but it had long been accepted that those trading on the securities markets would conduct themselves in accordance with its standards. The interim regulations are only meant to be in force until the new UK Companies Act comes into force. Following that, the Code and the Panel will be applicable to all listed UK, Channel Islands and Isle of Man companies on any exchange, including AIM. Companies listed on AIM are not affected, as AIM is not considered a regulated market and the old position applies.

One of the main reasons for the adoption of the Code by a BVI company is because the BVI has no securities legislation of its own. There is, in fact, no statutory definition under BVI law for the term takeover, which would not be a comforting fact for most potential investors or shareholders. Therefore, the reality is that if a BVI company listed on AIM received a takeover bid and we left it to BVI law to determine how to proceed, we would be dusting off the common law, whatever supporting case law there was and looking at the few sections of the BVIBCA that seem to address directors' duties but really represent a codification of the common law principles, in an attempt to advise the directors as to their duties and how they should conduct themselves in such circumstances. The advice provided in such circumstances could in no way be unassailable.

Another reason why this trend has become prevalent is because of the pressure that the Nomads, who are responsible for ensuring that a listing vehicle meets the requirements of AIM, have exerted by requesting that takeover provisions are inserted into a company's constitutional documents.

The ability of a BVI company to accommodate such a request, as well as the proposed amendment, is invaluable as the inclusion of the Code means that everyone is aware and is prepared to abide, from the beginning, by the stated rules if such a thing ever occurs. It means that potential shareholders can consider and make any necessary plans or strategies, given that the rules of engagement have been clearly set out.

The number of BVI companies listed on AIM, and indeed on stock exchanges around the world, will continue to increase, in spite of any further regulatory changes that might be imposed, because its ability to adapt to the changing landscape means that it will continue to be the perfect match.

Author biographies

Wendy Walker

Harneys

Wendy is a senior associate at the London office, where she specialises in all aspects of BVI corporate and commercial law, including advising on listings on the world's largest stock exchanges (New York, London, Singapore), in addition to joint ventures, private placements, mergers, takeovers, corporate restructuring and general aspects of corporate and commercial law. The companies she has assisted with listings and/or acted as their BVI counsel include Renesola Limited, Polo Resources Limited (AIM), Seabird Exploration Limited (Oslo Exchange) and Del Monte Group Limited (Singapore Exchange).