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Since its enactment 20 years ago, the BVI’s International Business Companies Act (Cap. 291) (the "IBC Act") has become one of the most widely-used corporate statutes with over six hundred thousand IBCs incorporated under it. Notwithstanding such phenomenal success, practitioners and users have for some time been calling for amendments to the IBC Act as well as for an additional and more flexible range of corporate vehicles, and its twentieth anniversary marked an appropriate occasion for reform. The result is a new corporate statute for the BVI called the BVI Business Companies Act 2004 (the "new Act"), which came into force on 1 January 2005, and which will eventually replace the IBC Act. In this paper we focus on the key features of the new Act and highlight some of its differences with the IBC Act.
2. Scope of the new Act
The new Act came into force on 1 January 2005. Unlike the current regime, this single statute allows for the incorporation of international offshore companies as well as locally owned companies doing business in the BVI. In order to give flexibility, there is a two-year transition period during which both the IBC Act and the new Act will be in force. Key features of the transition period are discussed below. After the two-year period, the new Act will be the sole corporate statue for the BVI and will regulate all BVI companies.
3. Range of corporate vehicles
The aim of the new Act is to provide flexibility and choice in the range of corporate vehicles available under it. Seven different types of companies can be incorporated: companies limited by shares (the only type of company that could be incorporated under the IBC Act); companies limited by guarantee not authorised to issue shares; companies limited by guarantee authorised to issue shares; unlimited companies authorised to issue shares; unlimited companies not authorised to issue shares; restricted purposes companies; and segregated portfolio companies.
Restricted purposes companies are companies limited by shares but with restricted objects or purposes and whose certificate of incorporation will state that they are restricted purposes companies. It is expected that their primary use will be in structured finance and securitisation transactions. Segregated portfolio companies (SPCs) are companies limited by shares that previously could only be incorporated under the Insurance Act 1994, but are now dealt with under the auspices of the new Act, and they will only be permitted if written approval of the Financial Services Commission (FSC) has been obtained. Previously, only insurance companies could register as segregated portfolio companies, but the opportunity has been taken to expand their scope by also allowing mutual funds to register as SPCs. Regulations will be made to extend the provisions to other types of businesses.
4. Restrictions on carrying on business in the BVI
The IBC Act did not permit IBCs to carry on business with persons in the BVIand the restrictions were required to be set out in their memorandum. There is no such prohibition in the new Act itself, but instead a company’s memorandum will have to have a statement in the approved form specifying limitations on the business they carry on.
5. Company names
The different types of companies can have different name endings. Unlimited companies must end with either "Unlimited" or "Unltd".Restricted purposes companies must have the phrase "(SPV) Limited" or "(SPV) Ltd" in the name, and SPCs must have either "Segregated Portfolio Company", or its abbreviation "SPC", in the name. Limited companies (including companies limited by guarantee) continue to enjoy the endings permitted under the IBC Act, e.g. Limited, Corporation, Societe Anonyme, and their respective abbreviations such as Ltd, Corp, S.A.
Two innovative features of the new Act are that the company number can be used as a name in the form "BVI Company Number 1234567 Limited", and, if a name is in that form, the company can also have an additional name in foreign characters. These features will prove to be very useful for incorporation agents, particularly in Hong Kong and Asia more generally.
6. Incorporation procedure
To incorporate a company under the new Act, the memorandum and articles of association signed by the registered agent must be filed with the Registrar of Corporate Affairs ("the Registrar"), together with the registered agent’s consent to act in the approved form, and any other documents that may be prescribed. For segregated portfolio companies, the written approval from the FSC must also be filed. Only the registered agent can file an application for incorporation; the Registrar will not accept it from any other person.
If he is satisfied that all the requirements of the new Act have been met, the Registrar will register the documents, allot a unique number to the company, and issue a certificate of incorporation. The company is incorporated from the date specified in the certificate.
7. Memorandum and Articles, no objects clause or authorised share capital
As with IBCs, the memorandum and articles are the company’s corporate constitution and together with the legislation regulate the relationship between the company, its members and directors. The new Act provides that they are binding as between the company and each member and between the members themselves and thus in effect constitute a "statutory contract" between them.
Besides the name and type of company, its registered office, and the name and address of its first registered agent, there are certain matters that must be stated for the different types of companies, e.g. companies authorised to issue shares must state the maximum number of shares that can be issued; companies limited by guarantee must specify the amount which a guarantee member must contribute to the assets on liquidation; restricted purposes companies must state that they are such companies; and SPCs must state that they are segregated portfolio companies. Beyond the compulsory matters, the new Act, like the IBC Act, gives total flexibility on what may be included in either the memorandum or articles.
However, two fundamental changes that should be noted. First, there is no requirement to state the objects or purposes in the memorandum of association. Whilst there is nothing to prevent a company from stating its objects or purposes, it is not required to do so. The only exception to this rule is a restricted purposes company which must state the purposes for which it is incorporated. Second, there is no concept of authorised share capital for such companies, and companies authorised to issue shares must state only the maximum number of shares they are authorised to issue.
8. Alteration to the memorandum or articles
As with the IBC Act, the memorandum and articles may be amended by the members, or by the directors if authorised by the memorandum but subject to certain restrictions on the directors’ ability to amend, e.g. they cannot amend to restrict the rights of members to amend the memorandum or articles. In general, a simple majority of those entitled to vote and voting is needed for an amendment.
The right of amendment can be restricted with the new Act allowing provisions to be entrenched so that they cannot be amended, or requiring a specified majority greater than 50% to amend, or requiring that they may only be amended if certain conditions are met. However, this does not apply to any provision in the memorandum restricting the purposes of a company that is not a restricted purposes company.
The company must file either a notice of amendment in the approved form, or a restated memorandum or articles incorporating the amendment made, with the Registrar, whereas under the IBC Act it is the resolution amending the memorandum or articles that must be filed. The amendments take effect from when they are registered by the Registrar, but there is power to apply to the court for an order that the amendments take effect from another date not earlier than the date of the resolution to amend.
9. Corporate capacity and ultra vires
Corporate capacity and ultra vires are dealt with differently under the new Act compared to the IBC Act. Four key points should be noted.
First, the new Act attenuates the ultra vires doctrine by: (a) not requiring companies to specify their objects or purposes (except restricted purposes companies); and (b) providing that a company has, irrespective of corporate benefit, full capacity to carry on any business or activity, do any act or enter into any transaction, and for those purposes it has full rights, powers and privileges. However, this latter provision is subject to the rest of the new Act, any other statute, and the company’s memorandum and articles.
Second, the new Act (as with the IBC Act) provides that no act of a company or a transfer of property is invalid by reason only of the fact that the company did not have the capacity, right or power to perform the act or receive the asset. This provision, which applies equally to the company as well as to third parties dealing with it and can therefore be relied upon by either, means that the mere fact that the company’s act is beyond its memorandum does not mean it is invalid; something more will be needed to render the transaction invalid. That further element is usually knowledge by the third parties that the matter is beyond the powers of the directors.
It is with regard to this further element, i.e. knowledge, that the third key point in the new Act should be noted. The new Act abolishes constructive notice and knowledge of documents (including the memorandum and articles) registered at the Registry or available for inspection at the company’s registered office, except in relation to charges registered on the Register of Charges (see below). Further, it provides that the company cannot assert against a person dealing with it that the new Act or its memorandum or articles have not been complied with unless that person either knew, or ought to have known, by virtue of his relationship to the company, of the matter.
Finally, the IBC Act allowed the lack of capacity to be pleaded by members in proceedings against the company to prohibit an ultra vires act, and by the company in proceedings against directors for loss or damage due to the ultra vires acts. There are no equivalent provisions under the new Act but the directors are under a duty not to act or agree to the company acting in a manner that contravenes the new Act or its memorandum or articles.
10. Members, their rights and liabilities
The new Act provides for three types of members, i.e. shareholders, guarantee members, and members of an unlimited company who are not shareholders. A member is a person whose name is entered as such on the register of members.
In general, members will have the rights conferred on them in the memorandum and articles. However, one of the new features of the new Act is that it specifies the rights that a shareholder has, namely, the right to one vote, the right to an equal share of any dividend, and the right to an equal share in the distribution of surplus assets. These rights can of course be negated, modified or added to where expressly authorised by the memorandum.
The new Act also provides for the liability of members for the debts and obligations of the company. In the case of limited liability companies, i.e. companies limited by shares and companies limited by guarantee whether or not authorised to issue shares, members are not liable for the debts and obligations of the company. The shareholders of a limited liability company are only liable for the amount unpaid on their shares and as may be specified in the memorandum. Guarantee members of a company limited by guarantee are only liable to contribute to the assets of the company on liquidation in the amount stated in the memorandum, and for any other amount provided in the memorandum. Unlimited members have unlimited liability for the debts and obligations of the company.
The new Act does not contain any provisions for members’ remedies along the lines of s.459 of the UK Companies Act 1985 for unfair prejudice (which is consistent with the IBC Act). Nor are there any provisions in the new Act for derivative actions where members can bring proceedings on behalf of the company.
11. Members’ resolution
As with the IBC Act, members may pass a resolution either at a meeting of members or by a written resolution but there is one important difference with the IBC Act. Under the new Act a simple majority (or such higher majority as specified in the memorandum or articles) of votes of those entitled to vote and voting on the resolution is sufficient for passing a resolution at a
meeting or as a written resolution, whereas under the IBC Act, a written resolution requires an absolute majority of the votes of all shares entitled to vote (or such higher majority as may be specified). A guarantee member and a member of an unlimited company without shares is entitled to one vote unless the memorandum and articles provide otherwise, and a shareholder is entitled to the votes attaching to the shares held by him.
12. Class rights and pre-emption rights
The new Act allows for the creation of classes of shares, but the rights, privileges, restrictions and conditions attaching to each class must be specified in the memorandum, so that they are set out in one document that is publicly available, whereas the IBC Act allows directors to specify these matters if specifically authorised, i.e. they did not have to be stated in the memorandum and could be set out in a resolution of directors.
Unlike the IBC Act, the new Act contains pre-emption provisions upon the issuance of shares which the company can "opt into", i.e. they only apply if the memorandum specifically states that they are to apply.
A company must have at least one director and it must keep a register of directors. As with the IBC Act, the new Act specifically provides that the business and affairs of the company shall be managed by, or under the direction or supervision of, the directors, but subject to any modifications or limitations in the memorandum and articles.
The directors can delegate most of their powers to committees of directors but certain important powers cannot be delegated to committees, e.g. the power to amend the memorandum or articles, the general power to delegate to committees (but certain powers can be sub-delegated if authorised by the directors), the power to appoint agents, and the power to appoint directors. The directors remain responsible for the exercise of the power by the committee unless they believed on reasonable grounds that the committee would exercise the power in conformity with the statutory duties imposed on the directors.
A director’s equitable duties of acting honestly, in good faith and in what he believes to be in the best interests of the company are given a statutory footing, as is his common law duty of care and skill. The new Act also allows a director of a subsidiary to act in the best interests of its holding company even though it may not be in the best interests of the company, provided he is expressly permitted to do so by the memorandum or articles, and has the prior agreement of all shareholders where the company is not a wholly owned subsidiary. He is also under a statutory duty to exercise his powers as a director for a proper purpose and he must not act in a manner that contravenes the Act or the memorandum or articles. The new Act also requires a director to disclose to the board his interest in any transaction to be entered into by the company, and failure to do so renders the transaction voidable by the company unless the material facts of the director’s interest in the transaction are known by the members and the transaction is approved by them, or if the company received fair value for the transaction. Nevertheless, he may vote on the transaction or attend a meeting relating to it and be counted for the purposes of a quorum.
14. Appointment and removal of directors The registered agent must appoint the first director(s) within 30 days of incorporation. Subsequent directors can be appointed by resolution of members (unless the memorandum or articles provide otherwise), or by the directors if permitted by the memorandum or articles, for such term as may be specified. The directors may also fill a vacancy on the board unless the memorandum or articles provide otherwise. However, unlike the IBC Act a person cannot be appointed a director unless he has consented in writing to be a director. A director may resign by giving written notice of his resignation. A director may be removed by a resolution of members that may only be passed either at a meeting of members whose purpose includes the removal of the director, or by a written resolution passed by at least 75% of the members entitled to vote. A director may also be removed by the directors where expressly permitted by the memorandum or articles.
There are important differences between the new Act and the IBC Act in relation to shares, of which one of the most fundamental is that there is no longer a concept of authorised share capital, or indeed of share capital, under the new Act. Thus, companies that are authorised to issue shares, i.e. companies limited by shares, companies limited by guarantee authorised to issue shares, and unlimited companies authorised to issue shares, are not required to state in their memorandum an authorised share capital, or the par value of shares with par value or the aggregate of such shares, or the amount to be represented by shares without par value, or the currency of shares that the company is authorised to issue. Instead, the memorandum of such companies must state the maximum number of shares they are authorised to issue.
One consequence of not having an authorised share capital is that the new Act does not contain any specific provisions relating to capital. Instead, these matters are now part of the provisions relating to the alteration of the memorandum and the purchase by the company of its own shares.
The new Act retains the same division between registered shares and bearer shares as the IBC Act. In the case of registered shares, title is prima facie evidenced by entry on the register of members that must be kept by the company. The company’s articles must state the circumstances in which share certificates will be issued.
Shares may be issued at the discretion of directors on the terms and consideration determined by them. Shares can be issued for consideration in kind but it must not be less than the par value if the share in question is a par value share. The new Act allows the memorandum or the terms on which shares are issued to contain provisions for the forfeiture of shares which are not fully paid for on issue. Further, subject to the memorandum or articles, the directors may refuse or delay the registration of a transfer of shares if the holder has failed to pay any amount due in respect of them. There is now a statutory provision that confirms that a company can give financial assistance in connection with the acquisition of its own shares.
If the memorandum provides, a company can issue shares of different classes and different series within a class, but the rights, privileges, restrictions and conditions attaching to each class of shares must also be specified. Unlike the IBC Act, however, there is no need to specify the number of shares of each class or series or their par value that the company is authorised to issue.
As noted above, the new Act sets out the default rights that a share confers on its holder, i.e. the right to one vote, and an equal share in any dividend and distribution of surplus assets, but these can be modified, varied or excluded. As with IBCs, a company can issue redeemable shares, preference shares, shares with no or only limited rights to distribution, shares with no or limited or conditional voting rights. It can, subject to the memorandum and articles, also issue bonus shares, partly paid shares and nil paid shares. It can issue fractional shares if permitted by its memorandum. A company can also hold treasury shares, i.e. where the company has acquired its own shares but not cancelled them, if permitted by the memorandum or articles.
Transfer of registered shares is by a written instrument of transfer signed by the transferor and containing the name and address of the transferee. The instrument must be sent to the company for registration and the company must enter the tranferee’s name in the register of members. The transfer is effective when the name is so entered. However, the directors may resolve to refuse or delay registration but only if permitted by the new Act or the memorandum or articles.
16. Bearer shares
Under the IBC Act the memorandum must contain a statement of the numbers of shares to be issued as registered shares and to bearer or an express grant of power to the directors to issue
registered shares or shares to bearer at their discretion. The new Act is more restrictive. A company cannot issue bearer shares unless expressly authorised by its memorandum to do so and, similarly, registered shares cannot be converted to or exchanged for bearer shares unless specifically permitted in the memorandum. The memorandum must state whether the company is or is not authorised to issue such shares. However, segregated portfolio companies are not allowed to issue bearer shares or convert registered shares into bearer shares under the new Act.
Bearer shares must be deposited with a custodian authorised or recognised by the FSC otherwise the shares are immobilised and the rights normally attaching to them are disabled, in particular any transfer of the certificate is void. The custodian becomes the member of the company but the beneficial ownership of the share vests in the intended bearer.
17. Acquisition by the company of its own shares
The provisions relating to the acquisition of its own shares highlight the flexibility of the new Act. It allows a company to purchase, redeem or otherwise acquire its own shares in accordance with two distinct regimes: either under sections 60, 61 and 62 of the new Act; or in accordance with its own memorandum or articles, in which case the provisions of sections 60-62 do not apply to the extent that they are modified, negated or inconsistent with the provisions in the memorandum or articles. The ability to provide for the acquisition of shares in the memorandum, to the exclusion of the statutory regime, will be of considerable benefit to companies, particularly mutual funds.
The statutory regime in sections 60-62 is itself very different from the provisions of the IBC Act. Under section 60, directors can make an offer to acquire shares either to all the shareholders or to one or more shareholders.An offer to all the shareholders must be one which if accepted would leave the relative voting and distribution rights unaffected. An offer to one or more shareholders can only be made if either all the shareholders have consented in writing, or if permitted by the memorandum or articles and the directors have passed a resolution stating that in their opinion the acquisition is for the benefit of the remaining shareholders, and the offer and consideration are fair and reasonable to the company and the remaining shareholders.
Section 62 deals with the situation where redemption is at the option of the shareholder. If the shareholder gives the company proper notice of his intention to redeem them, the company must redeem the shares on the date specified in the notice (or, if no date is specified, on the date of receipt of the notice), and from that date he ranks as an unsecured creditor of the company for the sum payable on redemption. The shares are deemed cancelled unless held as treasury shares.
The acquisition of its own shares, whether under the statutory regime or in accordance with its own memorandum or articles, is treated as a distribution to members which places an important restriction on the company: the directors must be satisfied on reasonable grounds that the company will satisfy the solvency test for distributions immediately after the acquisition, i.e. that the value of its assets will exceed its liabilities and it will be able to pay its debts as they fall due, and a resolution authorising the distribution must contain such a statement. However, there is no need to satisfy the solvency test where the acquisition is pursuant to a shareholder’s right whether under section 62 or under the memorandum or articles.
18. Distributions and dividends
Under the IBC Act, dividends could only be declared and paid out of surplus which was defined as the excess of the total assets over the sum of its liabilities as shown in the books of account and its capital. However, under the new Act, there are two changes. First, the concept of surplus is no longer retained. Instead, distributions of the company’s money or assets can only be made if the directors are satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test, i.e. that the value of its assets exceeds it liabilities and it is able to pay its debts as they fall due. Second, the provisions are not confined to dividends but relate to any "distribution" to a member. The definition of distribution is wide, encompassing the direct or indirect transfer of an asset to or for the benefit of a member and includes the purchase of an asset, the redemption or other acquisition of shares, and dividends.
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