Originally published in China Business Law Journal, July/August 2011
Recent years have seen explosive growth in the number and value of listings of Asian and other international businesses on the leading Asian stock exchanges, notably the Hong Kong stock exchange (HKEx). Many of these companies (and the vast majority in the case of the HKEx) have chosen to list through an offshore listing vehicle.
The last few months, however, have seen a new story emerge with questions being asked about the accuracy of the past financial reporting of some of the newly listed entities, and the effectiveness and rigour of their systems of corporate governance. This has followed the investigation last year by the US securities regulator, the Securities and Exchange Commission, into the use by a number of Asian businesses of reverse takeovers as a means of achieving a listing on US stock exchanges with only limited disclosure.
With offshore companies used so frequently as listing vehicles, it is important to consider whether a leading offshore centre such as Guernsey can provide a robust platform for reporting and corporate governance in order to protect shareholders and the public.
Guernsey law requires all Guernsey companies large enough to list to appoint an auditor who is both independent of the company and qualified and experienced to the requisite standard. This requirement arises as a matter of Guernsey law and is independent of any requirement for the appointment of an auditor under the listing rules of any relevant stock exchange. This should help to ensure that the financial statements of any Guernsey company have been suitably audited even in periods before the company is listed.
Listed Guernsey companies are subject to specific Guernsey legislation relating to insider dealing, market abuse and misleading statements and practices. Offences under these regimes carry both civil and criminal penalties. The legislation which underpins these regimes is modern and is based on similar legislation in the UK.
Listed Guernsey companies are subject to the City Code on Takeovers and Mergers issued by the UK Panel on Takeovers and Mergers. The code provides both the shareholders and the boards of listed companies with comfort that any takeover or merger affecting their company will be subject to a set of rules ensuring an orderly and effective transaction.
Finally, while there is no requirement for a Guernsey company to have any Guernsey-resident directors, Guernsey law does impose clear responsibilities and duties upon directors who sit on the board of a Guernsey company. There are clear sanctions should they fail to meet their corporate governance obligations, including the potential for disqualification from acting as a director.
Striking a balance
The above is not intended to suggest that Guernsey companies are inflexible or impose draconian penalties on directors, officers or promoters so as to make the use of Guernsey companies difficult, uncommercial or otherwise unattractive. That is not the case at all. The point is simply that the Guernsey legal and regulatory regime provides a practical and realistic balance between internationally accepted standards of financial reporting, corporate governance and shareholder protection on the one hand and high levels of commercial flexibility and ease of management and operation on the other.
Beyond the financial reporting, corporate governance and shareholder protection issues discussed above, there are many further reasons which make a Guernsey company an attractive listing vehicle.
Guernsey companies are widely accepted as listing vehicles. Guernsey is the most popular offshore jurisdiction for listing on the markets of the London Stock Exchange (LSE). Based on information from the LSE as at 31 December 2010, the total number of Guernsey companies listed on the combined LSE markets was over 100 and almost double that of any other offshore jurisdiction.
Guernsey companies are also listed (or have obtained approval to list) on a number of other international exchanges.
Guernsey is designated by the OECD as a "white listed" jurisdiction, meeting agreed international tax standards for information exchange and co-operation. Moreover, in July it was confirmed that Guernsey's high standards have been recognized further and Guernsey will not be treated as an "offshore secrecy jurisdiction" in the proposed US anti-tax haven legislation being sponsored by Senator Carl Levin.
Guernsey's corporate law is familiar and flexible. The legislation is largely modelled on previous English laws which also form the basis for the Hong Kong Companies Ordinance. However, Guernsey law also offers a degree of flexibility and enables changes to be made to a company's constitutional documents in order to accommodate investor expectations and to satisfy the listing rules of a particular stock exchange.
There are no statutory pre-emption rights under Guernsey law, but pre-emption rights can be included in a Guernsey company's articles, if these are required by the relevant listing rules, in order to enhance investor protection.
There are no statutory disclosure and transparency provisions under Guernsey law which require shareholders to disclose their interests in shares. Again, however, those provisions can be built into a Guernsey company's articles to reflect the requirements of the relevant stock exchange and investor expectations.
Guernsey companies may make a distribution or repurchase its own shares out of any source (including capital) provided the company's directors are satisfied that, in addition to meeting any requirements in the memorandum and articles, the company is able to meet the statutory solvency test. This test comprises a balance sheet test (i.e. assets must exceed liabilities) and a cash flow test (i.e. the company must be able to pay its debts as they fall due) immediately following the distribution or repurchase. The ability for Guernsey companies to distribute from any source may be an advantage over companies incorporated elsewhere which do not have this flexibility.
Shares in a Guernsey company can be held in dematerialized form. This is an advantage over those other jurisdictions which can only trade shares on certain stock exchanges through the use of global depositary receipts. Shares in a Guernsey company can be settled into, and cleared in, the CREST UK system.
With the likelihood of more offshore companies being used as listing vehicles for the HKEx and other exchanges, it seems clear that Guernsey vehicles will have their part to play in making the most of Asian opportunities.
Marcus Leese is a partner at offshore law firm Ogier in Hong Kong, and is an advocate of the Royal Court of Guernsey.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.