British Virgin Islands: The Mergers & Acquisitions Law Review 11th Ed.: BVI

Richard May and Richard Spooner1

I OVERVIEW OF M&A ACTIVITY

The British Virgin Islands (BVI) has for many years been at the forefront of international corporate structuring for cross-border transactions. The BVI is the world's largest offshore domicile for companies. There are just under 417,000 currently active BVI business companies, of which approximately two-fifths originate from Asia, while clients in 'G7'countries account for less than one-fifth, and the assets held by these companies have an estimated worldwide value of US$1.5 trillion.2 Approximately 31,800 new BVI companies were incorporated during 2016.3 While the rate of new BVI company incorporations has fallen since the 2008–2009 financial crisis, the BVI nevertheless remains an attractive jurisdiction for incorporating vehicles to pool capital and to invest in a globally diverse range of markets. According to the United Nations, the BVI was the ninth-largest recipient of foreign direct investment and the seventh-largest source of outward flows in 2015, which emphasises the important role of BVI companies in international investment flows.4

Many multinational companies listed on the world's major stock exchanges, including the London, New York and Hong Kong main stock exchanges, use BVI companies in their group structures, whether as subsidiaries or joint ventures or as vehicles for acquisitions, with one study finding that every company listed on Hong Kong's Hang Seng Index that has ties to the BVI has on average 35 BVI companies attached to it.5

Given the huge number of BVI companies on the international stage, it is perhaps inevitable that they appear in a very diverse range of industries, from mining and natural resources to TMT, and that they are used in an equally diverse range of jurisdictions. Because BVI companies are utilised in a wide variety of industries, across a wide variety of regions around the world, this renders the jurisdiction less susceptible to global M&A trends; furthermore, the sheer volume of active BVI companies ensures that there continues to be a regular flow of M&A transactions involving such companies.

In addition, because of their high level of corporate flexibility, BVI companies are frequently used to structure transactions. For example, a BVI company can merge with one or more BVI companies or foreign companies, and the surviving company to the merger may be the BVI company or the foreign company. This provides great flexibility for structuring M&A and cross-border deals.

The BVI is internationally recognised as having a cooperative regime in relation to the exchange of information for law enforcement, regulatory and tax-transparency purposes, and has a highly developed regulatory regime including with respect to anti-money laundering. The BVI is listed as 'largely compliant', along with the UK and the US, by the OECD Global Forum on Tax Transparency and Exchange of Information. The government has implemented US FATCA, UK FATCA and the OECD's Common Reporting Standard, of which it was an early adopter, and has signed numerous bilateral tax, law enforcement and regulatory information exchange agreements, including tax information exchange agreements with the US, the UK, France, Germany, China and India, as a result of which the BVI is on the Financial Action Task Force and OECD white lists. It has also adopted measures similar to the European Union Savings Directive. Under its various information exchange obligations, the government and its agencies regularly cooperate with law enforcement, regulatory and tax authorities to supply information to those authorities to assist them with legitimate and lawful enquiries. The BVI is a full member of the International Organization of Securities Commissions, and the BVI regulator, the Financial Services Commission (FSC), adheres to international regulatory standards on matters including anti-money laundering and regulator-to-regulator cooperation.

II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

M&A in the BVI are governed primarily by the BVI Business Companies Act, as amended (Companies Act), which is the primary company law statute in the BVI, and common law. BVI companies are incorporated or registered under the Companies Act.

The predominant type of corporate entity involved in private acquisitions as a target, buyer, seller or guarantor is a company limited by shares, whether privately held (e.g., a group company or an investment holding company) or a listed company.

Many M&A transactions are structured as straightforward sales and purchases of shares in BVI companies, in respect of which no mandatory requirements are imposed by the Companies Act, and there are no other specific statutes or government regulations concerning the conduct of such transactions, so buyers and sellers are generally free to contract as they wish as to the terms for sale and purchase. BVI law does not impose any restrictions on transfers of shares in a BVI company, and indeed the Companies Law expressly provides that, subject to any limitations or restrictions on the transfer of shares in the BVI company's memorandum or articles of association, a share in a BVI company is transferable.6 Accordingly, transfers of shares will be subject to any restrictions or other provisions (such as, e.g., rights of first refusal, drag-along and tag-along rights) in the BVI company's memorandum and articles of association.

In addition, the memorandum and articles of association may give the directors of a BVI company a right to refuse transfers of shares. In the absence of any provision in the memorandum and articles of association that permits them to do so, the directors may not pass a resolution refusing or delaying the registration of a transfer of shares, and the company is obliged on receipt of an instrument of transfer to enter the name of the transferee of the share on the register of members.7 Needless to say, these provisions are almost always overridden by the provisions of the memorandum and articles of association. The usual requirement under the Companies Act for shares to be transferred by way of a written instrument is disapplied (subject to the company's memorandum and articles of association) for any shares of a BVI company that are listed on a recognised stock exchange.

The transfer of a registered share is effective when the name of the transferee is entered in the register of members,8 and the entry of the name of a person in the register of members as the holder of the share is prima facie evidence that legal title in the share vests in that person.9 Registered shares may not be transferred by delivery of the share certificate relating to that share. The use of bearer shares is theoretically possible but is now highly restricted, and bearer shares are now very rarely encountered in international corporate transactions. In addition to straightforward sales and purchases of shares in BVI companies, acquisitions may be structured as statutory mergers or consolidations. Statutory mergers are a longstanding feature of BVI company law, and are one of the most common methods of structuring a complex acquisition or business combination, including, for example, 'going-private' transactions to acquire the shares of BVI companies listed on the US stock exchanges.

The Companies Act permits a BVI company to merge or consolidate with one or more other constituent companies. Each such constituent company may be a BVI company, or a foreign company incorporated in a jurisdiction outside the BVI provided that this is permitted by the laws of that jurisdiction. To be effected, the merger or consolidation must be authorised both by the board of directors and by a resolution of the shareholders of each constituent BVI company, and the threshold for such shareholder authorisation (subject to any contrary provision in the BVI company's memorandum and articles of association) is a simple majority of those shareholders who attend and vote at a general meeting of the shareholders, or by way of a written resolution passed by shareholders with a majority of the voting rights. (Unlike the law of some other jurisdictions, BVI law does not impose a requirement for a merger or consolidation to be approved by a super-majority of shareholders.) Provided that the requisite board and shareholder authorisations are obtained, and all other procedures set out in the Companies Law are complied with, no court order or approval is required for the statutory merger or consolidation to become effective, and the terms and conditions of the merger or consolidation will be binding and effective upon all shareholders regardless of whether or not they voted in favour of the resolution to authorise the merger or consolidation.

However, shareholders have the right to dissent from the merger or consolidation, in which case such dissenters will have the right to be paid in cash the fair value of their shares, as agreed with the company or, if agreement cannot be reached within the statutory time frame, as appraised by independent appraisers.10 This can be a factor where the offer involves a share-for-share swap as opposed to a cash buyout, or where the bidder anticipates issues with minority shareholders.

In a tender offer, private contractual acquisition or public takeover, where control of the majority of the voting equity is required, there is a statutory 'squeeze-out' mechanism available where the relevant statutory thresholds are met. Where a bidder has acquired 90 per cent or more of the votes of the shares in a BVI company (plus, if applicable, 90 per cent of the votes of the shares of each class of shares entitled to vote as a class), it can direct the BVI company to compulsorily redeem the shares of the remaining minority shareholders at a redemption price and in such manner as stipulated by the BVI company, and thereby become the sole shareholder.11 Minority shareholders have the right to dissent from the compulsory redemption, and while this will not prevent their shares from being so redeemed, it will entitle them to payment of the fair value of their shares (determined in the same manner as for statutory mergers discussed above).

Plans of arrangement12 and schemes of arrangement13 may also be appropriate methods of effecting M&A of BVI companies in certain circumstances:

a a plan of arrangement includes amendments to the memorandum or articles of association, company reorganisations or reconstructions, domestic mergers or consolidations, separations of two or more businesses carried on by a company, asset or share exchanges, company dissolutions or any combination of the foregoing; or

b a scheme of arrangement regulates compromises or arrangements proposed between a BVI company and its creditors or members, or any class of either.

Both plans of arrangement and schemes of arrangement require approval by an order of the court.

A scheme of arrangement must be approved by a majority in number representing 75 per cent in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting at a meeting. The principal benefit of a scheme is that if all the necessary majorities are obtained and hurdles cleared, and the court approves the scheme, then the terms of the scheme become binding on all members of the relevant class or classes of shareholders or creditors, whether or not they received notice of the scheme, voted at the meeting, voted for or against the scheme, and changed their minds afterwards.

The consents for approval of a plan of arrangement may be determined by the court, and are therefore less rigid than the prescribed majorities required for a scheme of arrangement. However, it should be noted that the court may order dissenters' rights to apply to a plan of arrangement, but not to a scheme of arrangement. For schemes of arrangement, no dissenters' rights apply, but the key challenge is achieving the high approval majorities required of each class of shareholder.

The BVI does not have any takeovers code that applies to offers or takeover bids in respect of BVI companies, or any other non-statutory rules or codes of conduct relating to M&A transactions involving BVI companies, whether privately held or publicly listed.

Acquisitions of BVI companies that are regulated entities in the BVI may be subject to additional statutory requirements. For example, there are change-of-control rules that apply to entities regulated by the FSC under relevant financial services legislation, including, for example, companies conducting investment business or companies that are regulated funds and that are regulated under the Securities and Investment Business Act 2010, companies conducting banking or trust business that are licensed under the Banks and Trust Companies Act 1990, and companies regulated under the Insurance Act, 2008.

Download >> The Mergers & Acquisitions Law Review 11th Ed.: BVI

Footnotes

1 Richard May is a managing partner at Maples and Calder and Richard Spooner is a partner at Maples and Calder (Hong Kong) LLP.

2 Creating Value: The BVI's Global Contribution, June 2017, a report by Capital Economics for BVI Finance Limited.

3 BVI Financial Services Commission's Quarterly Statistical Bulletin, Vol. 46/March 2017.

4 Footnote 2.

5 Ibid.

6 Section 52 of the Companies Act.

7 Section 54(4) and (5) of the Companies Act.

8 Section 54(8) of the Companies Act.

9 Section 42 of the Companies Act.

10 Section 179 of the Companies Act.

11 Section 176 of the Companies Act.

12 Section 177 of the Companies Act.

13 Section 179A of the Companies Act.

This article was first published in The Mergers and Acquisitions Review, - Edition 11

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.

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