ARTICLE
15 October 2008

Converting A Mutual Fund To A SPC - Practical Steps

W
Walkers

Contributor

Walkers is a leading international law firm which advises on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, Ireland and Jersey. From our 10 offices, we provide legal, corporate and fiduciary services to global corporations, financial institutions, capital markets participants and investment fund managers.
Under the BVI Business Companies Act 2004 ("BVI BC Act"), a company limited by shares may be incorporated or, if it has already been incorporated, be registered by the Registrar as a segregated portfolio company ("SPC") provided that the Financial Services Commission (the "Commission") has given its written approval and provided that the company:
British Virgin Islands Wealth Management

INTRODUCTION

Under the BVI Business Companies Act 2004 ("BVI BC Act"), a company limited by shares may be incorporated or, if it has already been incorporated, be registered by the Registrar as a segregated portfolio company ("SPC") provided that the Financial Services Commission (the "Commission") has given its written approval and provided that the company:

1. is, or on its incorporation will be, licensed as an insurer under the Insurance Act 1994;

2. is, or on its incorporation will be, recognised as a professional or private fund or registered as a public fund under the Mutual Funds Act 1996; or

3. is, or on its incorporation will be, of such class or description as may be prescribed by regulations made under section 159 of the BVI BC Act.

At present only licensed insurers and recognised or registered mutual funds can incorporate or register as an SPC under the BVI BC Act.

KEY FEATURES OF SPCS

An SPC is a single corporate legal entity that benefits from the statutory segregation of assets and liabilities between segregated portfolios established within the same company.

SPCs can establish segregated portfolios to segregate the assets relating to classes of shares with different investment criteria, thus protecting shareholders from the potential of cross liability arising from the adverse investment performance of other classes of shares.

The benefits of operating segregated portfolios are not restricted to new companies first incorporated as SPCs and it is possible for existing BVI Business Companies or International Business Companies to apply to be re-registered as SPCs upon application to the Registrar of Corporate Affairs and the Commission.

No separate legal personality

The SPC is a single legal entity within which may be established various segregated portfolios. Although each segregated portfolio must be separately identified it will not be a separate legal entity from the company.

Name includes "SPC" at length or in abbreviated form

A SPC must include the letters "SPC" or the words "Segregated Portfolio Company" in its name.

Segregation of assets and liabilities

The assets and liabilities of each segregated portfolio are legally separate from those of the other segregated portfolios and general assets of the company.

To achieve that segregation, the SPC must identify the relevant segregated portfolio(s) and make clear that business is being transacted in the name of, or by or for the account of the particular named segregated portfolio(s). The capacity in which the SPC contracts and the name(s) of the relevant segregated portfolio(s) must be set out in writing in the relevant transaction documentation.

Each segregated portfolio must be separately identified or designated and must include in its identification or designation, the words "Segregated Portfolio".

Directors' duties and liabilities

In addition, the directors have a duty to establish and maintain the segregation of each segregated portfolio's assets from those of other segregated portfolios and also the general assets of the SPC.

Recourse of creditors to the applicable segregated portfolio and general assets

Creditors of a segregated portfolio have recourse to the assets of the segregated portfolio and to any general assets of the company (being assets not comprised within any segregated portfolio) to the extent that the segregated portfolio assets attributable to such portfolio are insufficient.

When dealing with a SPC a third party should clearly establish which segregated portfolio of the SPC it is dealing with (and therefore which of the relevant segregated assets it has recourse against).

THE PROCESS

An application to the Commission for approval to register a company as an SPC that is already registered as a mutual fund with the Commission is dealt with in the Segregated Portfolio Companies Regulations 2005 (the "Regulations") and must include the following information:

1. the name, or proposed name of the company (which must include the letters "SPC" at length or in abbreviated form);

2. details of the person who is, or who will be appointed as the administrator of the company;

3. a list of the initial segregated portfolios that it is intended will be created, including the name, identification or designation of each segregated portfolio;

4. in respect of each of the initial segregated portfolios that it is intended will be created, details of the functionary who will be appointed by the company in respect of the portfolio;

5. its memorandum and articles and the changes proposed to be made to the memorandum and articles should its application be approved;

6. a statement in the form approved by the Commission, signed by at least one director of the company on behalf of the board, setting out the following:

(a) the assets and liabilities of the company as at a date no more than six months prior to the date of the application1;

(b) details of any transactions, events or other matters not reflected in the statement of assets and liabilities that the directors consider have materially affected or, prior to its registration as an SPC are likely to materially affect, the assets and liabilities of the company;

(c) the assets of the company that it is intended will be segregated portfolio assets, specifying in respect of which portfolio, and the assets that it is intended will be general assets;

(d) and how the liabilities of the company will be satisfied;

7. a declaration signed by at least one director of the company on behalf of the board that:

(a) resolutions of the directors have been passed approving the registration of the company as an SPC2;

(b) the company is solvent and that the company and each proposed segregated portfolio will, after the assets of the company have been allocated to segregated portfolios, be solvent;

(c) the company has given notice to members of its intention to apply for registration as a SPC; and

8. a copy of its offering document for each of the initial segregated portfolios that it is intended will be created.

CONSENTS

On the basis that the share class rights are being varied as a result of the transfer of assets and liabilities of the company into segregated portfolios, shareholder consent will be required.

ADDITIONAL MATTERS

A mutual fund SPC must, at all times, have one or more administrators, managers and custodians and may appoint one or more investment advisors. The instrument under which a functionary is appointed must specify the respective segregated portfolio or portfolios in respect of which the functionary is appointed and his responsibilities and duties in respect of each such segregated portfolio.

A mutual fund SPC must also have an auditor who will be responsible for auditing its financial statements, and such audited financial statements must be filed with the Commission within six months of the end of its financial year.

OTHER TASKS

The following other tasks will also need to be undertaken:

1. amend general prospectus/offering memorandum and each supplement to reflect the amended structure, including name changes (the company must have the letters "SPC" in its name and each portfolio (class) must have the words "Segregated Portfolio" in its name);

2. amend memorandum and articles of association to include SPC provisions;

3. amend all service provider agreements to reflect amended structure and segregation of assets and liabilities of each portfolio;

4. prepare directors' resolutions to approve registration as a SPC, including seeking shareholder consent, amending prospectus/offering memorandum and supplements, approving directors' declarations and attending to all necessary filings;

5. prepare directors' declarations as required under the Regulations;

6. make an application to the Commission to register the mutual fund as a SPC; and

7. arrange for the relevant accounting entries to be made to identify/segregate the portfolios.

TIMING

The Commission's authority to grant approval for a company to register as an SPC will usually, in the case of private and professional funds, be given between 24 and 72 hours and, in the case of a public fund, between seven to fourteen business days.

Footnotes

1.At present there is no approved form for the statement of assets and liabilities. In addition, the Commission has not instituted a requirement for the statement to be audited. The Commission has indicated, however, that it would assist in the application process if a copy of the latest audited statements is submitted, but that in the absence of audited statements a detailed balance sheet would be accepted as meeting the requirement.

The Commission has also provided guidance on a segregated portfolio which is in its infancy and has not yet been audited. The Commission has indicated that, in these circumstances, the details of its assets must also be included in the statement signed by the director (s) even if the administrator prepares the actual statement of assets. Where the date of the statement of assets of the infant portfolio does not coincide with the dates of the statements of the other portfolios, the appropriate date of the infant portfolio's statement of assets should be indicated and an explanation should be footnoted that the intended portfolio is new.

2.It may be necessary, under the existing memorandum and articles of association, for shareholder approval of the re-registration of the company as a SPC to be obtained. However, it should be noted that even if there is no specific requirement of shareholder approval of the registration as an SPC, the changes to the share class rights which will inevitably be affected by the conversion to an SPC, will require shareholder consent.

British Virgin Islands
Richard May

Cayman Islands
Jonathan Tonge, Partner
Mark Lewis, Partner

London
David Whittome, Partner

Jersey
Heather Bestwick, Partner

Hong Kong
Philip Millward, Partner

Dubai
Rod Palmer, Partner

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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