Taking the BVI Public: Using BVI Companies for IPOs

The BVI is the largest offshore corporate domicile in the world, with over 800,000 companies incorporated in the jurisdiction since 1984. In the first half of 2010 alone, just under 30,000 new BVI companies were incorporated.

BVI companies are listed on the world's largest international stock exchanges. At the time of writing, there are approximately 31 BVI companies listed on the NASDAQ and NYSE and approximately 36 listed on AIM and the LSE. In addition, BVI companies can be found on the TSX, the SGX and the ASX. In 2010, the most exciting development for the BVI in the context of international listings was the primary listing in October 2010 of Winsway Coking Coal Holdings Limited (‘Winsway’) – on the Hong Kong Stock Exchange (HKSE) – the first HKSE listing of a BVI company following the HKSE's decision to add BVI to its list of 'approved' jurisdictions.

It is estimated that Asia is home to approximately 50 per cent of all BVI companies incorporated and, as a consequence, it has been for sometime, the single biggest market for the jurisdiction's corporate offering.  One of the factors that has helped the BVI's popularity in Asia has been the appetite for its companies in the Hong Kong marketplace.  There are a number of incorporation agents – ie, intermediaries through whom you can purchase a BVI company - with a physical presence both in Hong Kong and elsewhere in the region and the 'real time' availability of those services has helped BVI to establish dominance not just in Hong Kong but in greater China as the first choice for an offshore corporate domicile.

In a commercial context, as we will see below, for a business, there are a number of very real advantages afforded by the BVI's corporate legislation (to being incorporated in the BVI).  For many years now, we have seen both foreign investors into Asia and "domestic" Asian businesses utilising the BVI Business Company for joint ventures, private equity structures and for international listings.  The prospect of now being able to list BVI companies in Hong Kong is yet a further validation of the jurisdiction's role in the Asian context.  We can now take a closer look at the practical implications of the legislation.

BVI Benefits to Consider Pre-IPO

The BVI Business Companies Act, 2004 (as amended) (the ‘Act’), is the statute that governs the operation of all BVI companies. Whilst the attractions of using a sole director/sole shareholder BVI company for holding company purposes and using BVI companies for joint venture vehicles are well known (particularly in Asia and in Russia), many who are familiar with the BVI have under utilised other advantages afforded to their companies by domiciling in the jurisdiction. A number of these advantages have relevance to a business with an eye on a future equity listing.

No par value shares and no share capital

The Act abolished the concept of share capital for BVI companies and therefore the need for par value shares. Whilst an off the shelf BVI company can still be purchased with par value shares (50,000 shares of US$1 each being the default position), a potential difficulty for a company of having par value shares is that as a matter of law, the directors of that company cannot issue the company's shares for less than their par value. From a fund raising perspective, particularly whilst in the start-up phase, this may hamper a company's ability to bring in new investors. No par value shares give a company the freedom to set the subscription price for shares at any level determined by the directors with no ‘backstop’ or minimum threshold. In the IPO context, this may provide an advantage when it comes to determining the price at which individual shares are to be marketed and offered.

The other advantage that the abolition of share capital provides to BVI companies is that all subscription monies received by the company upon the issuance of shares is available to apply to the business of the company - there is no requirement (or need) for the directors to segregate the subscription monies received into share capital or share premium accounts.

Ability to merge BVI companies with other BVI companies and with foreign BVI companies

Whilst this is not an advantage that is unique to the BVI, the ability to merge BVI companies with other BVI companies and with companies incorporated in other jurisdictions (subject only to local law restrictions in those jurisdictions), does provide flexibility that is not available to some of the jurisdiction's contemporaries. Whilst the Cayman Islands has recently introduced merger provisions into its corporate law, the voting thresholds and the mechanics involved are different to those in the BVI.

As practitioners, we often see clients who have incorporated multiple companies to hold separate businesses within their group structure - resource related companies are a good example of this where the various licences and related rights for each individual project are often held through separate legal entities. The ability to merge companies easily is an advantage to a business undergoing a pre-IPO reorganisation or restructuring.

Fiduciary duties of the directors of a BVI company

The Act provides that the directors of a joint venture entity can, when making decisions, act in the best interests of the shareholder or shareholders who appointed them even if the decision may not be in the best interests of the BVI company of which he is a director.

This statutory deviation from the common law position regarding a director's duties should prick the ears of any private equity investor. The BVI corporate regime, at law, endorses the commercial position that in reality all businesses with a financial backer represented at board level are likely to find themselves in. Whilst any preference share arrangement pre-IPO that an investor may agree with a business is likely to have a number of matters requiring the investor's consent and/or covenants or undertakings on the part of the founders of such business to procure that the company and/or its board effect certain decisions only with investor consent, the BVI position – which must be specifically provided for in the memorandum and articles of a company - adds further weight to the investor position and is an advantage not currently found in the corporate regime of any of the other comparable offshore jurisdictions.

Advantages of Using a BVI Listing Vehicle

‘Scalability’ of corporate governance requirements

One of the greatest strengths of the BVI as a corporate domicile is the flexibility which the Act affords to the owners of BVI companies as regards the everyday operation and management of a company. The Act provides a framework of corporate governance which is geared in favour of the directors of a BVI company - the approval of the directors (by way of a resolution of a simple majority) is all that is required to effect almost all business decisions. Under the provisions of the Act there are really only three key decisions which, as a matter of law, require the directors to seek a shareholder approval ‑ exercised by way of shareholder vote - and those are: (i) a disposal of in excess of 50 per cent of the total assets of a company; (ii) a merger or consolidation of a company; and (iii) a voluntary winding up of a company.

Clearly for a listed company, the checks and balances imposed on the board of directors will be greater than those provided for above and that is where the real advantage of the Act lies because the legislation provides throughout that the default position (provided for under the Act itself) is always ‘subject to’ the specific provisions of the constitution of the company itself - its memorandum of association and articles of association (M&A).

The effect of being able to ‘opt out’ of the statutory default position means that a BVI company can tailor the provisions of its M&A to fit the requirements of the particular equity market or markets that it is seeking to raise funds through. This means that not only can the company provide all necessary comfort to the regulator of the relevant exchange on which it is seeking to list its shares, but its advisers can also factor into the M&A any market standard requirements that investors in the relevant investment market or more broadly, the industry sector in which the company operates would expect to see. On the flipside, the founders of the company can look to limit the changes to the corporate governance regime only to those that the market requires, thereby retaining some of the flexibility that the BVI has in comparison to other potential domiciles.

Distributions to shareholders and reduction of issued shares / repurchase of own shares

The abolition under BVI law of the concept of share capital may offer a significant advantage to a BVI listed company, both in terms of its potential ability to make dividend payments to its shareholders and to its ongoing ability to repurchase its own shares.

Under BVI law, in order to effect either a dividend or a repurchase of shares, the directors of the company must satisfy themselves that immediately after payment of the dividend amount or the purchase price for the shares, the company is able to pass the following solvency test:

(i)         the value of its assets exceeds its liabilities; and

(ii)        the company is able to pay its debts as they fall due.

The absence of a requirement to maintain a share capital account or equivalent and a determination of the position via a straightforward balance sheet stress test gives the directors of a BVI company, in a commercial context, the opportunity to consider the demands for a return required by the company's investor base against the cash and other ongoing financial requirements of the company's business.

Statutory shareholder protections

From an investor protection perspective, the Act has, since its full introduction in 2006, provided for greater statutory minority shareholder protections than the majority of the jurisdiction's offshore contemporaries.

The Act provides for the following range of shareholder remedies:

• Compliance orders – the ability for a shareholder (or a director), where the company or a director is engaging in or is proposing to engage in conduct that contravenes the Act or the constitution of the company, to apply to the BVI court for an order restraining such conduct or an order directing compliance with the Act or the constitution of the company;
• Derivative actions – whereby the BVI court may grant a shareholder leave to bring proceedings in the name and on behalf of the company or to intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company; and
• Unfair prejudice remedies – the ability to apply to the BVI court for a wide range of potential remedies where a shareholder considers that the affairs of the company have been, are being or are likely to be conducted in a manner that is, or any act of the company has been, is or is likely to be oppressive, unfairly discriminatory or unfairly prejudicial.

The BVI court is expressly empowered to grant interim as well as final orders and to grant such consequential relief as it thinks fit.

Application of the ‘BVI advantage’ by Winsway

Winsway's recent listing in Hong Kong demonstrated the use of a number of the advantages discussed above. Perhaps the most note worthy was Winsway's use of no par value shares making BVI only the second jurisdiction (after Singapore) to have a Hong Kong listed company with this type of share structure.

In relation to the shareholder protections discussed above, the benchmark which the HKSE requires all 'approved' jurisdictions to judge themselves against (for the purposes of obtaining their 'approved' status) is the position of shareholders under Hong Kong companies legislation and whether the jurisdiction of the listing vehicle offers equivalent or better statutory protection for shareholders than that offered under Hong Kong law. Given the substantive statutory protection provided for under the Act, the BVI ticked all of the required boxes.

Conclusion

Given the BVI's long standing popularity in Asia, we expect in 2011 to see more BVI companies following Winsway to a primary listing in Hong Kong – a second BVI company has recently obtained a listing (a listing by introduction). Increased appetite from global investors for China related businesses may also result in an increase in BVI companies listing on other international exchanges.