Just how is the BVI used on a daily basis as an IFC – Sherri Ortiz, BVI IFC, provides a practical case study of a BVI structure in practice.
The British Virgin Islands (BVI) has always had a reputation for high standards of transparency and regulation. Whether it is in the fields of trusts, funds, company formations or other areas, business leaders continue to find the territory strikes the right balance between meeting the needs of the international community, while maintaining regulatory and corporate governance standards that match international best practice.
The BVI can point to an economy that remains in good health, in fact an International Monetary Fund report published in October last year indicated that the global financial crisis had not affected the health of BVI financial institutions. Revenue remains steady and the BVI continues to attract business.
This performance is down in large part to a diversified financial services sector. BVI vehicles are well known worldwide, easy to use and supported by robust and fair regulations, an efficient and effective regulatory environment, a favourable tax system, stable government and high quality infrastructure. The results are there for all to see. More than 450,000 companies are registered in the BVI, more than 3,000 of them hedge funds.
One area in which the BVI excels is the formation of trusts, which has become a growth area for the BVI as confirmed by the jurisdiction’s regular visits and presentations to business people all over the globe, including most recently the US, Switzerland, Luxembourg and the UK. Trusts value the flexibility the BVI gives them and the Virgin Islands Special Trust Act, 2003 (VISTA) has consolidated the BVI’s position as the location of choice for international trusts and operations. A substantial number of VISTA trusts have been set up to hold underlying assets worth many billions of dollars. Unique to the BVI, VISTA has been acknowledged by trust and estate practitioners and other international experts as providing one of the most modern and coherent pieces of trust legislation globally.
The implementation of the Financial Services (Exemptions) Regulations in August 2007 clarified the circumstances under which a BVI private trust company (or PTC) must be licensed and further enhanced the BVI’s international reputation for trust and estate planning products – with VISTA charitable or non-charitable purpose trusts being ideally suited to holding shares in PTCs. The PTC legislation, together with the continued popularity of VISTA, ensures that the BVI is able to provide a full suite of trust structures to cater for international demand.
Below are two separate case studies which illustrate how BVI VISTA trusts work.
CASE STUDY 1: BVI VISTA Trusts at Work – Business Succession Planning
The operator of a highly successful construction business, which operates in Country A, has been advised to place his high value 99.9 per cent shareholding in the company in trust. This is to ensure that upon his death, the business will be passed smoothly to his heirs and that probate is not needed in Country B where the company is incorporated.
However, the effect of the ‘prudent man of business rule’ – a rule of English trust law designed to help preserve the value of trust investments – might mean that even if a professional trustee could be found, the trustee of the new trust might be obliged, as a matter of law, to intervene in the affairs of the construction company, which the operator has worked hard to build from scratch, even if he remains its sole director. This would remain the case even if another company is inserted between the construction company and the trustees.
Furthermore, it is apparent that if an attractive offer is made, the trustees might have to sell the construction business to satisfy short term considerations or have to sell it regardless if they conclude that holding the entire underlying trust fund in a specialised business may not comply with their duty to diversify the trust’s investments.
The operator’s advisers point out that trustees will be required to be involved in the day to day running of the company and may require the directors to enter into an agreement with them so that all decisions which could impact the value of the company’s shares will need the trustees’ approval. This is despite the trustees having no expertise in relation to the technicalities of construction in Country A and could therefore mean they have to seek and pay for expert advice before they can approve any major decisions. This is a significant concern for a businessman who knows delays in the decision making process can be disastrous in the construction industry and who is also concerned to hear that the trustees might be obliged to exercise their shareholder powers by replacing the director if they do not follow the adviser’s recommendations.
The operator is extremely reluctant to be exposed to the fees that the trustees and consultants would likely charge both due to the value of his business and the risks involved in holding property of such a nature in trust and for the additional time spent monitoring the day to day running of the business.
He begins contemplating alternative solutions.
Given the circumstances the operator faces, a VISTA trust would be the most appropriate solution. A BVI company could be placed above the construction company and the shares in the former could be placed in a VISTA trust. The operator of the construction company could also be the sole director of the BVI company and the trust instrument would contain office of director rules specifying who will succeed him as director. Limited grounds for intervention could be included in the trust instrument, meaning the trustees would be unable to interfere in the day to day affairs of either the BVI company or the Country B company unless there were exceptional circumstances. The operator could be satisfied that a BVI VISTA trust has appropriately negated the aspect of the ‘prudent man of business rule’ that effectively requires trustees to monitor and intervene in the affairs of underlying companies.
Case study provided by Chris McKenzie, Partner, Walkers
CASE STUDY 2: BVI VISTA trusts at work – Estate planning
As part of his estate planning strategy, a retired businessman has been advised to transfer his valuable investment portfolio to the trustees of a new trust. In the past he has managed his portfolio personally and it has consisted of investments, which would not generally be regarded as being in compliance with the rules of trust law as laid down by the English courts.
The ex-businessman is concerned that if professional trustees are appointed, they would not be able to continue to employ the successful investment strategy he has adopted to date. Although he could be appointed as the trust’s investment manager, advisers have stated that due to concerns about “sham trusts” and breach of fiduciary duty, professional trustees are increasingly reluctant to allow this. This is especially true in cases where the settlor, although successful in managing his own portfolio, has no relevant qualifications, experience or insurance cover. Even if the former businessman was allowed to manage the trust’s investments, trustees will generally insist on having the ability to dismiss the investment adviser at short notice. He is also told that such an appointment could increase the trustees’ risk related fees and charges as a result of the time needed for constant monitoring.
Another adviser has suggested the trust could hold the investments through a company of which the retiree could be the sole director. However, the professional trustees who have been approached have all pointed out that as controlling shareholders they would still be required to exercise shareholder powers to ensure that the company’s investments are managed in a way which is compliant with the principles of English trust law and that in the absence of applying such a policy, they might have to remove him as director.
In recent times, the best solution to the ex-businessman’s situation has been to transfer the investments to a new BVI company with him retaining sole directorship of the investment portfolio. The shares in the BVI company can then be transferred to the trustee of a new VISTA trust. The terms of the trust would be such that the trustee shareholders would not be required or indeed empowered to monitor and intervene in the affairs of the company or to change its directors simply because the director is pursuing an investment strategy which does not comply with English trust law principles.
Case study provided by Chris McKenzie, Partner, Walkers
Globally Integrated and Responsible Financial Services
The BVI has been at the forefront of international financial services for decades and, as exhibited by its VISTA legislation, it continues to innovate and adapt to the constantly changing global financial environment. The BVI’s financial landscape is built on the premise that jurisdictions that are committed to working to ensure businesses have the maximum opportunity to thrive within the correct legislative framework will be the ones that will help lead the world into a new era. The BVI’s IFC is committed to keeping the jurisdiction at the forefront of the world’s financial centres. The jurisdiction has always set the highest standards of transparency, regulation, collaboration, enforcement and cooperation, as this has always been a key part of our strategy for retaining our competitive edge.
Ms Ortiz is responsible for the coordination and implementation of the BVI government’s marketing and promotion strategies conducted on behalf of the financial services industry.
Sherri Ortiz, Executive Director, BVI International Finance Centre, BVI