With many clients unfamiliar with the concept of a trust structure, Michael Gagie examines the wide range of alternatives available for Asian clients.
Whilst all offshore lawyers based in Asia will tell you that demand for private client services is growing throughout the region, one of the challenges that we all face when advising clients, is unfamiliarity with, and a potential lack of comfort derived from, the concept of a trust structure for wealth planning and succession purposes.
From a ‘consumer’ perspective, one of the impediments to the use of a trust is the loss of control that may arise over the asset or assets as a consequence of ownership of the asset being ceded to the trustee of the trust. Reserved investment powers and powers to revoke are common tools but even with this approach some clients cannot ‘let go’.
As a consequence of the above, we have explored with some clients in the region ways in which the share classes of their BVI or Cayman companies might be structured in order to provide some form of ‘succession’ planning and/or control within the framework of a corporate vehicle.
It should be noted that each of the transactions in which we have worked through this thought (and drafting) process with clients has been different – the family arrangements, business interests, tax domicile and planning objectives of each client are always different and any advice provided in terms of structuring is always against a backdrop of other advisers and intermediaries.
Succession Issues for Shares of BVI and Cayman Companies
It might be helpful to remind ourselves of the legal position regarding the ownership of shares in BVI and Cayman companies.
As readers will be aware, offshore companies are often used by clients as holding vehicles for underlying assets or businesses. It is very common in Asia for the head of the family or business, to hold shares in the offshore company in their own name. It is also very common for that same individual to also be the sole director of the offshore company. An alternative approach has been for the head of the family or business to appoint a ‘nominee’ to hold legal title to the shares of the company – often these nominee arrangements are constituted by no more than a couple of paragraphs of text, which require the nominee to defer to their appointor for direction as to how to exercise the rights attaching to the shares that they hold.
Generally speaking, in the constitution of a BVI or Cayman company (its memorandum and articles) there will be provisions dealing with the transfer, on death, of the shares of an individual shareholder. Notwithstanding the mechanics set out in the memorandum and articles, there is a legal requirement in both jurisdictions for the appropriate persons to obtain a grant (of probate where the deceased has a will; or letters of administration otherwise) in respect of the BVI/Cayman assets in the estate of the deceased in order to effect the transfer of title of the shares from the deceased to the beneficiary/ies of the deceased. In addition, in a situation where a nominee has been appointed to hold the shares, there will again be a requirement for such persons to instruct a nominee as to how to hold or transfers the shares it was holding on trust for the deceased, to the beneficiary of the deceased.
There are a number of permutations as to the right of any beneficiary to ‘succeed’ to shares in the scenario described above and these will be dictated by among other things, domicile (of the deceased), local inheritance laws etc. For the purposes of this article, the point to note is that for both control of the offshore company and ownership of the shares of the offshore company, the holding of a single class of shares in the sole name of one individual family member is likely to cause problems for the family.
In relation to BVI companies, the BVI Business Companies Act contains a helpful provision for companies owned by an individual who is the sole shareholder and sole director of the company. In that scenario, the individual can appoint what is called a reserve director – this is an individual or entity that has agreed in advance to become a director of the BVI company upon the death of the current sole director – so the trigger event for appointment is death of the appointor. From a succession perspective, having a reserve director does not avoid the need for administration of the estate (in relation to a transfer of the shares in the BVI company) but from a practical perspective it does ensure that there is someone able to make decisions on behalf of, and to enter into arrangements on behalf of, the BVI company. Whilst use of the reserve director provision has been taken up by a number of owners of BVI companies, there are many more yet that could take advantage of it.
What Can Different Share Classes Achieve?
In a situation where an offshore company is being used to hold assets, those assets may or may not be generating an income stream for the holder of the shares of that company – for instance in a corporate structure, subsidiaries of the offshore company may hold assets or be running a business which generates profits, which are then paid up to the offshore company by way of intra-group dividend payments. Alternatively, the offshore company may be being employed purely to hold an asset – for instance real estate in use by family members – which of itself does not generate income but has a capital value.
In exploring options with clients for ownership, control and the entitlement to income from their offshore company, one potential way to create a divide or a distinction between the ‘owner’ and a beneficiary or group of beneficiaries, is to establish different classes of shares, which then provide their holders with different variations of the rights and entitlements that would usually reside in the shares of a company with a single class of voting shares.
If the owner – ‘A’ - wants to retain control of the company - and by this we mean the right to appoint and remove directors from the board of the company and the voting rights attaching to the shares to approve a liquidation of the company, amendment of its memorandum and articles etc – but is willing to allow the beneficiaries (who should be adults) – ‘B’ - to participate in any dividends paid by the company, the memorandum and articles of the company can be structured to provide for A and B shares, which would reflect the division of control rights and economic rights.
This type of arrangement is not unusual and is close to the preference share arrangements commonly used for investment vehicles. However, it is also possible to build in trigger events for changes in the rights attaching to specific classes of share – trigger events that are linked to the physical wellbeing and mortality of the ‘owner’.
As a variation on the different class rights above, the A shares and B shares could be structured so that the voting rights attaching to the A share class ‘flip over’ to the B share class upon the death or during the incapacity of the holder of the A shares. Indeed, it is possible to provide for a conversion of sorts of the class A shares on the death or incapacity of the holder of the A shares so that the share class is no longer entitled to any voting or economic rights – thereby rendering the share class redundant (but which can switch back if capacity is regained). If the A shares were made redeemable at the option of the company upon the occurrence of death, the enhancement of the rights attaching to the B shares upon the death of ‘A’ coupled with the redemption, would extinguish the need for a formal transfer of the legal ownership of the A shares – thereby avoiding any need for transfer of ownership of the shares from ‘A’.
There are clearly other variations on this theme that can be considered, which could include additional classes of shares which benefit from income derived from specific assets held by the company and perhaps even a split of the voting rights - all of which would need to be subject to appropriate tax and other advice for both the owner and the beneficiaries. The beneficiaries are also themselves subject to the very same risks as the owner.
The use of one or more private companies structured in this way may help to form part of a succession solution for multi-generational families. From a practitioner perspective, the flexible nature of the corporate legislation in BVI and Cayman coupled with the familiarity and comfort level for clients in Asia of the jurisdictions may make this an attractive offering to clients.
Michael Gagie is the global head of the BVI law practice of Maples and Calder and is based in Asia. Michael practises both BVI and Cayman Islands law and his experience and areas of practice cover corporate, downstream private equity work, commercial, banking and structured finance.
Maples and Calder
Abu Dhabi, Dubai, Hong Kong, Shanghai, Singapore, Bermuda, Boston, British Virgin Islands, Cayman Islands, Delaware, Montreal, New York, San Francisco, Dublin, Jersey, Leeds, London, Luxembourg and the Netherlands.