Caribbean jurisdictions (including Bermuda, technically in the North Atlantic but covered here) are home to millions of business entities, many of which are created under laws whose architecture is based on English company law. Although English-architecture jurisdictions have made changes to various provisions, grafted concepts from other sources, and introduced their own innovations, the basic structure of the law is that of English law. This has given these jurisdictions a key advantage in winning business because investors, lawyers, and other service providers around the world understand that architecture and are comfortable with it. Combined with their ability to adapt the English architecture to particular market segments more rapidly and comprehensively than Britain herself can manage, those Caribbean jurisdictions with an English heritage are well positioned in the global competition for business entities.
The Evolution Of The Global Marketplace For Business Entities
For many businesses today, forming the legal entity that structures the business within the jurisdiction where it will operate is the sensible option. The owner of a single shop on a local high street has few reasons to incur the expense and inconvenience of using a business entity from a foreign jurisdiction. However, there are multiple examples of businesses in which shopping globally for legal entities is worth the cost. If a local legal system lacks sophistication, qualified judges, or basic respect for the rule of law, using entities from a jurisdiction that has those characteristics can be worth additional legal and other costs (BVI has done well in Asian markets with its international business entities).
If an entity is to be used for a specific purpose requiring clear creditor rights – as is the case in everything from asset securitisation to catastrophe bonds to secured finance – then using a jurisdiction where the law and the record of the courts support those rights is necessary (many Caribbean jurisdictions have successfully marketed these characteristics). Particular entities are often available only outside a business’ home jurisdiction, as is the case with segregated portfolio companies (offered under various names in Bermuda, Cayman, and many other Caribbean jurisdictions). Locating a company in a particular jurisdiction may provide benefits under that jurisdiction’s tax and investment treaty network (Barbados has offered opportunities for businesses to make use of its investment in developing its network). Using a familiar legal architecture for a bespoke solution makes the product more widely accessible and available in the global law market.
Today’s sophisticated offerings had simpler beginnings, however. In the 1960s, today’s Caribbean IFC leaders entered the market with relatively simple structures. Cayman, for example, took its first steps into the IFC business with its first company law, not passed until 1960 and based on the English Companies Act 1948. Most other Caribbean jurisdictions with connections to Britain had company acts based on much earlier English legislation, often transplanted to the Caribbean during the nineteenth century and to which legislatures had paid little attention before the 1960s. This did not prove a handicap in those early years, because the primary benefit to foreigners of locating a company in one of these jurisdictions at that time was that it was not in the United Kingdom or the United States. Because the rights and obligations of shareholders, directors, and managers under the various flavours of English law from which Caribbean jurisdictions derived their laws were well understood by the transactional lawyers in London and New York, potential clients had confidence in the business structures they created wherever the entity was formally registered.
During the 1960s and 1970s, most of the changes made to business entities laws in English-architecture jurisdictions were to simplify the laws, reducing or eliminating requirements like the annual filing of accounts or dropping legal rules like the ultra vires doctrine that had little relevance to the types of international businesses using these jurisdictions. One measure of their success is that the Caribbean laws are far shorter than their English counterparts. For example, Cayman’s most recent compilation of its Companies Act is just 14% of the length of the UK’s, and Bermuda’s is less than a sixth as long as Britain’s. Even worse for Britain’s competitive position, while the Caribbean jurisdictions were simplifying, it was making its statute more complex. The 1948 Companies Act had just 462 sections and 18 schedules, while the 2006 statute had 1,300 sections and 16 schedules. Things are even worse than these numbers suggest, as considerable material had previously been shifted from the Companies Act into the Insolvency Act 1986 and Company Directors Disqualification Act 1986.
Indeed, the initial success of Curaçao, which used not just a variant of Dutch company law but one which had no official English translation, demonstrates that where the potential gains were high enough – in Curaçao’s case, interest rates lower by several percent via access to the Eurodollar market with the benefit of the Netherlands-United States double tax treaty’s withholding tax exemption – even literally incomprehensible laws were not an obstacle . (We have not been able to find any evidence of how many U.S. attorneys were fluent in Dutch during Curaçao’s heyday, but it seems unlikely there were sufficient numbers of them to advise on all the Curaçao entity transactions that occurred then).
Once more sophisticated uses began to be made of Caribbean IFCs, however, the English-heritage jurisdictions took a substantial lead. Curaçao’s business faded rapidly after the 1984 cancellation of the tax treaty’s extension to it. English-architecture jurisdictions began to develop the menu of business entities they offered. International business companies, segregated portfolio companies, incorporated segregated portfolio companies, limited liability companies, US-style LLCs, civil-law-style private foundations and more became rapidly available across multiple jurisdictions. These innovations often preceded onshore jurisdictions’ development of similar institutions (as with the segregated portfolio companies) or adapted onshore developments (as with the LLC) to new uses. Moreover, business structures using multiple jurisdictions and multiple entities began to appear. For example, the combination of BVI companies above and below a Cayman company became a popular structure, enabling listing the Cayman company on a major stock exchange while allowing a founder to be connected to the listed entity in a personal capacity.
What Makes English Architecture So Valuable?
The English company law architecture bestowed five major advantages on Caribbean jurisdictions with a British connection. First, it has a permissive structure, allowing each individual company to create most of the rules regulating its internal affairs. In fact, many Caribbean jurisdictions took advantage of this structure by removing some of the relatively small number of strictures English law imposes. Second, it generally leaves the internal affairs of companies to the law of the jurisdiction where the company has its registered office, allowing a competitive law market for business entities laws. Third, it has long permitted single-member companies, something that many civil law countries did not. Fourth, English company law has a long history of responsiveness to competition. Indeed, as Professor Charles Freedeman documented, England’s adoption of limited liability in 1856 was largely in response to English businesses taking advantage of French company law’s limited liability provisions . Finally, English law has largely been built through a ‘learning-by-doing’ process, with case law taking a major role in setting out the substantive principles of the law.
The Advantages Of Not Being The United Kingdom
While English architecture to business entities laws brought the advantage of a common language understood by investors, attorneys, and other service providers around the world, Caribbean IFCs had a significant advantage in being able to adapt their laws through legislative action far more quickly than Britain has been able to accomplish. Paul Davies, author of one of the top commentaries on English company law, termed the Parliamentary process for the 2006 revision (still the most recent major overhaul) “leisurely” and “glacial” . By contrast to the infrequent Parliamentary attention to the subject, our count is that Bermuda’s 1981 statute has been amended 87 times through 2023, on a par with the leading U.S. jurisdiction, Delaware, which has amended its statute 70 times since 1980.
A second advantage Caribbean jurisdictions have over Britain is their commitment to tax neutrality for international businesses. A considerable amount of the complexity in English law is driven by tax considerations and tax considerations in turn have led English courts to be more willing than Caribbean ones to question whether corporate structures should be disregarded, undermining the certainty business entities law needs to provide to investors.
The third key advantage Caribbean jurisdictions offer clients over Britain is that Caribbean business entities laws differentiate more between large and small business entities. In general, the needs of small entities differ substantially from large businesses, and so making separate provision for their governance needs is an advantage for many of the types of firms that make use of IFCs.
English architecture Caribbean IFCs have the best of both worlds in business entities law. They ‘speak the lingua franca’ of business entities law due to the English architecture they inherited, while also being freed of the burdens of being a large, complex jurisdiction with a parliament too busy to give this area of the law the attention necessary to keep it up to date. Investors, lawyers, and other service providers can readily (and inexpensively) understand business structures with an English architecture legal design while Caribbean IFCs can adapt the menu of their offerings to be far richer than Britain can provide.
The Role Of Courts
English-architecture Caribbean IFCs have another significant advantage over their civil law competitors and even large jurisdictions with English architecture business entities laws: their courts. Caribbean IFC courts are superior to their competitors in three ways. First, the sophistication of business practice in Caribbean IFCs today means that many of the highest value and most interesting legal disputes arise there. As a result, Caribbean IFCs can routinely attract not only some of the best judges in the common law world to both permanent and visiting judge positions but also some of the most highly qualified counsel, both locally and from abroad, for major cases.
Second, these jurisdictions have available the vast body of common law precedents in business entities law to assist in resolving disputes as well as planning transactions. This body is far greater than any jurisdiction could hope to generate on its own. But because of their jurisdictional independence from any of the large jurisdictions that are the source of the vast majority of the precedents, Caribbean IFCs also retain the ability to deviate from those precedents when necessary. The ability to strike a balance between using established onshore jurisprudence as a point of departure while factoring in the special needs of the smaller and less complex IFC clientele, enables Caribbean IFC courts and lawyers to focus on addressing the business purpose of the entities involved. This provides greater certainty to those who use Caribbean IFC entities than they would following the more complex and abstract onshore jurisdiction rules.
Third, because legal communities in Caribbean IFCs are relatively small, most lawyers’ practices are diverse. One attorney may represent a minority shareholder in one case, an attorney from another firm representing the majority shareholder, only to find themselves with positions reversed in the next case. Lawyers from both their firms will likely serve on the committee that works to keep the law up to date. As a result, the legal community as a whole is far more attuned to the state of business entities law and the potential for modifications that could improve it than would be possible in a larger jurisdiction, where the bar is both more divided into regular roles representing particular classes of interests and so large that only a tiny number can meaningfully participate in generating law reforms.
Finally, because of the importance of their international business clients to their economies, Caribbean IFCs are focused on maintaining the credibility of their business entities laws to a far greater extent than larger jurisdictions. This gives the legal community more access to legislative time and attention as well as a greater willingness by the legislature to take seriously the concerns of the bar. It also means jurisdictions are willing to invest heavily in the expertise necessary to draft statutes well. Many Caribbean IFCs have spent considerable sums on distinguished counsel to aid in drafting statutes, as well as devoting far greater proportions of their legislative draftspersons’ time to business entities subjects than any large jurisdiction can afford. As a result, from a purely technical standpoint, their statutes are clearer, more concise, and more consistent than larger jurisdictions’.
Engines of Innovation
All these forces combine to make Caribbean IFCs engines of innovation in business entities laws. This is important because, as the President of the UK Board of Trade put it in announcing an earlier review of English company law: “Company law lies at the heart of our economy” . Indeed, as John Micklethwait and Adrian Wooldridge put it in their history of the idea of limited liability companies: “The company has been one of the West’s great competitive advantages” .
This competitive advantage requires constant innovation if it is to continue to provide advantages. For example, the development of the segregated portfolio company in both its original and incorporated form has proven a major advantage to both the captive insurance and the funds industries. Similarly, the listing of various Caribbean IFC entities on major stock exchanges around the world is a testament to their usefulness in marshalling capital to create and deliver goods and services. And the migration of many of these entities – from the segregated portfolio company to the common law private foundation – into onshore jurisdictions is an additional benefit of having these robust engines of innovation outside the Caribbean, as they contribute to enriching the domestic legal environments of other jurisdictions as well as the global law market.
1 See Craig M. Boise & Andrew P. Morriss, Change, Dependency, and Regime Plasticity in Offshore Financial Intermediation: The Saga of the Netherlands Antilles, 45 Tex. Int’l L. J. 377 (2009) available at https://scholarship.law.tamu.edu/facscholar/265/.
2 Charles E. Freedeman, Joint-Stock Enterprise in France 1807-1867: From Privileged Company to Modern Corporation 132 (1979). He calculates this cost £750 in the 1850s and documented that in 1852-53, “twenty English companies were founded as commandites par actions, each renting office space in France and hiring a French gérant, ‘who did nothing but give a power of attorney to one of the company’s English directors.’” Id.
3 Paul L. Davies, Gower and Davies’ Principles of Modern Company Law (8th ed., 2008) at v.
4 Margaret Beckett, Foreword, in United Kingdom, Board of Trade, Modern Company Law for a Competitive Economy i (1998).
5 John Micklethwait & Adrian Woolridge, The Company: A Short History of a Revolutionary Idea xx (2003).
Andrew Morriss is Professor of the Bush School of Government & Public Service and School of Law at Texas A&M University. Prior to this position, he was the Dean of the Texas A&M School of Innovation, the Dean of the Texas A&M School of Law, the D. Paul Jones & Charlene A. Jones Chairholder in Law at the University of Alabama, the Ross & Helen Workman Professor of Law at the University of Illinois, and the Galen J. Roush Chair in Law at Case Western Reserve University.
Charlotte Ku is a Professor at Texas A&M University School of Law. Her specialties include international law and global governance. She has previously served as Professor and Assistant Dean for Graduate and International Legal Studies at University of Illinois College of Law, Acting Director of Lauterpacht Research Centre for International Law at University of Cambridge, and Executive Director and Executive Vice President at American Society of International Law.