Alert readers of Asian Legal Business will no doubt be aware that the British Virgin Islands (BVI) Business Company remains a massively popular option for structuring special purpose investment vehicles for all sorts of transactions all over the world. More than 400,000 active BVI business companies are used by stakeholders globally and approximately two-thirds of these are from Asia. However, there are some pitfalls to be mindful of and this short alert is intended to provide the reader with a five-minute overview of seven of the deadliest structuring sins to avoid committing when using the BVI Business Company as a co-investment, joint venture or closely held investment vehicle. These are of course in no particular order of importance!

— No. 1 — Thou Shalt Not Forget that Directors are like Spouses and should be selected with a similar level of care and respect!

The most obvious consideration is for stakeholders to consider who will be acting as the directors of the Company, how the Company’s Board will be constituted and managed and whether such directors will be able to properly operate the Company as between themselves in order to facilitate the commercial objectives of the stakeholders. 

It is quite surprising how often parties find that their Company has become paralysed due to the wrong directors being selected, resulting in an inefficient or ineffective Board or where the Board becomes locked into a dispute and so is not in a position to properly determine or execute Board strategy. A lot of this is due to stakeholders not giving sufficient thought as to whom will be on the Board and how well they will get along. 

Current and prospective directors should also be mindful of their fiduciary duties under BVI law such as the duties to act honestly, in good faith, for a proper purpose and in the best interests of the Company and care, diligence and skill, which follow generally accepted English and Commonwealth common (case) law principles.

— No. 2 — Thou Shalt Not Fail to Read and Understand the Memorandum and Articles and thy Shareholders’ Agreement as a Result of Boredom!

During the structuring process, particular attention should be paid to the relationship between the Memorandum and Articles of Association (being the document that governs how the Company is to be run together with the BVI Business Companies Act (as amended) and the common law) and any other contractual agreements between the shareholders, such as shareholders agreements, share purchase or subscription agreements, side letters and other documents. 

These are admittedly usually incredibly boring to read (except to lawyers) but worth highlighting that the Memorandum and Articles and the contractual agreements should be carefully drafted to allow these documents to work together to facilitate the efficient use and operation of the Company. Another important reason is to minimise the potential for disputes to arise between the Board members and/or shareholders and, if such disputes do arise, to provide an appropriate dispute resolution mechanism to enable disputes to be resolved with certainty and in accordance with the expectations of stakeholders. For example, by way of independent arbitration or mediation.

— No. 3 — Thou Shalt Not Have Confusing Documents! 

Whilst the Memorandum and Articles will be read and construed following BVI law, it is quite common and acceptable for contractual agreements to be governed either by BVI law or by the laws of an alternative jurisdiction, such as the principal onshore jurisdiction where the parties are conducting their commercial activities (for example, Hong Kong or Singapore). BVI law is very flexible and, as a general statement, works well alongside the laws of other common law jurisdictions. 

The relevant contractual agreements will, of course, be read and construed following their governing law, but that is not to say that the Memorandum and Articles and such agreements cannot be constructed, with the right legal advice, to sensibly operate together. The key point to remember here is that all these documents should be developed and reviewed by appropriate qualified onshore and offshore BVI legal counsel to ensure that inconsistencies and conflicts between the documents are removed, or alternatively minimised, to the extent possible. One should avoid having documents that are governed by the laws of multiple jurisdictions that are inconsistent or which contradict each other, this is fertile ground for creating problems and developing a later dispute.

— No. 4 — Thou Shalt Not Forget the Value of Confidentiality! 

It is also important for the stakeholders to be mindful that the Memorandum and Articles of a BVI company is a public document and can be obtained by anyone who performs a search of that BVI company. As such, if the stakeholders wish to ensure the ongoing confidentiality of information (for example, information relating to the Company’s shareholders, the price for issuing and redeeming shares, the manner and methodology upon which economic rights such as dividends, distributions and liquidation preferences on a winding up are calculated), then it will be necessary for this information to be reflected in the contractual documentation, rather than the Memorandum and Articles itself.

The Memorandum and Articles can be prepared to contain framework, generic provisions in a form appropriate for the parties’ requirements. Do remember that the Memorandum and Articles will only be legally effective once this document is filed and registered with the BVI Registrar of Corporate Affairs. 

Do also remember that the details of members and directors are confidential and may not be accessed as part of a company search unless such details have been voluntarily filed with the BVI Companies Registry.

— No. 5 — Thou Shalt Not Have a Badly Structured Memorandum and Articles!

Heavens no! So, get it right the first time by making sure that the right advice is obtained so your documents enable the stakeholders’ requirements to be addressed.

Some common structuring considerations might include (but are not limited to) the following: 

1. identifying and specifying the powers and scope of authority of the Directors to operate the Company; 
2. identifying any shareholder consent or veto rights concerning any corporate actions to be performed by the Directors or the Company;
3. specifying economic (dividend, distribution and liquidation preferences) and information rights to be enjoyed by the shareholders and embedding shareholder rights into the Memorandum and Articles in order to ensure that these rights are preserved whenever these shares are transferred; and
4. prescribing restrictions and procedures regulating the way shares can be transferred (such as tag and drag provisions, pre-emption rights or rights of first refusal), including in the event of the death or incapacity of a shareholder.

 — No. 6 — Thou Shalt Not Forget Tax! 

It is always critical for stakeholders to obtain early tax structuring advice ideally well in advance of the incorporation of any BVI Business Company and/or reorganisation involving same. Whilst the BVI is a tax neutral jurisdiction and transactions involving BVI companies outside of the BVI are not subject to taxation by the BVI, tax cannot be ignored as stakeholders will still be subject to the taxation requirements of their principal onshore domicile(s). It is also worth noting here that the BVI has fully implemented an Automatic Exchange of Information (AEOI) tax reporting regime pursuant to the United States Foreign Account Tax Compliance Act, the global Common Reporting Standard and has established a beneficial ownership information regime.

— No. 7 — Thou Shalt Not Ignore Who and What thy Registered Agent Does!

Stakeholders who have Board appointees and material shareholdings in a BVI company should also understand the role of the registered agent and the importance of its function concerning the BVI company. Every BVI company must have a registered agent in the BVI and a registered office in the BVI.

Crucially, the registered agent is normally responsible for making all required updates to the Company’s registers (such as member’s register, directors’ register and register of charges). The registered agent is also responsible for making all filings with the BVI Registrar for the Company. The registered agent will only act upon the instructions provided to it by its client of record. So, any filings in terms of changes to a Company’s Memorandum and Articles, authorised share capital, appointment and removal of Directors and any updates to the Company’s Registers (such as the register of members, which is evidence of legal ownership of the shares under BVI law) can only be performed by the registered agent. Under BVI law, a person or entity becomes a member of the Company when the register of members of the company is updated.

A well-informed stakeholder will understand this and will have the contact details of the usual person at the registered agent handy, in case their help is required.

To contact the editorial team, please email ALBEditor@thomsonreuters.com.