The Cayman Islands remains the top destination for offshore transactions, including mergers and acquisitions and IPOs, edging out other popular destinations such as the British Virgin Islands (BVI).

The latest Offshore-i report from law firm Appleby, which is headquartered in Hamilton, Bermuda, and with offices in a range of offshore centers as well as London, Shanghai and Hong Kong, showed that Cayman Islands has positioned itself as the number one destination for offshore legal operations.

“The Cayman Islands dominated deal volumes as a top target, accounting for a quarter of all deals done offshore,” said Appleby in its report. “Bermuda, the BVI and Hong Kong were largely level-pegging behind.”
Cayman’s position in the offshore world is particularly significant given that 2014 was a peak year in terms of the total value of transactions, which at $277 billion topped the previous peak set in 2007.

“The year was up more than 60 percent in value terms over the previous year despite being broadly flat in terms of volume,” says Cameron Adderley, partner and Appleby’s global head of corporate, in the report.

Stability along with legal and political certainty helped the Caymans take the top spot.

“There are many and varied and well known reasons for this popularity but investor familiarity and comfort with the laws and regulations and the political regime in Caymans and Bermuda is perhaps paramount,” says David Lamb, a Hong Kong-based partner and co-chairman at Conyers Dill & Pearman, an offshore specialist law firm.

Lamb says that the choice of offshore destinations should be based on the type of transaction in question and the stakeholders involved.

“The Cayman Islands is the leading jurisdiction in the Far East, at least for public company deals, but it is not alone,” he said. “Bermuda has for many, many years traditionally been at the forefront of transactional activity in the Far East and the two jurisdictions are neck and neck, for example in IPOs on the Main Board of the Hong Kong Stock Exchange,” he says.

STABILITY COUNTS

Cayman Islands do offer a number of advantages when compared to other jurisdictions, not the least of which is political stability.
“The Cayman Islands are a politically stable democracy with rule of law,” says Greg Knowles, partner and head of corporate at Maples and Calder, an international law firm that advises clients on the laws of the Cayman Islands, Ireland and the British Virgin Islands.

Asian companies, particularly Chinese ones, often find the relative simplicity of the Cayman Islands attractive along with plenty of legal teams on the ground with a clear China focus.

“Cayman Islands legal advice is available, increasingly, in the Chinese language from lawyers with broad and deep experience of significant corporate transactions during the business day in Asia,” says Knowles. “Cayman Islands company law is relatively simple and straightforward, it does not get in the way of the deal. It is flexible. For example, Cayman companies can pay dividends and redeem and repurchase shares out of capital provided solvency is maintained.

“There is no requirement to hold an annual shareholders’ meeting or to conduct an annual audit,” Denton adds.

This simplicity, which makes it relatively easy for stakeholders and their lawyers to manage Caymans-based companies, combined with a constant interest by the country itself to adapt its legislation to international requirements without affecting companies doing business there.

“Cayman has demonstrated an ability to work with onshore regulators to accommodate their requirements in a timely and effective manner and there has been no material loss of business either in Asia or globally,” says Jonathan Culshaw, Asia managing partner at Harneys. “Last year also saw the introduction of a revised and much improved limited partnership law which demonstrates how Cayman continues to refine its products to better meet the requirements of international capital.”

Culshaw highlights that a number of regulatory changes abroad are having an impact on business in the Cayman Islands. Not the least of these are the Foreign Account Tax Compliance Act (FATCA) in the United States and the European Union’s Alternative Investment Fund Manager Directive (AIFMD).

He believes that the Cayman Islands and the BVI are the only two real choices of offshore jurisdictions for Asian companies.

“Both are popular vehicles for the establishment of material debt issuing vehicles, outbound and inbound investment structures and joint ventures,” Culshaw says. “Both Cayman and BVI can be used as a listing vehicle for the Hong Kong Stock Exchange but Cayman is dominant in this space and is also a much more popular jurisdiction for the establishment of closed and open ended offshore funds.”

In constantly and quickly adapting its domestic rules to regulatory changes around the world, the Cayman Islands displays a nimbleness that serves it well.

“The Cayman Islands have always sought to maintain their position as the offshore jurisdiction of choice by making improvements to their laws,” says Mark Western, joint managing partner and head of Finance at Maples and Calder in Hong Kong. “Cayman Islands was one of the first offshore jurisdictions to sign up to an intergovernmental agreement with the United States in relation to FATCA and the first reporting by Cayman financial institutions will take place later this year.”

“In addition, the Cayman Islands have signed up to the OECD’s common reporting standards for automatic exchange of information,” he says. “That constant review and updating continues.”

A series of legal amendments in the last few years have helped the Cayman Islands maintain close links with Asia, says Nathan Powell, corporate and commercial specialist partner at Ogier, a Jersey-headquartered firm with eight offices around the world including Hong Kong, Shanghai and Tokyo.

“Although it was already a leading jurisdiction for listings in Asia, the amendments to the Cayman companies law in 2011 were specifically designed to enhance Cayman’s flexibility and attractiveness for corporate transactions in the Asian market, including the ability to have an English and Chinese name,” Powell says. “These changes have helped to consolidate Cayman’s market leading position.”

The popularity of the Cayman Islands is on ample display in the Hong Kong stock market.

“Around 70 percent of all Hong Kong IPOs now use a Cayman listing vehicle,” Powell said. “Cayman is also commonly used for Taiwan listings and for Asian companies listing on stock exchanges in both London and New York.”

The Cayman Islands (and its close competitor BVI) are also benefitting from developments in Asia.

A case in point is the Shanghai Hong Kong Stock Connect Scheme that was launched in November 2014 and allows investors to invest in both cities. A similar scheme is in the works to link Hong Kong and Shenzhen.

“The Shanghai-HK Stock Connect is good for the markets and an injection for the IPO market, as would a Shenzhen-HK Stock Connect,” says Lamb of Conyers Dill & Pearman. “IPOs are up; dispute resolution is also doing well.”

BVI APPEAL

While Cayman Islands remain the top offshore destination for Asian deals and M&A, the BVI also stands as an important offshore destination and close competitor for market share in the offshore legal business.

“[BVI] have many of the advantages of the Cayman Islands and are increasingly highly regarded as a domicile for, in particular, holding companies, joint venture entities and trusts for use in commercial transactions,” says Knowles. “BVI companies have been listed on all the major international stock exchanges, including the (Hong Kong Stock Exchange).”

For Lamb of Conyers Dill & Pearman, private companies are the ones that benefit the most from BVI´s regulatory scheme.

And the BVI offers some other advantages, says Culshaw of Harneys.

“BVI is a more cost-effective place to do business and its companies law is in some respects clearer and more flexible than that of Cayman,” he said. “It continues to be the preferred domicile for the establishment of debt issuing vehicles and investment holding companies and is also a popular jurisdiction for the establishment of joint ventures.”

Culshaw also points to the Virgin Islands Special Trusts Act, which allows for the creation of special trusts known as VISTA.

“Its unique VISTA trust product is also a popular product in Asia allowing first generation wealth to effectively structure for the future whilst retaining control of the running of the family business.”

That’s not to say that the Cayman Islands lags far behind in this area.

“The continuing attractiveness of the Cayman Islands as a jurisdiction for deals has also resulted in an increase in Cayman Islands trust structures,” said Denton. “Such trust structures are used as estate planning and succession vehicles for wealthy individuals (often founders of businesses) and also as vehicles to retain, reward and incentivise employees and senior management.”

BOOM RIPPLES

Culshaw highlighted other advantages of both Cayman Islands and BVI.

“Jurisdictions other than BVI and the Cayman Islands struggle to win material work in Asia as they can offer only minor cost savings in terms of establishment costs which are outweighed by the lack of legal and corporate services support in the same time zone,” he said.

The boom in offshore business in both Cayman Islands and the BVI is causing some ripples. The rise in business has led to a rise in business disputes. The rising number of disputes is straining the efforts of law firms to deal with the increasing demand for services.

“Commercial disputes in the region are on the rise, typically leading to shareholder led litigation,” said Powell. “We established a litigation team in Hong Kong led by Mandarin speaking partner Ray Ng, previously the head of our litigation practice in BVI.”

Maples and Calder also sees the rise of opportunities for offshore law firms to take on more litigation-related mandates that go beyond commercial disputes. Solid legal systems make these destinations appealing to resolve disputes.

“Litigation is another growth area, reflecting the fact that the Cayman court system is now widely accepted as being an efficient place to litigate claims,” Powell said.

Moving from strength to strength, the Cayman Islands remains popular well beyond Asia.

IPOs from the U.S. have been strong, some with ties to Asia but listing in the U.S. nonetheless. The biggest recent example is the $25 billion listing of Chinese e-commerce provider Alibaba. The fact that Chinese companies remain keen to list in Hong Kong or further abroad is good news for these destinations.

At the same time, other types of deals continue to flow.

“There is a steady stream of private equity investment transactions utilising Cayman vehicles,” says Western. “Funds has been an especially active practice area with Cayman Islands companies, limited partnerships and unit trusts being used for hedge and private equity funds.”

One sector that has seen a spike in business is aviation.

“On the finance side, we have increasingly seen Cayman companies being used for aircraft financing transactions, in particular, as well as for more general capital markets deals,” adds Knowles.

For Appleby, the law firm that generated the Offshore-i report, the financial and insurance sectors are key drivers of the offshore universe.

“The financial and insurance activities sector was once again on top, thanks to two deals worth north of US$5 billion each. Deal value remains widely dispersed with 17 subsectors showing cumulative deal activity worth more than US$1 billion each,” the report says.

Meanwhile, in the fourth quarter of 2014, the most popular deal by type in the offshore region, was capital increases.

“[This] is a new definition to represent minority stake transactions that do not involve third-party acquirers,” Appleby says. “There were 225 of these deals, 211 acquisitions, and 135 minority stake deals in the quarter.”