British Virgin Islands
5 November 2007
Bringing a British Virgin Islands (BVI) company to market is no longer the novel idea that it once was - it has been tried, tested and accepted. The volume of BVI company incorporations has, for a long time, been a clear indication of their popularity as private vehicles, but now they are firmly ensconced in the public arena.
One only has to look at the AIM market in London, where BVI companies account for around 8 per cent (as at 31 August) of all companies traded, to see that BVI companies have become the offshore vehicle of choice on some markets.
A key legal debate encountered when preparing a BVI company for listing often centres on what form the company's constitution should take at admission. One virtue of BVI companies is that they have the capacity either to adopt very simple memorandum and articles of association (suitable for private companies in particular), or to build in more complex provisions and protections.
There is undoubtedly a balance to be struck between maintaining the flexibility of a typical BVI constitution while ensuring that shareholders are offered the investor protections they would typically expect from, for example, a UK-listed company.
To that end, while the core of the constitution of a BVI company preparing to list tends to take a traditional BVI form, a number of UK legal and regulatory protections are often built into the constitution to give the company the 'look and feel' of a UK-listed company from an investor's perspective.
Assuming a successful share offering, it is often critical to the company and its investor base that the company secures inclusion in the FTSE UK Index Series. In May 2007, the FTSE Nationality Committee issued a practice note which provided guidance as to how FTSE will treat companies seeking entry to the UK Series in respect of a company's nationality.
In the practice note, the Nationality Committee made it clear that it will adopt a principles-based approach to the issue of country allocation. For a company incorporated in one country but listed in another, in reaching its decision the Nationality Committee is able to take into account factors including the investor protection regulations governing the company, its tax residence and market perception of the company.
This approach once again throws the spotlight on the ability of BVI companies to adapt their constitutional documents. A number of issues need to be considered. While there is no exhaustive list of what should or should not be included in the memorandum and articles of a publicly listed BVI company, the following is of particular significance.
Takeover offers and poison pills
There is no takeover code in the BVI and a BVI company with a UK listing would not be governed by the provisions of the UK City Code on Takeovers and Mergers even if it is tax resident in the UK, as its registered office will remain in the BVI.
In order to give a target company's board some assistance in the face of a bid, and to provide shareholders with some of the protections that the code affords, elements of the code are often included in the BVI company's constitution. For example, the obligation on a shareholder to make a bid for the remaining issued shares if a stake of more than 30 per cent of the issued shares is built is now commonplace in a listed BVI company's articles of association.
The ability to make a company unattractive to a prospective bidder is a feature familiar to BVI advisers. In the UK these tactics are rarely, if ever, seen in the public company arena. Concern is therefore sometimes raised at the suggestion of including a poison pill.
The facts, however, show that the poison pill was created as a shield against hostile takeover attempts as it provides protection against corporate raiders. It does not prevent hostile takeovers, but gives directors more time to consider their options with a view to achieving a better sale price for shareholders.
This tactic has been quite popular since its introduction, but the current corporate governance leaning means that poison pills have come under criticism, with some taking the view that poison pills are detrimental to shareholders. However, the more prevalent view is that poison pills are beneficial as they place more control in the hands of directors, giving them a stronger negotiating position which can result in a higher bid price.
There is clearly no one solution for every company and the poison pill must take into account the peculiarities of each company. While statute in the BVI does not deal with this, it is clear from the perspective of directors' fiduciary duties that such a mechanism would have to be in place before a bid is contemplated by the board of the target company. Attempting to include a poison pill in the constitution once a bid is in contemplation may be viewed as a breach of these duties.
Usually the board of a BVI company will be ##continued empowered to issue shares at its discretion without the need to offer pre-emptively to the existing shareholders. This raises the issue of dilution for existing shareholders.
To bring new issuance requirements in line with UK legal requirements, the following would typically be included in the articles of association:
- An obligation on the directors to obtain shareholder approval to permit them to allot shares. This authority is usually limited in time and number of shares in accordance with the provisions of the UK Companies Act 1985; and
- An obligation to make cash issues on a pre-emptive basis, save in the case of rights issues or if such issue falls within the limits specified in the annual general meeting resolution (which, in line with Association of British Insurers (ABI) guidelines, is set at 5 per cent of the issued shares).
Coupled with this is control over the increase in the number of shares that the company is authorised to issue. Increasing this number constitutes an amendment to the memorandum of association of a BVI company, something which can often be done by the directors acting alone. However, to afford a greater degree of investor protection, BVI companies seeking a listing tend to refine this and require shareholder consent to make such an amendment.
Under BVI law, the acquisition by a company of its own shares is something which the directors may effect, typically with the consent of the shareholder concerned. The requirement for a resolution of shareholders is often introduced to put the BVI company on a par with a UK-listed issuer.
Unlike in the UK, there is no guidance from investor committees that suggests limits on the ability of a BVI company to acquire its own shares. However, it is now common for BVI companies to follow ABI guidelines in this regard. As a listed company, the company would in any event be subject to the requirements of the Listing Rules.
Disclosure of interests in shares
There are no such disclosure requirements under BVI law and the constitution of an unlisted BVI company would not usually include such requirements. Transparency of shareholdings and share dealings is, however, seen as exceptionally important by investors and regulators alike.
While a non-UK incorporated company which is listed on a regulated market is subject to the Disclosure and Transparency Rules in the UK, the requirements may, in certain circumstances, be less onerous than for UK incorporated listed companies.
Accordingly, to give clarity to investors, it is typical for BVI companies to incorporate the full UK regime, requiring disclosure of shareholdings above 3 per cent and each change through a percentage point thereafter.
In relation to these aspects, BVI listed companies are now able to demonstrate through their constitutional documents that they offer investors rights and protections in line with other listed companies already included in the UK Series.
Flexibility has always been a key benefit of a BVI company. With BVI companies now frequently seen in the public markets, this flexibility has taken on a new significance.
The key for advisers is to make the BVI entity palatable, and in some respect familiar, to investors and the market, while retaining the benefits that a BVI constitution can afford.
Stuart Bedford is a partner at Linklaters and Simon Dinning is an associate at Harneys