Off and on relationships
8 November 2010
As evidenced by Ireland, the growing strength of ’offshore’ centres and their firms means they’re closer than ever to their ’onshore’ counterparts. By Paul Govier
The offshore legal market has changed dramatically over the past decade. Prior to 2000 it was virtually unheard of for an offshore law firm to practise the laws of a jurisdiction other than its home one. However, over the past decade offshore expansion has exploded, with the major offshore law firms opening offices in offshore jurisdictions that at one time would have been considered competitors.
But while the major offshore firms all opened offices in various combinations of the six traditional offshore centres - the Cayman Islands, the British Virgin Islands (BVI), Jersey, Guernsey, the Isle of Man and Bermuda - in 2006 Maples and Calder took a different route and became the first offshore firm into Ireland, with other offshore firms now dipping their toes in the water in recent months.
On the face of it Ireland could be perceived to be an unusual choice in that it is not considered an ’offshore’ jurisdiction at all. However, upon closer analysis the move was not as strange as it might have seemed at the time. Ireland had made a concerted effort, through a combination of regulatory, currency and taxation initiatives, to become a vibrant centre for international finance. In addition to its longstanding and healthy domestic industry, Ireland had become the European jurisdiction of choice for the establishment of structured finance vehicles; it had an alternative investment fund and a Undertakings for Collective Investment in Transferable Securities (Ucits) platform; it had a thriving fund administration business; and a thriving stock exchange listing the securities of both debt and equity issuers.
On further analysis, the convergence with offshore centres was pronounced.
The finance vehicles and many of the alternative investment funds being established in Ireland were based on models developed by the US in conjunction with Cayman, BVI and other ’offshore’ lawyers.
That these products should be replicated in the EU in order to attract certain European investors invited those ’offshore’ law firms, which had built up expertise in the establishment and maintenance of such vehicles, to follow them. Similarly, the fund administration industry in Dublin administered principally hedge funds established in Cayman; and the securities often listed on the Irish Stock Exchange were securities in companies established in Cayman, BVI and the other offshore centres.
Certainly, many fund managers are finding that the combination of both traditional offshore hedge fund structures and Irish-based Ucits vehicles offers a compelling and complementary range of products to suit investors in different sectors of the market.
At the same time Ireland provided something entirely different. It was a member of the EU and a full member of the Organisation for Economic Cooperation and Development (OECD).
onsidering this, it was only natural for offshore firms to seek to apply their experience in structured finance and hedge funds to this new market.
Breaking new ground
The expansion of offshore law firms into new territories since 2000 was a reflection of the increased sophistication of the major offshore centres themselves.
The initiatives of the OECD and other supra-national organisations at the end of the 1990s, aimed at ensuring offshore centres contributed positively to the global economy and were stable and well-regulated, led to a rationalising of the offshore market. Those jurisdictions, including Cayman and BVI, which had always been well run with sophisticated and prudent regulation, and well-resourced service providers thrived. Those that were unwilling to embrace the globalisation of the market, and the transparency and prudence it required fell by the wayside. That consolidation in the market led to the creation of a magic circle both of jurisdictions and offshore law firms.
Indeed, it is contended that we have now reached the point where the terms ’offshore’ and ’onshore’ are themselves anachronistic, as ’offshore’ jurisdictions such as Cayman comply with international standards on anti-money laundering laws, tax information exchange and cooperation between securities regulators, which are very much on a par, or sometimes even more stringent, than those of onshore jurisdictions.
There is now a small number of sophisticated law firms that practise the laws of small international financial centres. They specialise in advising clients who require advice concerning jurisdictions that provide well-regulated, tax-efficient platforms to facilitate the flows of global capital. These firms’ principal client base is derived from the major UK and US and other major international law firms. These giants may have offices across the globe, but for strategic and economic reasons do not consider it necessary to have footprints in the relevant small international financial centres and so need legal advice of an equivalent standard to their own in order to assist their clients in complex, cross-border transactions and structures.
The points of intersection with those law firms are few and far between: while in some narrow examples Ireland may appear to be one of those points, the reality is that, for the vast majority of the work done by the law firms practising in the small international financial centres at the request of those practising in the larger international financial centres, nothing will change. The traditional onshore firms and their clients will continue to need advice on specialist jurisdictions where they do not practise; equally, those underlying business clients will continue to need the advice of the major international law firms in order to determine which specialist international financial centre best suits their needs.
The reality is that the drivers for the choice of a specialist international financial centre are determined by the location of the underlying client and the nature of their proposed transactions. Only the legal counsel close to the client and with a detailed understanding of the transaction – generally a UK, US or other major international law firm - is able to provide the advice necessary when selecting the appropriate specialist financial centre for the client and the particular transaction, and in turn to guide them as to the best law firm with which to partner.
The major law firms will have the relationships with the underlying client; they will have the resources to attract new clients and new deals; and they will have the technical expertise and experience to understand the particular transaction and, importantly, the legal, tax and regulatory issues that may arise. The traditional offshore firms will still be best served by working with the traditional onshore firms to provide the specialist advice they need in the best-run small international financial centres, whether they be in or near Europe, the Americas, the Middle East or the Far East.
Obviously, if a UK, US or other major international law firm decides to open an office in one of the smaller international financial centres, they will not need the services of another firm in that jurisdiction. But economic and practical realities dictate that those instances are likely to be few and far between.
Indeed, it would be interesting to see how a major international law firm would fare should it risk incurring the expense of building a credible and significant team in one of these jurisdictions. It would be attempting to expand into a relatively small legal market where it would not enjoy the benefit of referrals from other major international law firms (its usual competitors). It would also have to compete with those local law firms already well-established in that jurisdiction - no easy task.
The Directive on Alternative Investment Fund Managers and its implications for offshore firms
The EU directive in relation to alternative investment fund (AIF) managers (the directive) illustrates how firms traditionally considered to be ’offshore’ have evolved into firms providing legal advice in relation to specialist products that are concentrated in small international financial centres.
The directive is expected to be approved in its current form by the middle of November and come into force at a national level by early 2013.
After much uncertainty during the drafting process, it now seems certain that there will be a place in the European market for both EU and non-EU AIFs and their managers.
The directive will initially implement a ’passport’ regime for EU fund managers who manage funds established in a EU jurisdictions. That passport may become available to non-EU funds and non-EU managers in time.
However, in the meantime (and for the foreseeable future) the directive will retain a private placement regime for funds established or managed outside the EU.
That means AIF managers who have traditionally chosen to establish their private equity or hedge funds in places such as the Cayman Islands and the British Virgin Islands (BVI) will still be able to do so and continue to market them to investors based in EU countries on substantially the same basis as they have done to date (ie subject to local national rules).
Equally, if those managers want to avail themselves of the distribution opportunities that might be presented by the EU passport, they may like to establish complementary funds in jurisdictions such as Ireland in order to attract specific European investors who might otherwise not be eligible to invest.
The EU and non-EU products will coexist as complementary offerings used to maximise a manager’s potential to attract investors globally.
It also means that the traditional ’offshore’ law firms that have expanded into EU centres such as Ireland will continue to be able to partner with the US, UK and other major international law firms when advising fund managers on how and where to establish their AIFs.
Paul Govier is joint managing partner of Maples & Calder’s London office