The undoubted popularity of AIM since its inception in 1995 is clearly demonstrated by the 1,100 companies that are listed on it. March 2005 alone saw 69 companies make their first appearance in the market.
AIM offers companies the opportunity to achieve market exposure, potentially enabling them to expand their businesses at an earlier stage than they would be able to through the main market. While these companies seek to take advantage of a more flexible market, there has been an increasing trend of potential AIM candidates seeking float vehicles that offer a similar degree of flexibility.
The head of AIM Martin Graham has stated that one of his objectives is to attract more foreign companies to the market. With this, and the benefits described below in mind, it is incumbent on advisers to assist their clients in maximising the potential benefits of AIM by considering the advantages of an offshore float vehicle. The British Virgin Islands (BVI) can offer maximum flexibility within a protective and sophisticated legislative environment.
Following criticism of a number of low-tax jurisdictions in the late 1990s, the BVI made a concerted effort to make a number of significant improvements to its legislative structure. The changes have served to satisfy international regulatory requirements and have ensured that the BVI goes from strength to strength in its ability to attract foreign investors to the jurisdiction.
With the introduction of comprehensive insolvency legislation in 2004 giving regulators greater powers of intervention and protecting creditors and investors alike, draftsmen turned their attention to the International Business Companies (IBC) Act on the 20th anniversary of its coming into force.
The BVI Business Companies Act (the new act) came into force on 1 January 2005. It is designed to be an enhancement of the IBC Act with a number of new features. The new act retains much of the simplicity and flexibility of the IBC Act. In order to provide the opportunity for market feedback, as well as flexibility for existing IBCs (companies incorporated under the IBC Act) and a seamless transition to the new act, there is a two-year transitional period during which both the IBC Act and the new act are in force.
One of the main objectives of the new act is to provide flexibility and choice in the range of corporate vehicles available under it. Seven different types of company can be incorporated: companies limited by shares; companies limited by guarantee and not authorised to issue shares; companies limited by guarantee that are authorised to issue shares; unlimited companies not authorised to issue shares; unlimited companies authorised to issue shares; restricted purpose companies; and segregated portfolio companies.
Restricted purpose companies will be limited by shares and will have restricted objects or purposes, the expectation being that they will be used primarily in structured finance and securitisation transactions. Segregated portfolio companies (SPCs) are companies limited by shares and can only be incorporated with the written approval of the BVI Financial Services Commission. Prior to the new act, only insurance companies could register as SPCs, but the opportunity has been taken to expand their scope by also allowing mutual funds to register SPCs.
It is expected that the large majority of companies incorporated under the new act will follow the mainstream IBCs quite closely, being companies limited by shares. It is these entities that will be selected as the appropriate vehicle for an AIM listing where a BVI entity is required. But why should a BVI entity be selected in the first place?
BVI companies and AIM
AIM is open to companies from all over the world and from all industry sectors. Its admission requirements and its ongoing regulation of member companies are set at a level which is intended to be stringent enough to maintain investor confidence, but not prohibitive for companies considering joining the market. The arguments for choosing an AIM listing as opposed to a listing on the main market are well rehearsed – for example, the ability to raise capital, to fund acquisitions, to incentivise employees and to obtain a market valuation for the company.
Overall, AIM provides some degree of flexibility for companies seeking market exposure. This flexibility dovetails with that provided by a BVI entity limited by shares to allow a company to reap not only the market benefits, but also day-to-day flexibility in the running, funding and expansion of the business. This ongoing level of flexibility, as outlined below, is not available if, for example, an English company is used as the float vehicle.
Incorporation and constitution
Incorporation and ongoing administrative costs for a BVI company are comparatively low, particularly in light of the current US dollar-to-sterling exchange rate. A BVI company is required to pay an annual fee to the Registry of Corporate Affairs in order to maintain its name on the Register of Companies and to assist with the ongoing cost of maintaining a registered agent in the jurisdiction.
Although the shareholders of a BVI company are required to elect its directors, once elected the new act provides the board with authority to run the affairs of the company with little recourse to its shareholders, including all matters relating to the amendment of the company’s constitution and the issue of new shares.
Although it is possible to deviate from the statute so as to provide a check and balance at shareholder level on the authority of the directors, depending on whether the company is being listed on AIM with a purely institutional shareholder base or with a more widely drawn investor base, the ability to provide management with a freer rein than is possible in some other jurisdictions is attractive. Certainly, it has made it much easier to restructure an existing group of companies prior to the listing of the BVI holding company and to prepare the BVI vehicle itself for the listing.
Taxation and funding
A key advantage of using a BVI vehicle is that it can be used as a ‘money box’ company. As BVI companies carrying on business outside the jurisdiction are not liable for income tax in the BVI, such BVI companies are often used to hold group funds. These funds can then be used to either finance other group companies through injections of share capital, or they can be used to fund acquisitions by group members. Additionally, in many jurisdictions, the BVI company could sell a subsidiary without any tax charge arising on the sale.
The new act provides that a company thus incorporated can assist financially any person in connection with the acquisition of its own shares. This is a clear advantage over the prohibition on a public company providing such assistance in the UK.
Shares, capital and distributionsT
The new act abolishes the concept of share capital. Most BVI companies limited by shares will have shares with no par value.
The abolition of share capital allows a BVI company seeking to make a distribution to its shareholders to ignore any retention of capital in determining the amount of funds available for distribution. For a company with a large issued share figure, this is potentially a huge advantage.
Under the new act, “distributions” to shareholders are required to be made (subject to certain exceptions) only after the directors of the company have satisfied themselves on reasonable grounds that the company will immediately after the distribution satisfy the two-limbed statutory solvency test. A company satisfies the solvency test if (i) the value of its assets exceed its liabilities, and (ii) if it is able to pay its debts as they fall due. The provisions in the new act relate not merely to dividends, but catch any “distribution” to a shareholder.
Securities legislation and best practice
In light of well-publicised scandals, corporate governance remains high on the agenda of investors. While the BVI does not have any prescribed code of best practice, it does have the advantage of being able to incorporate into the constitution of a company the most attractive elements of best practice from key jurisdictions to ensure the proper running of the relevant company and to enable investors to be comfortable. From a UK perspective, this will inevitably include elements of the Combined Code on Corporate Governance.
Similarly, while not applicable in the BVI, elements of guidance and procedure provided in documents such as the Takeover Code in the UK can be incorporated into a BVI company’s constitution. This has a definite advantage of enabling the company to be prepared in an offer situation while allowing it to fall outside some of the more technical aspects of the Takeover Code.
Michael Gagie and Simon Dinning are senior associates at Harneys in the BVI