Cayman, Bermuda and the BVI are the ideal jurisdictions for Brazilian companies to turn to when they need sophisticated financial products. By Alan Dickson
When the economic crisis passes, Brazil will be remembered as being a calm port in the financial storm. Indeed, international investors are still interested in opportunities for exposure to Brazil’s relatively resilient economy.
Brazil-based businesses, in turn, are continuing to seek sources of international capital and emerging opportunities in the international economy. Both groups are routinely establishing vehicles in the Cayman Islands, Bermuda and the British Virgin Islands (BVI) to facilitate the inflow and outflow of capital from Brazil.
As leading international financial centres, each of these jurisdictions offers sophisticated financial products developed and demanded by internationally traded hedge funds, private equity funds and structured finance firms.
Each jurisdiction has highly developed electronic communications, banking and professional services to serve the needs of the international financial world, and leading Brazilian companies often find that the best financial and insurance products involve one or more of these jurisdictions.
Reasons for the success of Cayman, Bermuda and the BVI are well-documented. Each offers flexible, straightforward legal and regulatory schemes together with a strong history of English common law.
Each jurisdiction is a self-governing UK territory enjoying a tradition of parliamentary government. Like many others in the international financial world, Brazilian companies that require a neutral jurisdiction in which to structure their affairs actively seek out such infrastructures.
Each of the three jurisdictions competes and offers similar solutions in areas such as investment funds and ship and aircraft finance. But each jurisdiction has also carved out a special niche: the BVI is a leading provider of special purpose vehicles for joint ventures or structured finance transactions; Cayman is a centre of excellence for specialised investment funds and hedge funds; and Bermuda offers a welcoming regulatory environment for insurance and for public companies’ offerings.
Another innovation is that, in addition to offering regular limited-liability company formations, each of the jurisdictions also enables the creation of segregated portfolio/segregated account companies (SACs).
These structures provide further flexibility in structuring financial products and corporate groups. Within an SAC, assets can be segregated by establishing separate accounts in order to protect the assets of one account from the liabilities of another. The ability to use an SAC is particularly useful in investment fund structures demanding multiple classes of shares, captive insurance products, or in a structure where the statutory segregation of assets is desired.
It is common practice in Brazil for constitutional documents of investment vehicles and other financial structures to include customised terms. In Cayman, Bermuda and the BVI, shareholder agreements may be used to provide corporate governance for a privately held offshore company. Negotiated terms may include share transfer restrictions, mandated board representations for shareholders, veto rights, tag-along rights, drag-along rights and an IPO exit clause.
Often, groups investing into or from Brazil require tax neutrality in their international operations. This need, together with effective regulation and sophisticated infrastructures, are key drivers behind the trend for Brazilian companies to establish in offshore jurisdictions.
In particular, Brazilian businesses with operations in more than one country are also attracted to the absence of withholding tax and require a jurisdiction that places no restrictions on their ability to transfer funds in and out of the jurisdictions, or on paying dividends to non-resident shareholders.
Again, Cayman, Bermuda and the BVI offer these advantages.
Recently, the offshore world generally has suffered criticism as developed onshore countries re-examine their individual regulatory systems and the global environment of financial regulation.
Consequently, every offshore jurisdiction is on the defensive to justify their roles in the international financial world. Cayman, Bermuda and the BVI have responded productively to the international criticism by pursuing formal tax information exchange agreements with onshore jurisdictions.
The willingness of these islands to embrace international standards for exchange of information proves their commitment to assuring transparency in their financial transactions.
As one would expect, the trend for Brazilian business interests to utilise offshore structures has, in this environment, led to an increased interest in dealing only with those offshore jurisdictions accepted as part of the responsible international community.
Given their sophisticated regulatory structures and common law backgrounds, Cayman, Bermuda and the BVI can be expected to conform to new standards in international best practices.
In the meantime, interplay will continue between lawyers in Brazil and in the offshore jurisdictions as a direct result of the growth and development of the Brazilian economy, and the ever-increasing understanding within Brazil of the benefits and flexibility of offshore corporate vehicles.
Alan Dickson is managing partner of Conyers Dill & Pearman’s São Paulo office