I OVERVIEW OF M&A ACTIVITY
The British Virgin Islands (BVI) has for many years been at the forefront of international corporate structuring for cross-border transactions. The BVI is the world’s largest offshore domicile for companies. Over a million companies have been incorporated in the BVI, of which over half a million remain currently active. Approximately 45,000 new BVI companies were incorporated during 2015. While the rate of new BVI company incorporations has fallen since the 2008–2009 financial crisis, the BVI remains an attractive jurisdiction for incorporating vehicles to pool capital and to invest in a globally diverse range of markets. Given the huge number of BVI companies on the international stage, it is perhaps inevitable that they appear in a very diverse range of industries, from mining and natural resources to TMT, and that they are used in an equally diverse range of jurisdictions.
Because BVI companies are utilised in a wide variety of industries, across a wide variety of regions around the world, this renders the jurisdiction less susceptible to global M&A trends, and furthermore the sheer volume of active BVI companies ensures that there continues to be a regular flow of M&A transactions involving such companies.
In addition, because of their high level of corporate flexibility, BVI companies are frequently used to structure transactions. For example, a BVI company can merge with one or more BVI companies or foreign companies, and the surviving company to the merger may be the BVI company or the foreign company. This provides great flexibility for structuring M&A and cross-border deals.
One factor that has caused concern within the jurisdiction is the potential fallout from the ‘Panama Papers’ controversy, which the BVI found itself drawn into in early 2016. The controversy is particularly unfair, as the BVI has made concerted efforts in recent years to counter negative and often misleading publicity, and in particular the perception that the BVI is a ‘secrecy jurisdiction’. The BVI is internationally recognised as having a cooperative regime in relation to the exchange of information for law enforcement, regulatory and tax-transparency purposes, and has a highly developed regulatory regime including with respect to anti-money laundering. The government has implemented US FATCA, UK FATCA and the OECD’s Common Reporting Standard, of which it was an early adopter, and has signed numerous bilateral tax, law enforcement and regulatory information exchange agreements, including tax information exchange agreements with the US, the UK, France, Germany, China and India, as a result of which the BVI is on the FATF and OECD white lists. It has also adopted measures similar to the European Union Savings Directive. Under its various information exchange obligations, the government and its agencies regularly cooperate with law enforcement, regulatory and tax authorities to supply information to those authorities to assist them with legitimate and lawful enquiries. The BVI is a full member of the International Organization of Securities Commissions, and the BVI regulator, the Financial Services Commission (FSC), adheres to international regulatory standards on matters including anti-money laundering and regulator-to-regulator cooperation.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
M&A in the BVI are governed primarily by the BVI Business Companies Act, as amended (Companies Act), which is the primary company law statute in the BVI, and common law. BVI companies are incorporated or registered under the Companies Act.
The predominant type of corporate entity involved in private acquisitions as a target, buyer, seller or guarantor is a company limited by shares, whether privately held (e.g., a group company or an investment holding company) or a listed company.
Many M&A transactions are structured as straightforward sales and purchases of shares in BVI companies, in respect of which no mandatory requirements are imposed by the Companies Act, and there are no other specific statutes or government regulations concerning the conduct of such transactions, so that buyers and sellers are generally free to contract as they wish as to the terms for sale and purchase. BVI law does not impose any restrictions on transfers of shares in a BVI company, and indeed the Companies Law expressly provides that, subject to any limitations or restrictions on the transfer of shares in the BVI company’s memorandum or articles of association, a share in a BVI company is transferable.2 Accordingly, transfers of shares will be subject to any restrictions or other provisions (such as, e.g., rights of first refusal, drag-along and tag-along rights) in the BVI company’s memorandum and articles of association.
In addition, the memorandum and articles of association may give the directors of the BVI company a right to refuse transfers of shares. In the absence of any provision in the memorandum and articles of association that permits them to do so, the directors may not pass a resolution refusing or delaying the registration of a transfer of shares, and the company is obliged on receipt of an instrument of transfer to enter the name of the transferee of the share on the register of members.3 Needless to say, these provisions are almost always overridden by the provisions of the memorandum and articles of association. The usual requirement under the Companies Act for shares to be transferred by way of a written instrument is disapplied (subject to the company’s memorandum and articles of association) for any shares of a BVI company that are listed on a recognised stock exchange.
The transfer of a registered share is effective when the name of the transferee is entered in the register of members,4 and the entry of the name of a person in the register of members as the holder of the share is prima facie evidence that legal title in the share vests in that person.5 Registered shares may not be transferred by delivery of the share certificate relating to that share. The use of bearer shares is theoretically possible but is now highly restricted, and bearer shares are now very rarely encountered in international corporate transactions.
In addition to straightforward sales and purchases of shares in BVI companies, acquisitions may be structured as statutory mergers or consolidations. Statutory mergers are a longstanding feature of BVI company law and are one of the most common methods of structuring a complex acquisition or business combination, including, for example, ‘going-private’ transactions to acquire the shares of BVI companies listed on the US stock exchanges.
The Companies Act permits a BVI company to merge or consolidate with one or more other constituent companies – each such constituent company may be a BVI company, or a foreign company incorporated in a jurisdiction outside the BVI provided that this is permitted by the laws of that jurisdiction. In order to be effected, the merger or consolidation must be authorised both by the board of directors and by a resolution of the shareholders of each constituent BVI company, and the threshold for such shareholder authorisation (subject to any contrary provision in the BVI company’s memorandum and articles of association) is a simple majority of those shareholders who attend and vote at a general meeting of the shareholders, or by way of a written resolution passed by shareholders with a majority of the voting rights. (Unlike some other jurisdictions, BVI law does not impose a requirement for a merger or consolidation to be approved by a super-majority of shareholders.) Provided that the requisite board and shareholder authorisations are obtained, and all other procedures set out in the Companies Law are complied with, no court order or approval is required for the statutory merger or consolidation to become effective, and the terms and conditions of the merger or consolidation will be binding and effective upon all shareholders regardless of whether or not they voted in favour of the resolution to authorise the merger or consolidation.
However, shareholders have the right to dissent from the merger or consolidation, in which case such dissenters will have the right to be paid in cash the fair value of their shares, as agreed with the company or, if agreement cannot be reached within the statutory time frame, as appraised by independent appraisers.6 This can be a factor where the offer involves a share-for-share swap as opposed to a cash buyout, or where the bidder anticipates issues with minority shareholders.
In a tender offer, private contractual acquisition or public takeover, where control of the majority of the voting equity is required, there is a statutory ‘squeeze-out’ mechanism available where the relevant statutory thresholds are met. Where a bidder has acquired 90 per cent or more of the votes of the shares in a BVI company (plus, if applicable, 90 per cent of the votes of the shares of each class of shares entitled to vote as a class), it can direct the BVI company to compulsorily redeem the shares of the remaining minority shareholders, at a redemption price and in such manner as stipulated by the BVI company, and thereby become the sole shareholder.7 Minority shareholders have the right to dissent from the compulsory redemption, and while this will not prevent their shares from being so redeemed, it will entitle them to payment of the fair value of their shares (determined in the same manner as for statutory mergers discussed above).
- a a plan of arrangement includes amendments to the memorandum or articles of association, company reorganisations or reconstructions, domestic mergers or consolidations, separations of two or more businesses carried on by a company, asset or share exchanges, company dissolutions or any combination of the foregoing; or
- b a scheme of arrangement regulates compromises or arrangements proposed between a BVI company and its creditors or members, or any class of either.
Both plans of arrangement and schemes of arrangement require approval by an order of the court.
A scheme of arrangement must be approved by a majority in number representing 75 per cent in value of the creditors or class of creditors or members or class of members, as the case may be, present and voting at a meeting. The principal benefit of a scheme is that if all the necessary majorities are obtained and hurdles cleared, and the court approves the scheme, then the terms of the scheme become binding on all members of the relevant class or classes of shareholders or creditors, whether or not they received notice of the scheme; voted at the meeting; voted for or against the scheme; and changed their minds afterwards.
The consents for approval of a plan of arrangement may be determined by the court and are therefore less rigid than the prescribed majorities required for a scheme of arrangement. However, it should be noted that the court may order dissenters’ rights to apply to a plan of arrangement, but not to a scheme of arrangement. For schemes of arrangement, no dissenters’ rights apply, but the key challenge is achieving the high approval majorities required of each class of shareholder.
The BVI does not have any takeovers code that applies to offers or takeover bids in respect of BVI companies, or any other non-statutory rules or codes of conduct relating to M&A transactions involving BVI companies, whether privately held or publicly listed.
Acquisitions of BVI companies that are regulated entities in the BVI may be subject to additional statutory requirements. For example, there are change-of-control rules that apply to entities regulated by the FSC under relevant financial services legislation, including, for example, companies conducting investment business or companies that are regulated funds that are regulated under the Securities and Investment Business Act 2010, companies conducting banking or trust business and that are licensed under the Banks and Trust Companies Act 1990, and companies regulated under the Insurance Act, 2008.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
The Companies Act was amended by the BVI Business Companies (Amendment) Act 2015, which came into force on 15 January 2016, alongside certain provisions relating to the Registers of Directors of BVI companies, which came into force on 1 April 2016. The amendments were intended to provide greater flexibility and certainty for those operating or doing business with BVI companies, but the amendments do not affect Part IX of the Companies Act (with one exception, as discussed below), which contains the main provisions dealing with M&A transactions (including mergers, consolidations, compulsory redemptions, plans of arrangement and schemes of arrangement, all discussed above).
Nevertheless, there are certain amendments that may be relevant to M&A transactions, particularly those involving a BVI company whose shares are listed on a recognised stock exchange:
- a a BVI company listed on a recognised stock exchange is no longer obliged to keep a register of members containing the information required under the Companies Act, and instead the register of members may contain such information as may be provided by the BVI company’s memorandum and articles of association or by a resolution of its members. The intention is to allow listed companies the flexibility to operate in accordance with the rules and practices of the relevant stock exchange; and
- b shares of a BVI company that are listed on a recognised stock exchange may now be transferred without the need for a written instrument of transfer, and such shares may instead be transferred in accordance with the relevant stock exchange rules and other applicable laws. In essence, this change allows for the ‘paperless’ transfer of listed shares in accordance with the procedures of the relevant stock exchange.
The one amendment made to Part IX of the Companies Act was to expand the scope of the ‘arrangements’ that may be the subject of a plan, by moving away from a comprehensive list of transactions that may be effected by way of a plan of arrangement to an open definition. The BVI plan of arrangement regime has not been frequently used to date, but recent publicised plans have demonstrated the potential uses of the regime; for example, the potential to achieve a demerger, which is itself not available as a statutory occurrence in the BVI, although it should be noted that the courts resist the use of plans that would be confiscatory in their effect on shareholders.
Court guidance is evolving on the approach to appraising fair value on the exercise of dissent rights. Recent court guidance suggests that a discount for a minority holding may or may not be appropriate depending on the circumstances.
An important innovation was introduced by the Registry of Corporate Affairs in the BVI on 1 December 2015, when it commenced a ‘premium service’ under which it will guarantee a four-hour turnaround for certain transactions submitted to the BVI Registry, including (of relevance to M&A transactions) registration of statutory mergers. Any merger submitted to the BVI Registry through the premium service (and upon payment of the relevant fee) by 6pm (BVI time) will now be guaranteed a same day response. This service has been welcomed by the industry, and will be particularly valuable in acquisitions involving listed BVI companies.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
M&A transactions involving BVI companies are almost always cross-border transactions that involve foreign players. Typically, a BVI company is used as an asset holding company, and the parties involved in buying or selling shares in the entity or its assets are not located in the BVI. The commercial activities, business and assets of the BVI company are also unlikely to be situated in the BVI. As a result, it is usual for onshore counsel in the relevant jurisdiction or jurisdictions for the parties involved, or possibly the location of the assets to be acquired, to dictate the governing law of the transaction, and to prepare the commercial documents. A share purchase agreement can provide for a foreign governing law, and it is unusual for a share purchase agreement to be governed by BVI law. If a foreign governing law is selected, there are no BVI law provisions that would apply automatically, except that legal title to shares in a BVI target company will pass only when the register of members is updated.
The BVI is the world’s largest offshore domicile for companies, with over half a million active companies currently on its companies registry. Consequently, it is not surprising that BVI companies appear in deals originating from all regions of the world, with deals continuing to emanate from North and South America, Europe, Asia-Pacific and Africa. The BRICS economies of Brazil, Russia, India, China and South Africa continue to strongly support BVI M&A activity.
Asia continues to play a preeminent role. It is estimated that almost half of all currently active BVI companies are owned and operated from Asia and, in particular, from China, and the BVI has developed a significant market share in the pre-initial public offering (IPO) and private equity space where Asian entrepreneurs have, with both domestic and international investors, used BVI companies as the conduit through which to fund and invest in businesses across the region. In China, the substantial balance sheets of Chinese state-owned banks have been driving M&A activity in China, and Chinese lenders are expected to continue to play a key role in driving M&A financing activity in Asia.
BVI companies continue to be attractive vehicles for raising financing for business purposes. Banks and other financial institutions, when lending monies to BVI company-owned businesses, are familiar with, and take comfort from, a number of key features of the BVI legal system, not least its public security registration system, its recognition of foreign law remedies for security interests created over the shares of a BVI company and its creditor-friendly insolvency regime. In addition, many listed companies in Asia utilise BVI companies (as issuers) when looking to raise debt financing via bond issuances.
Ultimately, many of these pre-IPO structures will result in either a trade sale (and exit for investors) or a listing of the BVI company on an international stock exchange. There are BVI companies listed on all major international stock exchanges, including the Stock Exchange of Hong Kong, NASDAQ, the New York Stock Exchange, the TSX, the London Stock Exchange (LSE) and LSE’s AIM Exchange.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
In May 2015, Duc Long Gia Lai Group (DLG), a Vietnamese company listed on the Ho Chi Minh Stock Exchange, took over the electronic component producer Mass Noble Investments Limited, a BVI company, through a share swap. The Vietnamese company issued over 19.9 million shares in exchange for the shares of Mass Noble shareholders – Ansen Holdco Limited, Hampora Investments Limited and Valtec Capital Corporation – who collectively owned 97.73 per cent. Mass Noble was the production unit of the Hong Kong-headquartered electronic component company Ansen Electronics, with a five-storey plant located in Guangdong, China, which manufactures hi-tech telecommunications equipment, LED lighting products and LCD screens. This transaction represented a notable expansion of DLG outside of Vietnam, and was considered a pioneering transaction in Vietnam.
In June 2015, Florida-based Seven Seas Water, a division of AquaVenture Holdings, acquired Biwater (BVI) Ltd, which provides potable water to the island of Tortola from a desalination facility located on the island under a water purchase contract with the BVI government. Sir Richard Branson, founder of the Virgin Group, was identified as a long-term investor in Seven Seas. The acquisition was for US$55 million.
In June 2015, Sun Hung Kai & Co Limited sold a 70 per cent equity interest in Sun Hung Kai Financial Limited, a BVI company, to Everbright Securities Company Limited. Sun Hung Kai & Co Limited remained a 30 per cent shareholder. The consideration for the acquisition was approximately HK$4.1 billion. Sun Hung Kai Financial Limited has two core business segments, Wealth Management and Brokerage, and Capital Markets, with a workforce of about 800 across Hong Kong, Macao and China, and about HK$85 billion in client assets under management, custody or advice (as of the end of 2014).
In July 2015, The Link Real Estate Investment Trust, acting through its wholly-owned BVI company, Capital Gainer Limited, acquired two premium Grade A office buildings in Shanghai, Corporate Avenue 1 & 2, from Shui On Land for approximately 6.6 billion remnimbi. The properties were held by a BVI company, Brixworth International Limited (through intermediate companies incorporated in Hong Kong and China), and the sale was effected by means of an acquisition of all the issued shares of Brixworth from its sole shareholder, Interchina International Limited, also a BVI company and an indirectly wholly-owned subsidiary of Shui On Land. The Link Real Estate Investment Trust is the largest real estate investment trust in Asia, and is listed on the Stock Exchange of Hong Kong. Shui On Land, which is also listed on the Stock Exchange of Hong Kong, is one of the leading property developers in China.
In October 2015, Baring Private Equity Asia, one of Asia’s largest and most established independent private equity firms, completed its acquisition of a majority stake in Vistra Group from the previous majority stakeholder, IK Investment Partners. Vistra, one of the world’s leading providers of company formations, trust, corporate and fund administration services, was structured through a BVI company, and the sale was effected through a trade sale of shares in the relevant BVI holding company.
In November 2015, Evergrande Real Estate Group Limited (Evergrande), acting through its wholly-owned BVI subsidiary Shengyu (BVI) Limited, acquired a Grade A office and commercial building situated in Hong Kong for an aggregate consideration of HK$12.5 billion. The property was held by Pioneer Time Investment Limited, a BVI company that was indirectly wholly owned by Chinese Estates Holdings Limited, whose shares are listed on the Stock Exchange of Hong Kong, and the transaction was structured as the sale and purchase of all the issued shares of, and the debt owed by, Pioneer Time. Evergrande is a Cayman Islands incorporated company listed on the Stock Exchange of Hong Kong and based in Guangzhou, China, principally engaged in the development of large-scale residential properties and integrated commercial properties.
In January 2016, DSV, a Danish transport and logistics group, acquired UTi Worldwide Inc, a BVI company listed on NASDAQ, which is a global supply chain services and logistics company that was reported to have revenue of US$3.9 billion and 21,000 employees in 58 countries. The acquisition was structured as a statutory merger, valued at US$1.35 billion, and is believed to be the second largest takeover ever of a publicly listed BVI company by transaction value. The merger created the fourth-largest freight forwarder in the world.
In March 2016, Global-Tech Advanced Innovations Inc, a BVI company listed on NASDAQ, completed its going-private transaction, whereby a buyer group, led by Mr John Sham (the president and chief executive officer of Global-Tech), and certain of his controlled or affiliated entities, acquired all of the outstanding common shares and American depositary shares of Global-Tech that were not already beneficially owned by the buyer group, for a consideration of US$8.85 per common share. Global-Tech owned subsidiaries that develop, manufacture and market electronic components and other products for the communications industry in China. The transaction was structured as a statutory merger, and was one of a number of such going-private transactions of companies listed on the US stock exchanges with their underlying businesses operating in China.
In May 2016, Reservoir Minerals Inc increased its interest in the Timok copper-gold joint venture project in Serbia, which was previously owned 55 per cent by Freeport-McMoRan Inc (a US-based natural resources company with a global portfolio of mineral assets and oil and gas resources) through Freeport International Holdings (BVI) Ltd, and 45 per cent by Reservoir through its subsidiary Global Reservoir Minerals (BVI) Inc. The acquisition was made by Reservoir exercising its right of first offer under the joint venture/shareholders agreement among Freeport, Reservoir and Timok JVSA (BVI) Ltd, which was triggered by Freeport’s proposed sale of its interest to Lundin Mining Corporation. Reservoir paid US$135 million to Freeport in respect of the exercise of the right of first offer.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Given that M&A transactions involving BVI companies are almost always cross-border transactions, and that the parties involved in buying or selling shares in the entity or its assets are based in jurisdictions outside the BVI, these transactions will be financed outside of the BVI. The BVI banking industry is not particularly developed, and is focused mainly on servicing the requirements of local businesses and retail banking, rather than financing cross-border M&A transactions involving BVI companies.
VII EMPLOYMENT LAW
The majority of M&A transactions involving BVI companies relate to businesses located outside of the BVI as, ordinarily, the BVI company is a cross-border asset holding company. It is very unlikely that the BVI company will employ any employees in the BVI. To the extent that any BVI company employs employees outside of the BVI, such employment will almost always be governed by the local laws of the jurisdictions in which those employees are situated, and BVI employment laws will not be relevant.
In the unlikely scenario that a BVI company does have employees situated in the BVI, then the provisions of the Labour Code 2010 should be considered.
VIII TAX LAW
Companies incorporated or registered under the Companies Act are currently exempt from income and corporate tax. BVI companies and all dividends, interest, rents, royalties, compensation and other amounts paid by BVI companies to persons who are not resident in the BVI and any capital gains realised with respect to any shares, debt obligations or other securities of BVI companies by persons who are not resident in the BVI are exempt from all provisions of the Income Tax Ordinance in the BVI.
No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the BVI with respect to any shares, debt obligation or other securities of BVI companies.
All instruments relating to transfers of property to or by BVI companies and all instruments relating to transactions in respect of the shares, debt obligations or other securities of BVI companies and all instruments relating to other transactions relating to the business of BVI companies are exempt from payment of stamp duty in the BVI. (This assumes that the BVI company in question does not hold an interest in real estate in the BVI.)
There are currently no withholding taxes or exchange control regulations in the BVI applicable to BVI companies or their shareholders.
IX COMPETITION LAW
There is no relevant competition law legislation in the BVI that affects transactions involving BVI companies.
The BVI will continue to play a key role in the structuring of international and cross-border transactions. Sophisticated investors and professional parties are well aware of the many advantages provided by the use of BVI companies – the BVI’s progressive corporate laws offering a corporate structure that adds value to cross-border corporate transactions, not only by providing tax neutrality, but also in terms of protecting the interests of investors, mitigating corporate risk, and enhancing transaction certainty and success. Consequently, the BVI continues to maintain its reputation as a key jurisdiction of choice for international M&A.
1 Richard May is managing partner and Richard Spooner is a partner at Maples and Calder.
2 Section 52 of the Companies Act.
3 Section 54(4) and (5) of the Companies Act.
4 Section 54(8) of the Companies Act.
5 Section 42 of the Companies Act.
6 Section 179 of the Companies Act.
7 Section 176 of the Companies Act.
8 Section 177 of the Companies Act.