Using the British Virgin Islands for Private Equity Transactions

The British Virgin Islands ("BVI") has a reputation of being Asia's favoured offshore jurisdiction for companies. However, whilst the use of BVI companies as holding companies, sole director entities, and, more recently, listing vehicles for Hong Kong IPOs is well known, the advantages of the BVI as a domicile of choice in the context of private equity transactions is not as widely recognized. Many features which make the BVI an attractive domicile for listing vehicles, also make it an attractive jurisdiction for private equity and PE fund transactions. Some of these are discussed below. No Par Value Shares Under the Business Companies Act, 2004 as amended ("BCA"), the legislation that governs BVI companies, there is no concept of "share capital". Accordingly, there is no need for shares to have a par value. This means that a lot of the practical difficulties that arise with having a par value of shares disappear. If a BVI company is incorporated without par value shares, then the prohibition against issuing shares for less than par value would not apply. This means that the directors of the company, in the context of a fund raising, or a pre-IPO financing, are free to set the subscription price of shares at whatever level they choose without the need to adhere to a minimum level. However, more significantly, where a company is incorporated with no par value shares, all of the proceeds of a subscription can be applied directly to the operations of the company. In the context of a private equity fund acquiring a target entity through a BVI special purpose company (which is issuing shares to the fund in exchange for subscription monies ("SPC")), this means that the fund only needs to draw down capital equal to the price of the underlying target and estimated acquisition costs and fees there is no need to call an additional amount in respect of the par value of the shares in the BVI SPC. Directors Duties in BVI Companies In the context of private equity acquisitions, where the fund is taking an activist position, or has the right to appoint directors to the target board, the BCA offers another important advantage over other offshore jurisdictions. Under the BCA, when making their decisions, directors of a joint venture company or subsidiary may be entitled to act in the best interests of the shareholder that appointed such directors. This is a significant departure from the position in other offshore jurisdictions and many other common law countries where directors may not depart from their fiduciary duty to act in the best interests of the company. In the context of a series A financing, pre-IPO preference share arrangement, or joint venture, the ability of a director to act in the best interests of their appointing shareholder reflects what will often be the underlying intention of the parties and the commercial reality of the deal. Although the transaction documents will typically include the need for various levels of shareholder consent for certain actions, and the use of undertakings from founders, certain directors, and other interested players (for example), these mechanisms are generally heavily negotiated,

and ring fenced to a number of specific items. The ability to have an appointee director make any decision in a manner that reflects the interests of their appointing shareholder not only adds to these protections, but it provides a practical and operationally flexible mechanism to assist in ensuring transactions are carried out in accordance with the parties' intentions. In addition, the BCA makes clear the exact duties of directors. Although director's fiduciary obligations are based on centuries of English common law, these concepts are often not as well understood by all players involved in private equity deals in emerging markets. The fact that the duties of directors are codified under the BCA provides a one-stop list, ensuring that all the parties know exactly the extent of the rules that the director's need to play by. Flexible Corporate Governance The clarity of the BCA in this regard is coupled with provisions that allow a great amount of flexibility in respect of corporate governance, and vests much of the responsibility for the dayto-day business and operations of the company with the directors. Under the BCA only 3 actions require the directors to seek shareholder approval a merger or consolidation of the company, subject to the company's articles, a disposal of over 50% of the total assets of the company, and a voluntary winding up. However, there remains the ability to draft the memorandum and articles of association of the company to require consent for other actions, if required. Importantly, subject to a few limitations, the BCA provides that the board may amend the memorandum and articles of association of a company, including to increase the maximum number of shares that the company can issue without shareholder approval. The BCA also permits the creation of multiple levels of voting majorities for approving corporate matters, rather than being restricted to the use of defined terms such as "special resolutions".

This flexibility, and the ability to tailor the constitutive documents of a BVI Company to fit the requirements of the particular market, or transaction, means that a company can be set up in a manner that not only ticks all of the relevant regulatory boxes, but can also be structured so as to reflect the commercial and market standards of the relevant industry sector whilst protecting the interests of the founders or the anchor PE investor. Mergers The flexibility of the BVI company structure which makes it a particularly well suited to series A financings and IPOs is also demonstrated in the ease with which BVI companies can be used in restructurings. Importantly, the rules in relation to merging BVI companies with other BVI companies and foreign companies are relatively simple, and well tested. Although the ability to merge is not germane to BVI companies (the Cayman Islands recently enacted merger legislation as part of amendments to its Companies Law) having the option to merge provides significant flexibility in respect of structuring M&A deals. In the context of a private equity fund, the ability to consolidate a number of separate target investments into one listing vehicle, or undertake relatively simple pre-IPO restructures through a merger can be an important, time and cost saving element of the exit strategy. Fund Formation Although the items listed above largely focus on the use of BVI companies for down stream PE deals, occurring below the private equity fund level, the BVI is also attractive as a private equity fund formation jurisdiction. The Partnership Act, 1996 instituted a regime for the establishment of limited partnerships which, in most important respects, closely reflects the characteristics of the Cayman Islands exempted limited partnership, which remains the most common structure for private equity funds. This means that the operation and establishment of BVI international limited partnerships should be familiar to most sophisticated private equity fund investors.

In addition, international limited partnerships established in the BVI as closed-ended PE funds are not required to be registered or licensed under the Securities and Investment Business Act. This means that an entire fund structure (including underlying SPCs and holding entities in one jurisdiction) can be maintained in a single jurisdiction, having regard to the rules administered by a single regulator. Accordingly, using the BVI as a domicile for a private equity limited partnership can give rise to significant cost and time savings. Other BVI Regulatory Advantages Another attractive feature of the BVI, from a tax perspective, is that, as well as not imposing tax on capital gains or income of companies, the jurisdiction has been granted membership of the "white list" maintained by the Organisation for Economic Co-operation and Development. Being on the white list requires that a jurisdiction has entered into a number of tax information exchange agreements with other jurisdictions, which provide for the cross border provision of tax information without regard to domestic taxing interests or bank secrecy rules. As such, from a tax perspective, BVI is a jurisdiction in which investors in offshore structures can have confidence. Similarly, the BVI Financial Services Commission ("FSC") is a member of the International Organization of Securities Commissions ("IOSCO"), and a signatory of IOSCO's Multilateral Memorandum of Understanding which represents a common understanding amongst its signatories with regard to how they will consult, cooperate, and exchange information for securities regulatory enforcement purposes. With IOSCO membership, the FSC stands with other securities regulators including the Australian Securities and Investments Commission, Hong Kong's Securities and Futures Commission, and the US Securities and Exchange Commission. Again, this demonstrates the BVI's standing in the international regulatory community, and is

regarded as providing significant comfort to investors coming into BVI structures. Conclusion The ability of BVI companies to list on the Hong Kong stock exchange reminded many in the investment community of the advantages inherent in using BVI structures. However, the flexibility, practicality and integrity of the corporate regime in the BVI can be equally applied to private equity transactions and this can be a benefit both in terms of making and exiting investments, but also at the fund formation stage. If you would like any further information please speak with your usual Maples and Calder contact or: James Gaden +852 3690 7447 james.gaden@maplesandcalder.com March 2012 MAPLES AND CALDER About the Author James Gaden has experience across a broad spectrum of legal issues affecting the investment funds industry. He specialises in investment fund formation, as well as advising private equity and hedge fund service providers, and investors in hedge and private equity funds.