Conyers Dill & Pearman
www.conyersdillandpearman.com
Fawaz Elmalki – March 2009
While to date the British Virgin Islands (“BVI”) have not enjoyed the same visibility as the Cayman Islands for Islamic finance transactions, BVI business companies are increasingly used by managers of Shariah compliant funds and by financial institutions and investors for this purpose. In fact, the BVI is the most popular offshore jurisdiction in the world and has the same attributes which have made the Cayman Islands such a success. This article highlights some of the features common to both the Cayman Islands and the BVI and describes some of the specific advantages of the BVI as a domicile for a joint-venture Musharakah.
Common Features
Like the Cayman Islands, the BVI is an internally self-governing British Territory and offers all the security and stability traditionally associated with the British flag. It enjoys an independent legal and judicial system based on English common law, with a right of final appeal to the Privy Council of the House of Lords in England. The BVI also has a sophisticated infrastructure, an established financial services sector and a long history of accommodating international businesses. In each of the Cayman Islands and the BVI, the government and business community have traditionally worked together to ensure that the reputation and integrity of the respective jurisdictions are preserved without the need for overly burdensome regulation.
Both the Cayman Islands and the BVI enjoy tax neutral regimes. There are no income, profit or capital gains taxes in the BVI. In addition, the absence of withholding taxes in the BVI is attractive to a BVI company's shareholders. There are no restrictions on a BVI company's ability to transfer funds in and out of the BVI or on paying dividends or distributions to shareholders. The Cayman Islands and the BVI have robust anti-money laundering and know your client legislation. Such legislation ensures that both jurisdictions are only used for legitimate transactions. Finally, the names and details of members and directors of both Cayman Islands and BVI companies are confidential and there is no requirement to publicly file financial information relating to companies in these jurisdictions.
British Virgin Islands Joint Ventures
BVI joint venture vehicles are popular with both non-Muslim and Muslim investors worldwide, particularly in Asia and, more recently, the Middle East, Russia and South America. Interestingly, Chinese government statistics show that the BVI is the second largest investor in China. A typical joint venture company will have two shareholders, each holding 50% of the shares of the company. A shareholders’ agreement will structure the relationship between the parties, and the memorandum and articles of association of the joint venture company should reflect the terms of the shareholders’ agreement. Often, the joint venture company is a holding company which holds the shares of an operating company which carries out the business in question. Taking the example of investors from United States and a Gulf Cooperation Council (GCC) State such as the United Arab Emirates, an American company (often a large multi-national) will wish to enter into a joint venture with a United Arab Emirates partner to manufacture or market a product in the GCC or North Africa. The question will arise as to where to locate the joint venture company. Neither party wants the joint venture company to be incorporated in the other party’s jurisdiction, as it gives that party “homefield” advantage. A neutral jurisdiction must be chosen which is acceptable to both sides. The BVI is the typical choice for both the reasons explained above and the following.
Modern Corporate Law Legislation
BVI companies are incorporated under the BVI Business Companies Act 2004. This is a modern piece of legislation which is based on the Delaware corporate statute, although anglicized to take into account the fact that the BVI is an English common law jurisdiction. Major international banks and multinationals are comfortable with the legal features of a BVI company. The versatility of the BVI Business Companies Act appeals to international investors and offers numerous benefits including the ability of the parties to incorporate tailored management, administration and corporate governance provisions into the memorandum and articles of association of the BVI company and any shareholders’ agreement.
Unique Joint Venture Provisions ]
Directors of a joint venture company are generally nominated or appointed by the shareholders who wish to police their investment. Of course, directors of a BVI company have the usual responsibilities to act honestly and in good faith and in what they believe to be the best interests of the company, just as is the case in most other common law jurisdictions. However, there will be occasions where the joint venture company’s interests will not necessarily be the same as those of the joint venture shareholders. A director nominated by a shareholder (who will often be a senior employee in the shareholder’s organisation) can sometimes be faced with a tricky dilemma, where the shareholder’s interest dictates one course of action for the joint venture company but the joint venture company’s best interest dictates another. The latter must prevail, according to well-established case law, but this can cause business and operational difficulties for the shareholder and divided loyalties for the director.
As further evidence of the modern and up to date approach of the BVI legislature, the BVI Business Companies Act introduces a valuable element of latitude for joint venture company directors when compared with the common law and corporate law rules of other offshore jurisdictions. The BVI Business Companies Act allows a director of a joint venture company to act in a manner which he believes is in the best interest of one or all of the shareholders rather than in the best interest of the company.
Flexible Distributions
A major attraction of a BVI company to joint venture parties is the ease in which profits can be released from the company. The directors of a BVI company may, by resolution, authorize a distribution to shareholders at such time and of such an amount as they think fit if they are satisfied, on reasonable grounds, that the company will, immediately after the distribution, satisfy a statutory solvency test. Such test is satisfied if the value of the company’s assets exceeds its liabilities, and it is able to pay its debts as they fall due. This test relates to any type of distribution including the payment of dividends, without the application of distributable profits tests or further constraints. This test provides considerable flexibility, with the focus being on solvency rather than capital requirement rules.
Domicile of Choice
As evidence of its success, the BVI is the largest and most successful offshore incorporation jurisdiction in the world, with over 462,000 companies. Most of these companies are special purpose vehicles such as holding companies established to acquire securities, real estate, aircrafts, ships, yachts and other investment assets and joint venture companies. Moreover, BVI companies are increasingly recognized for listing on many of the key exchanges around the world including NASDAQ, the New York Stock Exchange, the Singapore Stock Exchange and the London Stock Exchange. Approximately 10% of all international companies listed on London’s Alternative Investment Market (AIM) are BVI companies. BVI companies have been used for Islamic finance transactions such as the Purple Island Corporation sukuk, a US$267 million five-year fixed coupon Mudarabah Sukuk raised by the Saudi Binladin Group, which won Islamic Finance News’ Mudarabah deal of the year in 2008. One of the world’s largest hedge fund managers, Permal, has also chosen the BVI as the domicile for its offering of Shariah compliant funds.
Ease and low cost of incorporation
The incorporation of a BVI company is simple and can be completed within 24 hours by the filing of the company’s memorandum and articles of association with the Registrar of Corporate Affairs (the “Registrar”), together with a document in the approved form signed by the first registered agent signifying its consent to act in that capacity. There is no requirement to publicize an intention to incorporate, nor is there any pre-approval by any BVI regulatory body. The registered agent is required to perform a due diligence review on the promoters of the company. Having been satisfied that all of the BVI Business Companies Act’s incorporation requirements have been met, the Registrar will register the memorandum and articles of association and issue a certificate of incorporation certifying that the company is incorporated on that date. The fee payable to the BVI Financial Services Commission for the incorporation of a standard BVI company authorised to issue a maximum of 50,000 shares is US$350. The fee increases to US$1,100 for companies authorised to issue more than 50,000 shares.
Conclusion
Offshore structures have a meaningful role to play in international business and in Islamic finance transactions. A BVI business company, because of its simplicity and flexibility, is being increasingly used by Islamic asset managers, financial institutions and investors. Its proven record in facilitating joint-ventures coupled with the progressive provisions in the BVI Business Companies Act also makes it a natural choice for Musharakas.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is
intended to merely provide a brief overview and give general information.
Notes to Editors
Conyers Dill & Pearman has pioneered the field of offshore law since its establishment in 1928. It is the first law firm to have established an office outside of its home jurisdiction, setting up shop in Guernsey in 1982 as a base for servicing European clients (superceded by the London office in 1998). It is also the first to have expanded into Asia, with the opening of its Hong Kong office in 1985, and the first to establish a presence in Singapore in 2001. The firm continued in this vein in 2008, becoming the first offshore law firm to have a Russian presence with the launch of its Moscow office in March, and the first offshore law firm to have a physical presence in Brazil with the establishment of its São Paulo office. With a current complement in excess of 550 staff, with over 150 lawyers, Conyers Dill & Pearman advises on the laws of Anguilla, Bermuda, British Virgin Islands, Cayman Islands and Mauritius from those islands and from Dubai, Hong Kong, London, Moscow, São Paulo and Singapore. The firm has earned clients’ trust, loyalty and respect by consistently providing responsive, timely and thorough advice on all aspects of offshore corporate, company and commercial law, commercial litigation and private client matters.
Affiliated companies (Codan) provide registered agent, registered office, corporate director and secretarial services, as well as specialised company management services. An affiliated global network of licensed trust companies undertakes a broad range of trust establishment and administration services. These services range from the administration of family trusts for private clients to the structuring of highly complex and innovative corporate ventures including special purpose trusts for ownership of securitization structures.
For further information please contact:
Naomi J. Little
Tel: +1 441 298 7828
Fax: +1 441 299 4987
e-mail: naomi.little@conyersdillandpearman.com
web: www.conyersdillandpearman.com
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