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International Legal Services - Resilient Offshore

By Lowtax Editorial
28 November, 2013

As legal services markets in major onshore countries struggle to recover to their pre-crisis levels, demand for cross-border legal services in key offshore jurisdictions is going from strength to strength.

According to a December 2012 report by the Law Society of England and Wales, total turnover generated by those supplying legal services was GBP25.6bn in 2010, but turnover was predicted to have fallen to GBP25.4bn between 2011 and 2012, with long-term growth not expected to return until 2015 onwards. Indeed, while legal services remains one of the UK’s key services sector exports (worth GBP4bn in 2011), the Government is worried enough about the situation that in 2011 it published a plan for growth designed to promote the UK legal services sector abroad.

Meanwhile, the picture in the United States is no better. A report on the state of US legal services in 2013 by Thomson Reuters observes that the market “continues in the fifth year of an unprecedented economic downturn” as law firms struggle against sluggish demand. The same report also notes that the 100 largest independent firms in continental Europe achieved revenue growth of less than 5% in 2011, well below the double-digit growth rates recorded before the crisis.

Economically, the offshore world also took a substantial hit in the global financial crisis of course, and this was reflected in the sharp fall in key income streams like company registration and renewal fees for some governments.

In fact, the majority of offshore jurisdictions experienced a decline in company incorporation activity in the second half of 2012 compared with the first half, according to legal services consultancy the Appleby Group. There were 37,881 new offshore company formations in the jurisdictions covered by the report, a decrease of 3.6 percent from the second half of 2011, and a deeper decrease of 11 percent on the preceding six months in 2012.

However, company registrations in certain jurisdictions offered signs of optimism, and 2013 could see a return to pre-crisis company formation activity across the board, says Farah Ballands, partner and global head of fiduciary and administration services at Appleby.

Having been blamed by many onshore governments for precipitating the financial crisis in the first place, offshore jurisdictions have also been struggling under the weight of new regulation and demands for transparency, especially in the areas of corporate ownership and tax. As Bahamas Prime Minister Perry Christie lamented in a speech to the United Nations General Assembly in September 2013: "Some have used their power either unilaterally or in small groups of high-powered nations to impose their will, arguing that there is something fundamentally immoral, something intrinsically sinister, about the accumulation of wealth in offshore jurisdictions.

In a strange sort of way though, the latest campaign by the OECD and others to “clean up” the world of offshore has made many parts of it stronger, and this is reflected in the demand for sophisticated offshore structures from corporate and wealthy individual investors.

It used to be that tax, trust and asset protection was the traditional bread and butter business of offshore advisers. But these days, law firms are called upon to advise on and act in much more complex matters such as corporate finance, company restructurings, insolvencies, captive insurance, investment funds, private equity, corporate listings, and compliance and regulation, among other things.

It may surprise many to learn that a sizeable chunk of the world’s most significant merger and acquisition deals take place offshore, utilizing the flexible legal structures available in jurisdictions such as the British Virgin Islands, the Cayman Islands and the Channel Islands. The latest edition of Appleby’s quarterly Offshore-i report on offshore M&A activity shows that 538 deals were completed in the third quarter of 2013 for a total value of USD34.5bn. According to the report, the offshore market was one of only two global regions that saw deal volumes increase in the third quarter, and businesses incorporated in offshore jurisdictions were the target of transactions worth more than those of companies based in Africa, the Middle East, Oceania, and Latin America. Furthermore, average offshore deal size during the quarter, at USD64m, was larger than the average for all world regions except the Americas.

Q3 2013 was a strong quarter for the Cayman Islands in particular, followed by Bermuda, Hong Kong and the BVI, with Guernsey and the Isle of Man also performing well compared with a year ago. Financial services, insurance and manufacturing were said to be the most active sectors.

While politicians of all colours in North America, Europe and elsewhere continue to verbally bash the world of offshore, it is undeniable that a select group of offshore financial centres is playing a hugely important role in channelling investment into the very economies that these politicians represent, as these and other impressive statistics show. For instance, a recent study by Capital Economics found that Jersey is a conduit for almost GBP500bn of foreign investment into the UK, comprising 5% of the entire stock of foreign-owned assets.

Capital-raising via an offshore platform is now a major cog in the global corporate investment machine. For example, the Channel Islands and the Isle of Man are heavily represented among the companies listed on the Main Market of the London Stock Exchange (LSE) and its small-cap offshoot, the Alternative Investment Market (AIM). Excluding the UK, there are already more Guernsey companies listed on the LSE than from any other jurisdiction (ex-UK), including 37 AIM-listed structures. Likewise, BVI Business Companies are becoming the structure of choice for Asian investors listing on the Hong Kong Stock Exchange.

It comes as no surprise then, that advising on the offshore aspects of corporate listings is a growth area for law firms with expertise in offshore legislation and regulation. Carey Olsen’s corporate group for example has recently played a significant role advising on a number of high-profile Main Market listings. In November 2012, the firm advised the Battle Against Cancer Investment Trust (BACIT Limited) on its establishment as a Guernsey-registered closed-ended investment company and its flotation which raised GBP270m. The funds raised will be invested in long-only funds, hedge funds and private equity funds – some of which are not readily accessible to the investor community. Carey Olsen also acted for ICG-Longbow Senior Secured UK Property Debt Investments Limited on the first London-listed fund Initial Public Offering (IPO) of 2013 which raised over GBP104m. The company was admitted to the premium listing segment of the Official List of the UK Listing Authority and to trading on the London Stock Exchange's main market for listed securities.

In October 2013, Carey Olson announced that it had become a listing agent of the Cayman Islands Stock Exchange, complementing the firm’s well-established reputation for listing debt and equity on the Channel Islands Stock Exchange.

Jason Allison, managing partner of the Cayman Islands office explained that the firm originally planned to apply to become a listing agent of the CSX nearer the end of 2013, but the application was brought forward due to client demand.

“Equity listings appear to be on the increase due in part to the introduction last year of new rules that make it easier for ‘specialist companies’ to obtain a listing,” Allison said. “Our clients have welcomed the expansion of what we offer to include listing agency services."

Offshore jurisdictions are also the ideal places from which to list more specialist and complex vehicles, as when Mourant Ozannes acted as Guernsey legal adviser on the launch of Chenavari Capital Solutions Limited (Chenavari), listed on the Specialist Market of the LSE and the Channel Islands Stock Exchange in October 2013.

Chenavari has been established as a registered closed-ended collective investment fund to undertake capital solutions transactions with European banks, with a range of asset types, including mortgage, corporate and SME loans and asset-backed securities.

Mourant Ozannes Gavin Farrell said of the IPO, which successfully raised GBP130m: “This deal contributes to the growing importance of Guernsey as a leading jurisdiction, with the requisite expertise and appropriate environment, for the establishment of specialist investment funds."

With most major offshore financial centres now having investment fund regimes in place, the registration, restructuring, liquidation and refinancing of funds are other key lines of business for offshore legal advisers. This is especially so as hedge fund assets begin to recover following the crisis, with much of this growth is being driven by rising levels of wealth in Asia where the under-developed hedge fund market was not hit as hard as in the West. The Cayman Islands remains by far the largest domicile for offshore investment funds, and Harneys, the law firm, says that its Cayman funds practice in Hong Kong is “booming” at present as a result of strong demand for investment fund vehicles from clients in the region.

The offshore world is, however, a very competitive place, and few jurisdictions stand still for fear of being overtaken by their rivals. As a result, legislation is almost constantly being reviewed and adapted to suit the needs of a global client base, and this means that it pays for legal advisers to have a presence on the ground offshore.

A notable example is that of Conyers Dill and Pearman, which has offices in Bermuda, the British Virgin Islands, the Cayman Islands and Hong Kong, and which in November 2013 announced that it had advised on the first Class A Exempt Fund to be registered in Bermuda under the jurisdiction’s new funds regime.

The Investment Funds Act 2006 was amended in October 2013 to introduce two new fast track categories of funds: Class A Exempt Funds and Class B Exempt Funds. The new Class A Exempt Fund category guarantees instantaneous registration for funds managed by qualified investment managers. The registration was effected for a US SEC registered investment adviser with over USD90bn in assets under management.

“Allowing funds to be established and launched within one business day confirms Bermuda’s commitment to providing sophisticated investors and their advisors with innovative and tailored solutions,” said Dawn Griffiths, Head, Bermuda Investment Funds in Conyers Dill & Pearman’s Bermuda office.

While offshore jurisdictions are subject to increasingly onerous regulation, ironically this is providing yet another source of business for offshore legal advisers as investors attempt to come to terms with important new legislation coming out of Europe and the United States, including the EU Alternative Investment Fund Managers Directive and the Foreign Account Tax Compliance Act.

Indeed, rarely a week goes by without one of the major offshore law firms expanding their practices in the key offshore jurisdictions. In August and September, Bedell announced new hires in their Singapore office and Jersey legal team. In May 2013, Harneys announced the recruitment of two new Cayman partners, which preceded the relocation of its Hong Kong office in July 2013 “to accommodate recent growth and anticipated future expansion.” In recent weeks, Walkers has also expanded its footprint in Hong Kong and Singapore, and in June 2013 bolstered its presence across its global network with a number of senior appointments.

Denise Wong, a partner in the Global Corporate and Investment Funds Groups of Walkers' Hong Kong said after the firm’s decision to expand its presence in the city that: “We’re seeing an increasing need from clients for in-depth and real-time legal advice on offshore issues.”

It is a trend which at the moment shows few signs of changing.


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