Lowtax International Legal Services
By Lowtax Editorial
20 February, 2013
Offshore financial centers have long acted as a linking channel for investment between high tax countries, and this feature examines how modern international business trends and the demand for ever more sophisticated corporate structures has fueled the demand for offshore legal services.
There has always been a certain level of demand for offshore legal services, particularly in the sphere of wealth management and asset protection. Understanding trust laws in a foreign jurisdiction often requires specialist help, and it can be difficult to establish complex corporate structures from afar, hence the presence of well-established networks of legal and corporate services providers in most offshore jurisdictions.
However, globalization and the increasing internationalization of business transactions has meant that demand for offshore legal services from corporate clients in particular has increased in recent years, and jurisdictions like the Cayman Islands, the British Virgin Islands, Guernsey, Jersey, the Isle of Man and Hong Kong are featuring more prominently in the corporate planning process, playing their parts in some of the most significant merger deals and initial public offerings (IPOs) of recent times.
The Rise of Asia
The rise to prominence in the global economic arena of Asia-Pacific countries and other emerging markets has been a major driver of the increased demand for offshore legal services, with offshore financial centers often used as the conduit for investment between East and West, and vice versa. To respond to this demand, the major offshore law firms have been increasing their footprints both in the traditional offshore jurisdictions and in the Asian financial centers like Singapore and China.
Following the opening of a new office in Hong Kong in January 2012, offshore law firm Mourant Ozannes announced last September that it is to significantly expand its presence in the BVI with the launch of a local litigation and insolvency practice, with the firm reporting strong demand for its BVI legal services, particularly from clients in Asia.
In July 2012, Bedell Cristin announced the launch of an office in Singapore, to expand the firm's international reach in the provision of BVI legal services. The firm said at the time that it intends to offer an extensive range of BVI corporate legal services to clients in Singapore, including mainstream corporate finance work, joint ventures, listings, banking, capital markets, IPOs and sale and purchase transactions. Announcing the new Singapore office, Richard Gerwat, Managing Partner at Bedell, said the opening of the office in Singapore was a logical move because there is significant global demand for BVI legal services, but more especially in Asia.
Offshore law firms have also responded to the ever-changing regulatory landscape, particularly with regard to the investment fund industry, leading them to expand into new territories. Back in January 2012 for example, Ogier, a leading provider of international legal and fiduciary services, announced plans to target new clients in Luxembourg with the establishment of legal and fiduciary businesses there the first offshore law firm to establish a presence in the country. Commenting on the announcement, Group Chief Executive Officer, Nick Kershaw said, The new office is being driven by client demand as many of our existing clients currently use or have expressed an interest in using Luxembourg, either stand-alone or as part of an offshore structure. Having a Luxembourg legal capability will therefore complement our existing suite of services."
Ogier said that its boutique Luxembourg firm would focus predominantly on providing services to existing offshore investment fund clients with Luxembourg structures, either alongside or in addition to their offshore structures, as well as introducing new business into Luxembourg from existing clients from other Ogier offices, notably in Asia and North America. Francois Pfister, who will head up Ogier's Luxembourg legal practice, said: "The convergence between offshore and onshore law as it relates to the investment funds industry makes this a very exciting time to be joining a leading offshore law firm. Luxembourg is a natural fit for Ogier."
One area of the legal services market which has seen a noticeable increase in business recently relates to listing of offshore companies on major stock exchanges, particularly the London Stock Exchange (LSE).
According to figures publicized in January 2013 by Guernsey Finance, low-tax Guernsey remains the top domicile of incorporation globally for non-UK entities listed on the LSE, based on end-of-year data from the LSE. The statistics show that at the end of December 2012 there were 122 Guernsey-incorporated entities listed on either the Main Market, the Alternative Investment Market, the Specialist Fund Market or as "Trading Only." A number of other companies incorporated offshore or in low-tax jurisdictions are well represented among the non-UK entities listed on the LSE, including Jersey (86), Ireland (54), the Isle of Man (52), the Cayman Islands (46), Bermuda (44) and the British Virgin Islands (37), Luxembourg (11), Singapore (8), Gibraltar (5), Hong Kong (3), and Malta (2).
Commenting on these figures, Fiona Le Poidevin, Chief Executive at Guernsey Finance observed that: The fact that so many companies and securities on the exchange are incorporated in Guernsey means that we have developed significant expertise in London listings and this continues to be recognized by professional advisers in the City of London and beyond."
Guernsey played host to the first London-listed Initial Public Offering (IPO) of a fund this year, that of ICG-Longbow Senior Secured UK Property Debt Investments Limited, which began trading on the London Stock Exchange's main market for listed securities on February 5, 2013. Carey Olsen advised the company on the establishment of a Guernsey registered closed-ended collective investment scheme regulated by the Guernsey Financial Services Commission and corporate partner Tom Carey, stated: We are very proud to have assisted ICG Longbow with this successful IPO which is another endorsement for Guernsey as the listed fund domicile of choice for this asset class."
As the aforementioned figures show, Jersey is also a popular jurisdiction from which to list on the LSE, and the island played host to the exchanges largest IPO in 2011, that of Glencore International's USD11bn dual London and Hong Kong listing. Commenting on the transaction, Nathan Powell , a partner based in Ogier's Hong Kong office, said that: "Our ability to offer Jersey law advice in both the London and Hong Kong time zones was a key factor in securing this instruction. We are also well placed to advise on the Hong Kong listing as we acted on the first listing of a Jersey company, United Company RUSAL Plc, on the Hong Kong Stock Exchange at the beginning of 2010. The fact that Glencore chose Jersey for its listing vehicle reflects Jersey's reputation as a well regulated jurisdiction, acceptable to investors globally, which offers robust but flexible corporate laws".
Offshore has also facilitated some more unusual listings, such as in 2012 when the shares of HKT Limited, a Cayman Island company with British Virgin Islands subsidiaries, were stapled to and listed along with the units of HKT Trust on the Hong Kong exchange. HKT Trust and HKT Limited trade together as a stapled security.
In 2011, HKT Trust, which provides telecommunications products and services in Hong Kong, became the first single investment trust to list in Hong Kong. Conyers Dill and Pearman said that the use of the innovative trust structure was designed to meet the commercial objectives of the issuer and allow the HKT group to focus principally on distributions, as distinct from other listed issuers on the exchange. The firm said that the trust structure and associated arrangements, including the role of the trustee manager in managing the trust and the issue of share stapled units, should also provide investors with all the protections generally available to holders of shares under applicable laws, rules and codes in Hong Kong, whilst keeping the flexibility of the trust structure.
Mergers & Acquisitions
The offshore mergers & acquisitions market is one of the few world markets to have experienced growth over the past couple of years, and advising on the offshore aspects of M&A deals is becoming another major source or work for offshore law firms.
According to a report on offshore M&A activity for the third quarter of 2012 by Appelby, while there was a 10% drop in the volume, and a 17% drop in the value of transactions that took place offshore compared to Q2 2012, values were 11% higher than they were in the same period in 2011, suggesting that conditions are improving year-on-year. In the last 10 quarters, only three periods have seen a larger average deal size than what the offshore markets experienced in Q3, at USD78m.
The report shows that the financial services sector continues to dominate activity in the offshore region, accounting for over a third of all deals. The financial services sector accounted for 139 of the 428 deals this quarter, worth a combined value of USD4.2bn. Also of note was the USD2bn sale of the minority stake in insurer AIA Group to institutional investors from Hong Kong as well as the USD1.4bn sale of the holding entities of Conversus Capital, the Guernsey-incorporated asset management company, to HarbourVest Partners of the US.
The second highest value sector was telecommunications, which accounted for three of the top five deals and generated a cumulative value of USD8.3bn. The manufacture of computer, electronic and optical products was the third highest value sector.
The Cayman Islands remain the most attractive offshore target destination for investors. In the third quarter, there were 86 deals for Cayman targets worth a combined value of USD9.1bn.
Hong Kong was said to be the story of the third quarter, with a 15% increase in volume from 68 deals in Q2 to 78 deals in Q3, and a 72% increase in value from USD4.6bn to USD7.9bn.
The Isle of Man that saw the biggest increase in money being spent on its shores between Q2 and Q3 of this year, generating 23 deals against 21 last quarter, with a 95% increase in combined value from USD221m to USD430m.
According to the report, the offshore region ranks ninth amongst world markets by deal volume and fifth for value, significantly ahead of some hot markets including the Middle East and Oceania.
Indeed, offshore played a substantial part in the largest M&A deal of 2012 - the acquisition by Rosneft of Alfa Group, Access Industries and Renova's (AAR) 50% stake in Russian oil company TNK-BP, for USD55bn.
TNK-BP, Russia's third-largest oil producer, is owned by a holding structure established in the BVI, reflecting the jurisdictions popularity as a domicile for international joint ventures.
Robert Briant, the head of Conyers Dill and Pearman in the British Virgin Islands, which advised the consortium, commented that: "The TNK-BP sale was an exciting transaction to work on and underscores Conyerss pre-eminence in the British Virgin Islands in advising on large and complex joint ventures and merger and acquisition transactions. Not only is this one of the largest deals of recent times, but the twin track sale process by AAR and BP and the complex corporate governance arrangements of the group made this unique and interesting."
The acquisition of TNK-BP by Rosneft will result in it becoming one of the worlds largest oil producers, matching the output of Exxon. Completion of the transaction is expected in the first half of 2013 subject to approval from Russian and EU competition authorities.
London has traditionally been the location of choice for arbitration, and a 2010 study by the School of International Arbitration at Queen Mary, University of London showed that the UK capital was the preferred seat of arbitration for 30% of those surveyed.
In Asia, Singapore remains the largest arbitration center, but the city-state could soon face a challenge from Hong Kong, where the Government is making a conscious effort to position the territory as the regions international legal services jurisdiction of choice, especially in the area of arbitration.
The recent updating of the Arbitration Ordinance is an example of the government's continued efforts to strengthen Hong Kong's formal legal infrastructure to promote its status as an international dispute resolution hub. Major features of the new Arbitration Ordinance, which went into force on June 1, 2011, include the protection of confidentiality in arbitration proceedings as well as court hearings related to those proceedings. This new law is designed to strike an appropriate balance between safeguarding confidentiality in arbitration and protecting the other substantive legal rights of the parties.
Hong Kong arbitral awards are enforceable in more than 140 contracting states to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, and in China by virtue of a mutual legal assistance arrangement reached in 1999. By December 2011, the Hong Kong International Arbitration Centre had handled more than 170 international arbitration cases, and was ranked second in Asia in terms of the number of its cases in 2010.
In terms of exports of legal services, Hong Kongs customers are mostly regional offices of foreign multinationals, investment banks, developers, construction companies, industrialists, etc., which have substantial business interests in the region and would seek legal advice from time to time to safeguard their interests. However, demand for Hong Kong's legal services support comes mainly from foreign and Hong Kong companies which have investments or are planning to invest in the Mainland.
Also, under the Hong Kong China Closer Economic Partnership Arrangement (CEPA), barriers to trade in services, including the provision of legal services, have been reduced. CEPA allows Hong Kong law firms which have set up representative offices in mainland China to form 'associations' with Chinese law firms. Mainland law firms can also employ Hong Kong legal practitioners. Mainland China is expected to increasingly be an important market for Hong Kong's professionals, particularly in the light of Chinas accession to the WTO, and the ongoing liberalization of professional and other services under CEPA.
Although economies remain depressed in many parts of the world, particularly in Europe and the United States with talk of double and triple dips, the fact that international law firms are growing to meet the demand for their services from clients in Asia and other emerging markets suggests that this is an industry with a bright future.
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