British Virgin Islands: Offshore Business Sectors
Financial Holding and Investment
The phenomenal growth of the BVI International Business Company (IBC) was fed by political instability in Latin and Central America, and more recently the handover of Hong Kong to mainland China. It is difficult to be sure why the BVI became the jurisdiction of choice for these markets. It is true that the IBC has been highly flexible; that secrecy is good; that the BVI's reputation is good; and, that there is common law but other jurisdictions could make similar claims. In any case, it happened, and the IBC's success has had a knock-on effect in terms of the diversity and professionalism of supporting services in the BVI. The authorities are keen to expand into new markets, and will no doubt legislate further to open up new possibilities.
The great majority of IBCs were formed as asset protection vehicles, sometimes in association with trusts, either to hold shares or other types of asset.
Responding to international pressure, the BVI Government has legislated to restrict bearer shares. The International Business Companies (Amendment) Acts of 2003 and 2004 provide the legal framework for immobilising bearer shares. The Acts came into force on 1 January 2005. The Financial Services Commission (Amendment) Act of 2004 addresses the regulatory framework for immobilising bearer shares, in particular the rules governing custodians.
Companies formed before 1 January 2005 had until 31st December 2009 to comply with the new rules. Companies formed after 1st January 2005 must comply from their date of formation.
An Authorised Custodian is a person who holds a valid licence issued under the Banks and Trust Companies Act 1990 ("BTCA"), and whose licence specifically includes an authorisation permitting the holder to act as a custodian. Recognised Custodians are persons not licensed under the BTCA and not resident in the British Virgin Islands but who are specifically approved by the Financial Services Commission as Recognised Custodians. At the time of writing, there are 13 such custodians.
In December 2009 the Hong Kong Stock Exchange (HKEx) announced that the BVI had been placed on its list of acceptable jurisdictions for an issuer’s place of incorporation under Chapter 19 of the Listing Rules, paving the way for the listing of BVI-incorporated companies on the exchange.
The decision by the HKEx means that companies wishing to list shares on the exchange can do so under a less stringent process, detailed within a guidance note available on the HKEx's website, rather than applying as an overseas company.
Commenting on the announcement, law firm Conyers Dill and Pearman, which has been involved in over 40 listings on the exchange by BVI companies, said that whilst it would significantly reduce red tape, BVI companies may need to alter their articles of incorporation to enhance shareholder protection to comply with Hong Kong securities legislation. Under the legislation, an applicant must satisfy the following criteria:
Amend its memorandum and articles to address certain issues of shareholder protection where the protection afforded to shareholders is considered less stringent than in Hong Kong; and
Demonstrate a reasonable nexus between its place of incorporation and its place of business operations.
According to Conyers Dill and Pearman: “the key advantage for British Virgin Islands companies in being able to list directly on the Hong Kong Exchange is there should be no need for an applicant to undertake either (i) a restructuring of its business and operations through the establishment of a new Bermuda or Cayman Islands holding company or (ii) a redomicile of its place of incorporation by way of merger or continuation, prior to listing. This would be of particular benefit for companies incorporated in the British Virgin Islands:
- with a listing on another exchange who wish to have a secondary listing in Hong Kong and avoid the time, cost and expense of such a restructuring or redomicile; or
- used as a private equity investment vehicle with complicated convertible preferred share type structures, where a restructuring of the sort described above may not be readily achievable, or only achievable with difficulty, due to the need to obtain multiple preferred shareholder and other approvals.”
“In light of the popularity of British Virgin Islands companies as special purpose vehicles for investments in Asia, and particularly the People’s Republic of China, the Hong Kong Exchange’s decision provides investors in such companies with a further route to exit investments through a listing on a highly regarded, Asian-focused, stock exchange. In addition, for those entities incorporated in the British Virgin Islands with operations in Asia but a primary listing on another stock exchange (i.e. AIM, NASDAQ), a secondary listing on a more market appropriate exchange is now easily within reach.”