Contributed By Conyers
The principal statute governing the formation and operation of a BVI business company is the Business Companies Act 2004, as amended (the BC Act). The BC Act regulates the incorporation of all types of BVI companies, including those limited by shares, those limited by guarantee, unlimited liability companies, restricted-purpose companies and segregated portfolio companies. However, the most common form of company in the BVI is a company with limited liability authorised to issue shares.
Business companies provide the most flexibility and are a popular choice for incorporations. They are of particular value for structures with investors from different jurisdictions, where a neutral vehicle is required.
There are no qualification criteria under BVI law that impose restrictions on which shareholders may invest in a BVI business company. However, any beneficial owner who owns 10% or more of the voting shares of a BVI business company, directly or indirectly, will need to satisfy the registered agent’s "know-your-client" requirements.
There is substantial flexibility in the types or classes of shares that a BVI business company may issue. A business company may issue shares with or without par value. The most common type of shares are ordinary shares. The BC Act does not stipulate separate share classes or shareholders’ rights attaching to particular classes of shares.
A business company may issue shares:
The rights are set out in the business company’s memorandum of association (Memorandum).
Shareholder approval is typically required to vary a special or class right, and the requirements for such approval are set out in the company’s articles of association (Articles). A purported variation of such a right without the necessary approval would likely be ineffective.
There is no concept of share capital under the BC Act. Business companies incorporated under the BC Act are authorised to issue a specific number of shares, or the company's Memorandum may provide that the company is authorised to issue an unlimited number of shares. The BC Act also provides that, subject to the company's Memorandum and Articles, shares can be issued with or without a par value and in any currency. The BC Act also permits the company to issue fractional shares.
The minimum number of members is one. A member can be an individual, a company, a partnership or a trustee on behalf of a trust.
There is no requirement under the BC Act for a member to be resident in the BVI.
Shareholders’ agreements/joint venture agreements are common in the BVI. The shareholders of a business company may enter into shareholders’ agreements, and the BVI courts will generally seek to respect the commercial arrangements agreed by the parties thereto.
The BVI is a popular jurisdiction for the establishment of corporate vehicles for the purposes of joint ventures. There are a number of reasons for this, including the speed of incorporation of business companies, the tax neutrality offered by a BVI business company and the ability for BVI business companies carrying out joint ventures to modify common law directors’ duties by providing, in their Memorandum and Articles, that a director may act in the best interests of a shareholder, even in circumstances where a decision may not be in the interests of the company.
Shareholders’ agreements/joint venture agreements are generally enforceable if they are drafted in compliance with BVI law and common law principles.
Any such shareholders’ agreement does not operate to amend or modify the shareholders’ rights as set out in the business company’s Memorandum or Articles, which govern the rights of shareholders. The effect of the shareholders’ agreement is that the parties thereto may be stopped from enforcing the particular shareholder rights in that respect.
Shareholders’ agreements are occasionally incorporated by reference into the Memorandum and Articles. Whilst the position is not free from doubt, the view exists that this reference is not effective and that the shareholders’ agreement would not be incorporated in the Memorandum and/or Articles as a consequence of such a reference. Rather, to the extent that the shareholders’ agreement deals with matters that are governed by the Memorandum or Articles, the provisions need to be expressly set out in the Memorandum and Articles.
The main reason why a shareholders’ agreement/joint venture agreement may not be enforceable as a matter of BVI law is due to inconsistencies between the terms of such agreements and the Memorandum and Articles. While there is some case law where the courts have sought to honour the commercial agreement between the parties, even where the shareholders’ agreement/joint venture agreement is inconsistent with the Memorandum and Articles, it should be noted that the relevant cases generally involve unsophisticated individual shareholders. Therefore, proceeding to draft a shareholders’ agreement/joint venture agreement that is inconsistent with the Memorandum and Articles carries some risk for sophisticated parties.
A further consideration is that a shareholders’ agreement/joint venture agreement is only binding on the parties to the agreement. The Memorandum and Articles bind the company as well as all current and future shareholders.
There is no requirement under the BC Act for a shareholders’ agreement/joint venture agreement to be publicly filed in the BVI.
There is no requirement under the BC Act for a business company to hold an annual general meeting of its shareholders.
The BC Act specifies that the minimum notice for a shareholders’ meeting is seven days. The BC Act does allow for a longer notice (but not a shorter notice) to be specified in the Memorandum or Articles.
Service of notice on shareholders is typically governed by the Articles, which will specify the manner in which notice may be validly given. In the absence of notice provisions in the Memorandum or Articles, notice may be given by:
Under the BC Act, shareholders holding at least 30% of the voting shares of a business company (or a lower ownership percentage as specified in the Memorandum or Articles) may compel the directors to convene a shareholders’ meeting.
Meetings of members can be called as the directors consider necessary or desirable, and can be held within or outside the BVI.
Notice of a shareholders’ meeting is required to be given to all persons who are entitled to vote at the meeting and whose names are recorded in the register of members on the date the notice is given. The Memorandum or Articles may specify the information that should be contained in the notice.
Under the BC Act, a member is entitled, upon giving written notice to the company, to inspect the following:
If they are satisfied that it would be contrary to the company’s interests to allow the member to inspect any document, the directors may decline to make it available. The relevant member may apply to the BVI court for an order that they should be permitted to inspect the relevant document.
The BC Act provides that, subject to the Memorandum or Articles of the BVI business company, a member may attend a meeting of the members by telephone or other electronic means, provided all members participating in the meeting are able to hear each other. The Articles of most BVI business companies contain parallel provisions. Accordingly, subject to a review of the constitutional documents, BVI companies are typically permitted to hold virtual shareholders’ meetings.
Typically, the quorum for a meeting of the shareholders of a business company will be stated in the Memorandum or the Articles. Where the Memorandum and Articles are silent as to the quorum requirements, the BC Act states that the quorum for a properly constituted shareholders' meeting will be shareholders entitled to exercise at least 50% of the votes, present in person or by proxy.
The BC Act makes no distinction between different types of resolutions. Instead, a resolution is passed if it is approved by a majority in excess of 50%, or by any higher majority as required in the Memorandum and Articles, of those members or directors (as applicable) entitled to vote and voting on the resolution.
Shareholder approval is generally required to vary a class right, as set out in the Memorandum or Articles. Without the requisite shareholder approval, a variation of a class right is ineffective. Class rights are generally considered to be the right to vote, the right to receive dividends and the right to receive payments upon a winding-up, although the case law is not clear as to precisely what constitutes a class right.
Furthermore, the courts have tended to apply a narrow interpretation of what constitutes a variation of a share right, particularly in relation to the determination of when a variation of a class right attached to one class of shares also has the effect of varying a class right attached to another class of shares.
A variation of shareholder rights would require an amendment to the Memorandum and Articles in order to be effective. The BC Act provides that:
Therefore, it is theoretically possible to state in the Memorandum or Articles that certain shareholder rights may not be amended, although it would be unusual to introduce such a degree of inflexibility in the business company’s constitutional documents. It would be more typical to set the required majority for the shareholder approval at a threshold higher than a simple majority.
The BC Act does not prescribe the procedure to be followed in relation to voting at a shareholders’ meeting, whether held as a physical meeting or by virtual means. However, the Articles of BVI companies will typically set out any specific voting procedure to be followed at a shareholders’ meeting. It is not uncommon for the Articles to state that the chairman shall be responsible for deciding whether any resolution has been carried or not, in whatever manner they consider appropriate, and the result of their decision shall be announced to the meeting and recorded in the minutes thereof.
Under the BC Act, shareholders do not have the ability to require specific matters to be raised at a shareholders’ meeting. Rather, prior to the notice of a shareholders' meeting being circulated, a shareholder may recommend to the directors that particular matters are included in the notice of the shareholders' meeting for discussion at the meeting. However, the directors are under no legal obligation to include any such matters in the notice of the shareholders' meeting.
Shareholders may require the directors of a business company to call a shareholders' meeting if they are entitled to exercise at least 30% of the voting rights in respect of the matter for which the shareholders' meeting is requisitioned (or a lower percentage as specified in the Memorandum or Articles). If the directors do not call the meeting, the shareholders may apply to the BVI court to order the meeting to be held.
A member may be able to bring a subsequent challenge to a resolution passed at a general meeting under one of the shareholder remedies discussed in 7.1 Remedies Against the Company. The Articles may also specify a procedure for shareholders to challenge the outcome of a shareholder vote.
Any action that may be taken by the members in a meeting may also be taken by a resolution of members consented to in writing, without the need for any notice.
The shareholders of a business company acting by resolution have the right to appoint and remove directors from the board, unless the Memorandum or Articles provide otherwise. In the case of the removal of directors from the board of a business company, this right may be exercised by the shareholders holding at least a simple majority of the votes in a shareholders' meeting specifically called for the purpose of the removal of a director, or if the purposes of the shareholders' meeting include any such removal.
Where the shareholders exercise the right to remove a director by passing a written resolution, a majority must be of at least 75% of the shareholders entitled to vote (or, in either case, other thresholds specified in the Memorandum or Articles).
Under BVI law, shareholders are not entitled to intervene directly in decisions made or actions that may be taken by the directors. The directors of the business company are required to comply with their common law duties as well as specific duties imposed under the BC Act. The common law duties encompass:
The statutory duties imposed by the BC Act include the duty to act honestly and in good faith, and in what is believed to be in the best interests of the company.
Shareholders of a business company may seek remedies such as injunctions against the board if it is proposing to take an improper action or, as is more likely to be the case, pursuing a claim for damages or other restitutionary remedies in the wake of a particular decision or action by the board of directors. The BC Act prescribes penalties for a breach by a director of their statutory duties.
It should be noted that the mere fact that a decision taken by a director is wrong or not beneficial to a particular shareholder does not necessarily present grounds for liability on the part of the director.
The BC Act does not impose an obligation on business companies to prepare an annual audit, nor to appoint auditors in relation to its financial statements. This does not preclude a business company from electing to appoint auditors and carry out an annual audit, particularly where it is part of a corporate group that is subject to audit requirements in another jurisdiction. Subject to the terms of the Memorandum or Articles, an auditor may be appointed by the directors or the shareholders.
It should be noted that certain types of business companies may be subject to regulatory obligations that require the appointment of an auditor. Typical examples are insurance companies and investment funds.
The register of members of a business company is not a public document, except where the business company has elected to file its register of members with the BVI Registrar of Corporate Affairs. Public filing of the register of members is sometimes carried out where security has been granted over the shares of the business company, and the lender or charge holder requires such a filing.
The registered agent of the business company has a duty under the BVI "know-your-client" laws to collect prescribed information in relation to each of the beneficial owners of a business company. However, this information is not in the public domain.
Unless otherwise restricted in the Memorandum or Articles, shareholders of a business company are entitled to grant security interests over their shares. Under the BC Act, a mortgage or charge over shares in a business company is required to be in writing and signed by, or with the authority of, the registered holder of the shares to which that mortgage or charge relates. There is no specific form for a mortgage or charge over shares prescribed in the BC Act; however, whatever form is adopted must clearly state the intention to create a mortgage or charge and the amount secured by the mortgage or charge or how that amount is to be calculated.
Disposing of Shares
In the absence of any restrictions or limitations on the transfer of shares contained in the Memorandum or Articles, shares in a business company are freely transferable. The process for transferring registered shares involves a written instrument of transfer signed by the transferor, containing the name and address of the transferee. The signature of the transferee is required under the BC Act where the transferee as registered holder of the share would incur a liability to the business company.
In general, upon receipt of a duly executed instrument of transfer, a business company, acting by a resolution of the directors, will enter the name of the transferee in the register of members, which gives the transferee title to the shares. If permitted to do so under the Memorandum or Articles, the directors of a business company may resolve to refuse or delay the registration of the transferee as the registered holder of the shares, for reasons that must be stated in the relevant directors’ resolution.
As an alternative option for a shareholder wishing to dispose of their shares, the BC Act allows a business company to acquire its own shares for no consideration by way of the registered shareholder surrendering the share to the business company. A surrender of shares under the BC Act is effected in writing and signed by the registered shareholder.
The shareholders of a business company may, if they wish, agree to be bound by transfer restrictions contained in a shareholders’ agreement or joint venture agreement. These transfer restrictions typically include pre-emption rights, coat-tails, drag-along rights and tag-along rights. It is common to include a provision in the shareholders’ agreement/joint venture agreement stating that any transfer of shares in the business company that is not in compliance with the contractual transfer restrictions will be null and void.
Under BVI law, in order to ensure that any transfer of shares in breach of the transfer restrictions contained in a shareholders’ agreement/joint venture agreement is null and void, the relevant transfer restrictions should be included in the Memorandum or Articles. Otherwise, a transfer in breach of these transfer restrictions will constitute a breach of contract rather than being null and void under BVI law. A further benefit of including the transfer restrictions in the Memorandum and Articles is that specific performance will then be available as a remedy. If not included, it is possible the courts may only award damages for a breach of the terms of the shareholders’ agreement/joint venture agreement.
Transfer restrictions may also be included in an instrument creating a charge or mortgage over the shares of a business company. If the governing law of the relevant instrument is not BVI law, the business company will need to be a party and the instrument will need to be in compliance with the legal requirements of the applicable governing law in order for the mortgage or charge to be binding on the business company.
The remedies available to the mortgagee or charge will be determined by the applicable governing law. The relationship between mortgagor/mortgagee, in its capacity as a shareholder, and the company will be governed by BVI law, regardless of the governing law of the instrument.
Subject to anything in the Memorandum and Articles, a business company may make a distribution (which term includes by statutory definition a dividend) if the directors are satisfied that the following conditions will be met immediately after the payment:
Rights in the Event of Insolvency
The primary statute in the BVI pertaining to the insolvency of business companies is the Insolvency Act 2003 (IA 2003), under which a business company is insolvent if:
If a business company is insolvent under the IA 2003, a shareholder may make an application to the BVI court to appoint a liquidator of the business company. The application by the shareholder to appoint a liquidator may only be made with the leave of the BVI courts, which will not grant leave unless they are satisfied that there is a prima facie case that the company is insolvent based on the test in the IA 2003.
Appointing a Liquidator
The shareholders may also appoint an insolvency practitioner as liquidator of the business company out of court by passing a "qualifying resolution", which is a resolution passed at a properly constituted meeting of the business company by a majority of 75% of the votes of the shareholders present at the meeting and entitled to vote, or any higher majority stated in the Memorandum or Articles. The shareholders are not permitted to use the out-of-court route if a liquidator has already been appointed by the BVI court or if an application to appoint a liquidator is pending with the BVI court.
Under the IA 2003, shareholders’ equity ranks last in the priority of payment in an insolvency, including as regards liquidation costs. In the liquidation of a business company, shareholders are prevented from claiming any sums due to them in their capacity as a shareholder, which includes dividends, profits, redemption proceeds or other amounts. The extent to which a shareholder has a claim for any of these amounts will be taken into account in the final determination of the rights of the shareholders (and former shareholders) between themselves only.
The shareholders of a business company have a number of statutory and common law remedies available to them in an action against the business company.
Restraining or Compliance Order
Under the BC Act, if a business company engages in, proposes to engage in or has engaged in conduct that contravenes the BC Act or the Memorandum or Articles, a shareholder (including a minority shareholder) may apply to the BVI court for an order directing the business company to comply with, or refrain from, conduct that breaches the BC Act or the Memorandum or Articles. The BVI court may also grant any such consequential relief as it thinks fit. At any time prior to the determination of the shareholder’s application, the BVI court may make, as an interim order, any order that it could make as a restraining or compliance order under the BC Act.
This is a relatively straightforward statutory procedure that allows a shareholder to enforce their statutory or share rights against a business company.
The BC Act contains a right for a shareholder to bring a personal action against a business company for any breach of duty owed by the business company to that shareholder as a member. This provision of the BC Act places a common law remedy on a statutory footing under BVI law. This is a remedy that would also be available to a minority shareholder of the business company.
The BVI court has the statutory power to make an order appointing one shareholder as a representative of some or all shareholders sharing an interest in relation to the proceedings against the business company. The BVI court may make any such orders as it sees fit, including but not limited to in relation to:
Oppression, Unfair Discrimination and Unfair Prejudice
A shareholder who is of the view that the affairs of the business company have been, are being or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the shareholder has certain remedies available to them under the BC Act. The statutory remedies under the BC Act are discretionary, and the BVI court will exercise its power to grant relief when it is just and equitable to do so.
The BC Act prescribes eight non-exclusive remedies, including:
These provisions provide robust remedies for minority shareholders and will often make up the basis of a claim in the BVI courts by a minority shareholder.
A shareholder may apply to the BVI court for a restraining or compliance order under the BC Act in relation to any conduct by a director of a business company that contravenes the BC Act or the Memorandum or Articles, as discussed in 7.1 Remedies Against the Directors.
A shareholder may also use the statutory derivative action under the BC Act to bring a claim against a director of a business company for breach of fiduciary duty. The statutory derivative action regime is discussed further in 7.3 Derivative Actions.
In both cases, these remedies are available to a minority shareholder of a business company.
Under the BC Act, a shareholder may apply to the BVI court for leave to bring proceedings in the name of and on behalf of the business company, or to intervene in proceedings to which the business company is a party for the purposes of continuing, defending or discontinuing the proceedings on behalf of the business company. Whilst leave of the BVI court is required in order to bring a derivative action, the BC Act sets out five matters which the BVI court must take into account in making its determination:
It should be noted that leave will only be granted if:
Derivative actions are most likely to be used in the BVI in cases where there has been improper exercise of the voting power of the majority shareholders of a business company, an infringement of a shareholder’s rights or an issue with the corporate governance of a business company.
The BVI court has the statutory power to grant interim relief as it may deem appropriate, pending the determination of the application by a shareholder. In addition, at any time after granting leave to a shareholder in relation to a derivative action, the BVI court may make any order it deems appropriate, which could include giving directions for the conduct of the proceedings or an order requiring the business company, or its directors, to provide information or assistance in relation to those proceedings. The statutory provision expressly replaces the common law right to a derivative action.
BVI business companies are commonly used in international capital markets as listing vehicles. Such business companies are therefore subject to dual regulatory regimes, the first being the BC Act as the primary legislation under which the BVI listing vehicle was incorporated and the second being the rules and regulations of the relevant securities exchange.
The BC Act and the Memorandum and Articles of the BVI listing vehicle will play an important role in shareholder activism because they collectively govern matters such as:
The Memorandum and Articles are particularly significant in the context of shareholder activism, due to the fact that it is not uncommon to find protective provisions in the Memorandum and Articles of BVI-listed vehicles (for example, poison pills and staggered boards), designed to frustrate hostile takeovers.
The listing rules and regulations of the relevant securities exchange will typically regulate matters such as the disclosure requirements in relation to stake-building in a listed company and the enforcement of mandatory takeover obligations once a shareholder crosses a particular ownership threshold.
As BVI business companies are listed in a number of overseas jurisdictions, an assessment of the key aims of activist shareholders would most likely be dependent on the relevant securities market, as well as a variety of macro-economic factors.
Shares and Directors
The agenda pursued by activist shareholders commonly includes seeking a change of management (the directors and/or CEO), as the operational matters of a business company are the responsibility of the board of directors under BVI law. This is a common avenue for activist shareholders seeking to influence the future strategy of a business company.
Acquiring a minority stake in a business company (or increasing an existing minority stake) is likely to be a first step in the activist shareholder’s strategy. Following an acquisition, the approaches taken by an activist shareholder to advance their agenda may involve an initial "soft" approach, such as open or private letters to the board of directors of the business company. If the initial approach fails, an activist shareholder may seek to use the statutory right under the BC Act to request that a shareholders' meeting be convened, subject to the activist shareholder being entitled to exercise at least 30% of the voting rights (or any lesser percentage specified in the Memorandum or Articles). Gaining board representation is also a common activist shareholder strategy. Subject to provisions of the Memorandum or Articles, a director may be appointed or removed by the shareholders.
The BC Act permits shareholders holding 90% of the voting shares of a business company to redeem the shares held by the remaining shareholders. It should be noted that shareholders are entitled to use this statutory power at any time, subject to complying with the BC Act and, therefore, it may be used in a strategy that is employed by an activist shareholder if it manages to secure the requisite majority.
Another alternative available to an activist shareholder would be to proceed by way of a squeeze-out merger under the BC Act. A squeeze-out merger requires director approval of a written plan of merger, which must also be authorised by a resolution of the shareholders of the business company. In the case of a squeeze-out merger, the required shareholder approval is by simple majority and therefore a lower ownership threshold needs to be crossed than for a redemption of shares held by the minority shareholders.
As business companies are used across a variety of industries and sectors, it cannot be definitively stated that any specific industries or sectors have been targeted by activist behaviour.
As BVI business companies are listed in a number of overseas jurisdictions, an assessment of the types of shareholders that are particularly active would most likely be dependent on the relevant securities market, as well as a variety of macro-economic factors.
Information on the proportion of public activist demands in the last year that were met, either in full or in part, is more relevant to the appropriate exchanges rather than the BVI.
The typical strategies of an activist shareholder include a friendly transaction, a creeping acquisition and a hostile takeover. A business company’s response to the activist shareholder will vary, depending on the approach taken by the particular activist shareholder.
In response to a friendly transaction, the parties would likely negotiate a non-binding offer letter. When consummated, the transaction would typically take the form of a squeeze-out merger under the BC Act, although it is also possible to utilise a BVI court-approved scheme of arrangement or plan of arrangement. The latter two methods are less common in the BVI.
Gradual Acquisition of Shares
Where the activist shareholder gradually acquires additional shares in the market toward a control stake (ie, a creeping acquisition) and the board of directors of the business company view such actions as hostile, the business company may seek to impede or prevent the activist shareholder from acquiring a controlling stake, or seek a more acceptable transaction. In taking action to frustrate the potential acquirer, the board of directors of the business company will need to consider its fiduciary duties and act in the best interest of the business company.
Hostile Tender Offers
If the activist shareholder opts to launch a hostile tender offer, having been initially rebuffed by the board of directors of the business company, the board of directors should consider its fiduciary duties to determine whether it is in the best interests of the business company to frustrate the hostile takeover by, for example, seeking an alternative transaction on superior terms or deploying corporate defensive measures, such as a poison pill or shareholder rights plan, which may also be deployed in the circumstances of a creeping acquisition, if structured appropriately.