Some Misunderstandings about Transferring Cayman Islands or British Virgin Islands Shares on Death
This article first appeared in International Financial Law Review’s May 2012 issue.
This article addresses some of the common misconceptions about transferring shares in Cayman Islands and British Virgin Islands ("BVI") companies after the death of the shareholder. The legal issues are not unique to the Cayman Islands or the BVI. They arise in almost all common law jurisdictions that have adopted English law.
Unity of the Estate
As a first step, it is important to understand one of the principles of common law: "unity of the estate". This is a technical legal term that can be translated as: "a man must be just before he is generous".
The estate of any deceased person has to be dealt with as a whole because the assets of a person in any jurisdiction have to be available to pay his or her creditors in any other jurisdiction. Inevitably, the surest way in any legal system of centralising questions of who has authority over the property of others is through the courts. So there is a court procedure in the Cayman Islands or in the BVI as a necessary step in transferring the shares of the deceased shareholder to whoever may be entitled to them.
Some popular misconceptions
This is at odds with some of the misconceptions that prevail: "I am sure my spouse will be entitled to the shares" or "the directors of the company know what I want them to do with the shares when I die" or "I have left a power of attorney in the hands of a trusted adviser and he knows what to do" or "I have signed an undated share transfer form and my trusted adviser, when he hears that I have died, will fill in the date of the day before I died".
There are some other attempts to deal with this problem. They are all variations on a simple theme: a basic nomineeship. The "real" shareholder arranges for an obedient nominee to hold the shares in the name of the nominee for the real shareholder. The nominee is sometimes the chauffeur, the gardener or even the infant children of the real shareholder. But this solution fails for a number of reasons.
First, since the original shareholder owned the beneficial interest in the shares, the beneficial interest under the nomineeship is part of the estate of the deceased and the deceased's personal representatives as a matter of Cayman Islands or BVI law are the only people who can tell the nominee what to do with the shares. Second, using a nominee does not achieve the shareholder's objective if the nominee dies before the shareholder. Not only will the nominee no longer be able to transfer the shares, but there is now the necessary legal process for transferring the shares from the name of the deceased nominee.
The same principle of unity of the estate is relevant, but this time as it applies to the estate of the deceased nominee. Cayman Islands law and BVI law recognise the rights of the personal representatives of the deceased nominee. The nominee's liabilities to third parties as nominee are liabilities of his personal estate but he is entitled to be reimbursed for them from the shares. Therefore, the personal representatives of the deceased nominee need to have the same access to the shares that the deceased nominee had immediately before he died. So the law protects the personal representatives of the deceased nominee by recognising their lien over the shares as security for their right of reimbursement. While this may seem complicated, it achieves the necessary balance between competing rights over the same assets.
For those reasons, therefore, a nomineeship will not provide protection or certainty of succession to the shares.
Changing the share register
The critical decision about re-registering the shares of a deceased shareholder in the name of a new shareholder falls to the directors of the company in question. They control the share register and only they can decide whether the evidence put to them about who is entitled to those shares is satisfactory.
The lawyers to the company will advise the directors that they should not make any transfer without sight of a sealed document issued by the court of the Cayman Islands or the BVI (as the case may be) naming the personal representatives. The risk for the directors is obvious: if they decide to act on less than this evidence, the personal representatives recognised by the court may arrive later with all the correct paperwork and demand the transfer of the shares.
Executor "de son tort"
There are further dangers in this situation. As a matter of common law, if somebody meddles with the property of a deceased person, whether or not they have obtained the authority of the court, they may be classified as an executor "de son tort" which, essentially, means that they are self-appointed by accepting that responsibility. By accepting that responsibility, they are taken to accept all the responsibilities of being an executor.
The procedure for the correct transmission of property on death is complicated where different systems of law are involved.
The process starts with the law of the place of the property in question. For company shares, this is almost invariably the place where the register of those shares is kept. For most Cayman Islands and BVI companies, this will be in the Cayman Islands or the BVI. On that basis, the question of succession to those shares is governed by Cayman Islands or BVI law as the case may be.
The legal systems of both the Cayman Islands and the BVI refer the question of the succession of movable property (shares in a company are movable property) to the laws of the jurisdiction of the domicile of the deceased. Unfortunately, in many countries that use Cayman Islands and BVI companies, the concept of "domicile" is relatively unknown. For example, many civil law countries will refer to nationality, citizenship or residence in comparable circumstances. Domicile is not necessarily the same as any of these.
Those seeking to become the registered owners of the shares will have to take legal advice in the jurisdiction of the domicile of the deceased to establish whether or not they are entitled as a matter of the laws of that jurisdiction. If they are, then the next step is to assemble the evidence proving their entitlement under the laws of the domicile of the deceased and to put it before the court. If the court is satisfied, it will issue the grant of representation to the applicants. They can then take that court-sealed document to the directors of the company, ideally accompanied by the share certificate. The directors, on sight of the court-sealed grant of representation, should be willing to transfer the shares.
This can take at least six months and often much longer. This is not the time taken by the court (which normally moves quite quickly); it is the time required to assemble all the documents, to do the necessary research into the history and to obtain the legal advice.
Between death and the grant of representation by the relevant court, the shares are paralysed. Nobody can vote those shares and nobody can give a receipt for any dividend paid on them. Nobody can transfer those shares and nobody can sell them. The worst scenario, of course, is where the deceased was the sole shareholder and sole director of the company. In the Cayman Islands, this can cause the circular problem that there is no director able to change the share register but there is no registered shareholder capable of passing a shareholder's resolution to appoint a new director. In the BVI, on the other hand, there is the concept of a "reserve director", a creature of BVI company law who is authorised to step in, if nominated, as a director on the death of a deceased sole director.
Matters are more complicated still where the deceased died domiciled in a civil law country that gives fixed portions of the estate of the deceased on the surviving spouse and surviving children. In those circumstances, the deceased's shareholding may be broken into unequal fragments between the surviving spouse and children. It is not hard to imagine a deceased shareholder with children by a first marriage, a surviving spouse of the second marriage and infant children of the second marriage. With the surviving spouse as guardian for the infant children of the second marriage, the surviving spouse may hold the balance of power, to the dismay of the children of the first marriage. Because Cayman Islands law and BVI law, as explained above, refer the question of who is entitled and in what fractions to the jurisdiction of the domicile of the deceased, Cayman Islands law and BVI law will honour those forced heirship laws, even if this produces crippling disagreements within the family.
The solution: a lifetime trust
The solution to most of these problems is simple. The deceased should take advantage of the laws of the Cayman Islands and the BVI that allow an individual to settle the shares on a trustee who will largely hold them for and subject to the management of the original shareholder during his lifetime and will then distribute the shares according to the trust deed. The important thing, of course, is that the shares are no longer in the name of the deceased so his death does not affect the ownership or voting of those shares.
Legislative advances such as reserved powers trusts have codified and therefore put beyond doubt the nature and scope of the powers and rights that the grantor of a trust can reserve or confer on others. He can retain full powers of revocation and amendment and rights to either income or capital. Equally important, he can retain full management. Concerning his daily management of the relevant company, he need not see any significant change merely for the fact of the setting up of the trust.
On the death of the shareholder, the trust deed will tell the trustee what to do. For example, the trust deed may tell the trustee to divide the shares between the deceased's family. If the trust is properly set up during the shareholder's lifetime, there is further specific Cayman Islands and BVI legislation that prohibits any challenge to the trust or the gifts made under the terms of the trust on the death of the shareholder brought by children or spouses purely because the trust does not achieve the same result for them personally as the heirship laws of the home jurisdiction of the shareholder.
A will is not sufficient
It is sometimes thought that a will, particularly a will limited to property in a specific place, can resolve many of these issues. But that is incorrect. The problem is not that there is no will but that the shares are the name of an individual who has died. A will does not speed up the process between death and the court issuing a grant of representation. A will still has to be limited to what the deceased could have done with his property under the laws of his domicile (and so the same foreign and local documents are needed for the application to court for the grant). A will is therefore incapable of taking advantage of the anti-forced heirship legislation in the Cayman Islands or the BVI. A will is also subject to the "unity of estate" rule, also described above. Therefore, even if there is a valid will appointing specified executors, those executors have an obligation to contact the home jurisdiction representatives to make sure there are no unpaid debts in the estate of the deceased globally. This can bring the shares to the attention of the home jurisdiction executors (of which they may not have been aware), which may trigger reporting and taxation obligations.
As has been explained, there are many subtle and complicating questions that can arise in what might otherwise seem to be a simple matter: the death of a shareholder and the transfer of his shares. The law tries to strike a balance between the inheritance expectations of the next generation and the rights of creditors of the deceased. The law also has to provide a logical and effective series of steps to ensure that there is a predictable mechanism for finding the answers to these questions.