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Statutory Redemptions of Minority Shareholders in a British Virgin Islands Company

2012年 7月 12日

The BVI Business Companies Act, 2004 (as amended) (the "Act") provides a statutory framework whereby the majority shareholder(s) of a British Virgin Islands ("BVI") company have a right to force the redemption (or "squeeze out") of a minority shareholder at any time. 
This article seeks to provide a general outline of how this right can be exercised, the timelines involved and details of a recent court decision which has provided some useful guidance on how minority shares are to be valued (which is often contentious).

Directing the Redemption of Minority Shares

The rights of shareholders in a BVI company to "squeeze out" a minority shareholder are governed not only by the Act (at section 176), but also by the company's memorandum and articles of association, and any agreement between the shareholders.
 
Under the Act, subject to the memorandum or articles of a company:
 
(a)  shareholders of the company holding 90% of the votes of the outstanding shares entitled to vote; and
 
(b)  shareholders of the company holding 90% of the votes of the outstanding shares of each class of shares entitled to vote as a class;

may give a written instruction to the company directing it to redeem the shares held by the remaining shareholders.
 
Shareholders are entitled to use this power to direct the company to redeem the minority shares at any time, whether pursuant to a tender offer or otherwise.  Upon receipt of such written instruction, the company must redeem the shares specified in the written instruction irrespective of whether or not the shares are by their terms redeemable.

Notice of the Redemption

Each shareholder whose shares are to be redeemed must be given notice by the company, which must state the proposed redemption price and the manner in which the redemption is to be effected.  Although there is no prescribed form for such a notice, it must be given within seven days immediately following the direction given to the company (pursuant to section 176) to redeem the minority shares.  The proposed redemption price to be stated in the notice shall be a specified price that the company determines to be their "fair value".

Redemption Price by Agreement

The affected shareholder(s) and the company have 30 days after the notice has been given in which to negotiate and try to agree on a price.  If, within 30 days immediately following the date on which the offer is made, the company making the offer and the shareholder(s) agree upon the price to be paid for the shares, the company simply pays to the shareholder(s) the amount in money upon the surrender of the certificates representing their shares.

Appraisal of Fair Value

If the company and the minority shareholder (the "dissenter") fail, within 30 days, to agree on the price to be paid for the shares owned by the dissenter, then within 20 days (as to which, see below):
 
(a)  the company and the dissenter must each designate an appraiser;
 
(b)  the two designated appraisers together must designate an appraiser;
 
(c)  the three appraisers must fix the fair value of the shares owned by the dissenter as of the close of business on the day prior to the date on which the vote of shareholders authorising the action was taken, or the date on which written consent of shareholders was obtained, excluding any appreciation or depreciation directly or indirectly induced by the action or its proposal, and that value is binding on the company and the dissenter for all purposes; and
 
(d)  the company must pay to the dissenter the amount in money upon the surrender by him of the certificates representing his shares, and such shares are cancelled.
 
The BVI High Court confirmed in Brantley Inc v Antarctica Asset Management Ltd (2008) that the 20 day period referred to above is not an extension of the negotiation period, but is the timeframe within which the appraisal process must be started and completed.  If the 20 day period expires without anything having been done (whether intentionally or unintentionally) the Court has an inherent jurisdiction "to deal justly and fairly with matters of such nature". The Court has jurisdiction to order appraisers to be designated even though the 20 day period has passed, but the parties should not assume that the Court will consider it appropriate to do so in every case.

Discount for Minority Shares

The BVI High Court in HRH Prince Faisal v PIA Investments Limited (2011) was asked to consider that the dissenter will generally hold a small minority stake and whether the fair value should reflect the lack of marketability of minority shares (where there is no public market for the shares).  A contractual valuation provision would typically state whether a minority discount will be applied or not, but the Act is silent on the matter.
 
The Judge commented that "fair value" is capable of meaning different things in different cases; a discount for minority shares was only one component in determining fair value; and a determination of fair value might well require an assessment of the nature of the business of the company: where asset based valuations might be appropriate, an earnings approach may not.  It may be that where an assets based approach was used, the minority discount had no application at all.
 
The Judge also said that "fair" must apply to fairness to both parties but no particular gloss should be put on the phrase to impose a rule that a discount could not be applied due to the lack of marketability of minority shares. 

Agreement to Alternative Appraisal Procedures

The BVI High Court in HRH Prince Faisal v PIA Investments Limited (2011) also upheld the validity of an agreement between a dissenting shareholder and the company, by which they agreed that the fair value of the shares would be appraised under an alternative to the statutory appraisal process.
 
The Court held that the parties may contract out of the statutory mechanism for assessing fair value, which is "merely a mechanism for establishing a price".  If a particular dissenter prefers other machinery he is merely choosing a different route to achieve the same end.

Effective Date of Redemption of Shares

It is worth noting that the shares are not redeemed on the date written notice to the shareholder is given.  The shareholder remains a shareholder until the statutory process is completed.  However, upon the giving of a notice of election to dissent, the dissenter ceases to have any of the rights of a shareholder except the right to be paid the fair value of his shares, and the right to institute proceedings to obtain relief on the ground that the action is illegal.  Once the process has been completed and the "fair value" has been paid, the shares acquired by a company under this process are cancelled.


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