The British Virgin Islands as a Domicile for Closed-end Fund Companies
Asset managers seeking to structure a closed-end fund vehicle will have many initial considerations, including the proposed asset and investor base, the anticipated return and exit strategies. Amongst these initial considerations will be the legal entity that will be used as the fund vehicle. In this respect the merits of a company and a limited partnership will invariably come under discussion.
For closed-end funds where a fixed amount is to be paid on subscription with respect to fixed investment terms, a company will often be the favoured vehicle. A limited partnership is more often used in the private equity environment where a commitment will be sought from investors and this commitment will be drawn down over time by the manager on an as-needed basis and where the terms upon which investors participate may vary. For the purposes of this article, we have focussed upon the fund vehicle (and the management company) being companies incorporated under the BVI Business Companies Act, 2004 (the "Act").
Once a decision has been made to structure the fund vehicle as a company, the question becomes one of where to incorporate. Clearly, asset managers have a choice of jurisdictions, of which the most popular include the Cayman Islands and the British Virgin Islands (the "BVI"). Each is a common law jurisdiction with robust, creditor friendly legislation and widely recognised as a fund domicile.
As the number of closed-end funds are not reported, given that such funds are not regulated, in contrast to open-ended funds where numbers are published, it is difficult to gauge quite how many closed-end funds are domiciled in the BVI but our experience as one of the leading law firms involved in the establishment of funds would suggest that the BVI's market share for such funds is on the increase. But a decision to incorporate in the BVI should not be based simply on a continuing trend to domicile there. So why BVI?
The BVI statutory framework offers a number of particularly attractive features for fund managers:
(a) the Act gives companies incorporated under it a great deal of freedom to establish its share rights, distribution waterfall and constitution in its memorandum and articles of association (the "M&As"), subject to a requirement to state certain administrative information. This means, for example, that a fund company can provide for multiple classes of shares, each with specific rights. This enables a class of voting, non-participating shares to be created and held by the manager and various classes (If required) of non-voting, participating shares to be held by investors;
(b) there is no requirement for a company to state its authorised share capital (i.e. a fixed amount divided into a fixed number of shares with a par value), but rather the requirement is simply to state the maximum number of shares they are authorised to issue or that the company is authorised to issue an unlimited number of shares, which reduces the risk of issuing more shares than are authorised for issue;
(c) the Act vests wide ranging powers with the directors; one of the most significant powers of the directors is the ability to amend the M&As in certain circumstances. This facilitates amendments of an administrative nature and changes which do not amend share rights;
(d) the fiduciary duties of directors have been codified in the Act giving statutory standing to the duties to act honestly and in good faith, in what the director believes to be the best interests of a company. A feature of the Act is that it permits a director of a subsidiary company to exercise this duty by acting in the best interests of a holding company, even though it may not be in the best interests of the company of which he is a director, if so authorised by the memorandum or articles of association. In a closed-end fund context, this may be of relevance where trading subsidiaries are incorporated in the BVI to hold discrete assets of the fund company;
(e) recent regulations contain detailed provisions for the registration of foreign character names for BVI companies as well as their amendment and de-registration. A BVI company is permitted to register an "additional foreign character name" which does not necessarily need to be an equivalent translation or transliteration of the English name. This new feature creates a greater degree of flexibility in relation to company names and enables the use of Chinese and other non-Roman characters;
(f) payments of dividends and other distributions are subject to a simple solvency test and there is no concept of any protected capital or share premium. A company may make a distribution if its directors are satisfied on reasonable grounds that, immediately following the distribution, the value of the company's assets exceeds its liabilities and it is able to pay its debts as they fall due; and
(g) BVI Business Companies can be formed with or without a specified term limit. Once the term of the company has come to end, the Act provides a straightforward and efficient mechanism for its voluntary liquidation, involving a number of simple statutory filings and the appointment of a liquidator who does not need to be a licensed insolvency practitioner.
Managers of BVI closed-ended funds and the Approved Manager Regime
Managers of and advisors to closed-ended funds structures have often chosen to operate their businesses through BVI companies. Following the adoption by the BVI of the Securities and Investment Business Act, 2010 ("SIBA"), these companies have been required to obtain a full investment management license. In December 2012, as an alternative to becoming a fully licensed manager, the BVI created a regime for managers falling within certain de minimis levels to apply to be registered as an approved investment manager by the BVI's Financial Services Commission (the "Commission") and be subject to a lighter touch regulatory regime (the "Approved Manager Regime").
The qualifications for access to the Approved Manager Regime for managers and advisors of closed-ended funds are that:
(a) the manager or advisor is incorporated as a company or formed as a limited partnership in the BVI (a "BVI Manager");
(b) the BVI Manager only acts as investment manager or investment advisor to closed-ended funds incorporated, formed or organised under the laws of the BVI, together with their feeders and affiliates;
(c) the closed ended funds have the characteristics of a private or professional fund; and
(d) the total closed-ended fund assets managed by the approved manager do not exceed US$1 billion.
In relation to whether a closed-ended fund has the characteristic of a private or professional fund, the Commission has confirmed that closed-ended funds that are restricted by their constitution to issue interests only to professional investors (as defined in SIBA) and have a minimum investment threshold of US$100,000 will have the character of a professional fund; closed-ended funds that are restricted by their constitution either (i) to issuing interests to not more than 50 investors or (ii) to offering interests on a private basis only will have the character of a private fund.
The application process is relatively straight forward and applications should be processed within 30 days of submission. For more details on the Approved Manager Regime, please see the accompanying article here.
Given the simplicity of the application process, the lighter touch regulatory approach and the speed with which the application is to be processed, this regime is expected to be popular with start-up and existing mid-size managers who will look to take advantage of the lower cost of compliance to achieve greater efficiencies in their business.
For more details on structuring a closed-ended fund or an approved investment manager, please contact your usual Maples and Calder contact or any of the individuals listed above.