Trusts established under Cayman Islands law are well known for providing tax benefits, flexible structures and effective mechanisms for asset protection and management, with a legal framework based on English common law designed to enhance certainty in court decisions. Chinese high net worth (HNW) persons find these features appealing when seeking to separate personal wealth from risks. Once assets are properly settled into a trust, legal title passes to the trustee, removing them from the settlor’s personal estate and from creditor risks, other business risks, and certain political and economic risks.

Even accounting for CRS reporting obligations, and other rules and restrictions on the transfer of capital from China and other countries into offshore structures, there has been an increase in the use of BVI trusts by investors in Asia. As was shown by the Wahaha case, HNW families now acknowledge the importance and value of such planning in preserving and protecting wealth. Trusts, when properly established during the lifetime of the settlor, allow wealth to pass to beneficiaries outside of probate, avoiding the delays, publicity and costs of estate administration.

Both the Cayman Islands and the BVI have created special trust regimes that deal with the major concern around losing control of underlying businesses.

BVI VISTA trust. The VISTA regime in the BVI disapplies certain traditional trustee duties in relation to trusts owning shares in BVI companies. Although a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee. Key family members may also take up the role of an “Office of Director Rules Appointor”, which allows them to have control over the members of the board of the BVI company. The BVI VISTA trust therefore addresses families’ need for succession planning while retaining some level of control of the underlying companies.

Cayman STAR trust. The STAR trust is unique to the Cayman Islands and can be structured for specific purposes including for the health and wellbeing of family members and/or for the education of the family’s children overseas, giving settlors great flexibility to define outcomes and governance mechanisms.

The settlor may retain a degree of control over other aspects, such as the power to approve distributions, the power to appoint and remove trustees, and the power to revoke the trust.

Neither the BVI nor the Cayman Islands imposes taxes on income or capital gains on the assets in these trusts, increasing the interest of foreign investors. Both jurisdictions allow resident trustees and non-resident trustees to act, and both the BVI and the Cayman Islands remain tax-neutral with respect to the assets in the trust, which is particularly attractive for Chinese clients holding global assets.

From a confidentiality and asset protection perspective, the counterparty of a BVI company or a Cayman company will only see the trustee as the legal owner of the company, and the settlor’s details will not appear in any publicly accessible documents. This privacy is a significant advantage for clients concerned about reputational exposure or political sensitivity.

The jurisdiction where the judgment was obtained will determine which procedure (i.e. the 1922 Act or the common law) is used to enforce the foreign monetary judgment.

1922 Act

Monetary judgments from the following jurisdictions are covered under the 1922 Act:

1. England and Wales;
2. Scotland;
3. Northern Ireland;
4. New South Wales;
5. the Bahamas;
6. Barbados;
7. Bermuda;
8. Belize;
9. Guyana;
10. Grenada;
11. Jamaica;
12. Nigeria;
13. St Lucia;
14. St Vincent; and
15. Trinidad and Tobago.

The 1922 Act provides a simplified registration process for judgments originating from one of the abovelisted jurisdictions. In order for a foreign monetary judgment to be recognised, the judgment from the foreign court must be for a specified sum of money and be final and conclusive on the merits. The BVI court must be satisfied that the foreign court had jurisdiction over the judgment debtor, and that they were duly served. Registration would be prevented if, among other things, the judgment was obtained by fraud or registration of the judgment would be against public policy.

A monetary judgment from a jurisdiction which is covered by the 1922 Act can be registered in the BVI for enforcement as if it were a BVI judgment (the judgment will have the same force and effect as if it was a BVI judgment from the date of its registration). An application for registration of a foreign judgment under the 1922 Act may be made without notice but must be supported by affidavit evidence, together with a certified copy of the foreign judgment and a certified English translation (if necessary).

It should be noted that a judgment is registrable within 12 months of the date of the judgment if (in all the circumstances of the case) the court thinks it is just and convenient to enforce the judgment in the BVI. The 12-month period can be for such longer period as may be allowed by the BVI court.

Common law debt claim

A judgment that is not from a jurisdiction that is subject to the 1922 Act cannot be registered. Notwithstanding this, a judgment creditor can normally commence a common law claim in the BVI court for the judgment sum as a cause of action for debt in itself so that there is no retrial of the issues. Such a debt claim on the foreign judgment must be commenced within 12 years of the judgment becoming enforceable.

Any arrears of interest on the foreign judgment debt cannot be recovered after six (6) years from the date on which the interest was due.

The foreign judgment must not be impeachable. It must also, among other things, be for a debt or definite sum of money as well as be final and conclusive.

A common law claim is commenced via a Claim Form and Statement of Claim. An affidavit must also be included (exhibiting a certified copy of the foreign judgment and, if relevant, a certified English translation).

After the claim is served, the judgment creditor will generally be able to apply for either:

1) default judgment (if no acknowledgement of service or defence is filed); or
2) summary judgment (on the grounds of the doctrine of obligation by action or estoppel).

The BVI court will not look again at the merits of the foreign judgment. A common law debt claim is not generally a lengthy or complicated process. If judgment is granted on the judgment creditor’s common law debt claim, it is enforceable like any other BVI judgment.

In the BVI, there is only the indirect enforcement of non-monetary judgments. Where a judgment creditor has a foreign judgment which is based on a cause of action that is recognised under BVI law and can establish that the courts in the BVI have jurisdiction over the judgment debtor, then the cause of action can be brought in the BVI by the judgment creditor. The cause of action or the issue(s) are not re-litigated because of the foreign judgment and the principles of estoppel. It should be noted that the BVI claim must seek to determine an identical issue or question to that which was determined in the foreign proceedings and given in proceedings between identical parties.

The recognition and enforcement of arbitral awards are governed by the Arbitration Act.

Convention Award

A Convention Award is enforceable in the BVI either:
1) by instituting an action in court; or
2) applying to seek leave of the court.

Non-Convention Award

A non-Convention Award can only be enforced by seeking leave of the court.

Leave to enforce arbitral award

The requirements and procedure which are applicable to both a Convention Award and a non-Convention Award are the same.

An application for the recognition and enforcement of a foreign arbitral award is made by way of a Fixed Date Claim Form supported by affidavit evidence. The evidence must, among other things:

• exhibit the original or a certified copy of the award (and, if relevant, a certified English translation); and
• exhibit the original or certified copy of the arbitration agreement (where applicable).

The Fixed Date Claim Form must be served on the award debtor. In the event that the award debtor is located outside the jurisdiction, the award creditor must serve out of the jurisdiction.

If leave is granted, the award has the same effect as a BVI court judgment or order and can be enforced using the remedies provided for under the Eastern Caribbean Supreme Court Civil Procedure Rules which apply in the BVI. The order must be served on the award debtor. The award debtor has the right to apply to set aside the decision.

Refusal to enforce a Convention Award

The enforcement of a Convention Award may only be refused if the person against whom enforcement is sought proves one of the Convention defences. The defences include:

• the arbitration agreement was invalid under the applicable law, or if there was no indication of the applicable law, under the law of the country where the award was made;
• the party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings, or was otherwise unable to present their case; and
• the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

The party against whom enforcement action is taken against has the burden of proof to demonstrate that one of the applicable circumstances applies

Refusal to enforce a non-Convention Award

The grounds for refusal of enforcement of a non-Convention Award are the same as for a Convention Award. However, there is the additional ground where the court has a wider discretion to refuse enforcement on its own volition if it considers it just to do so.

Once the foreign judgment or arbitration award become a BVI judgment, it can be enforced by:

• a charging order;
• garnishee order;
• judgment summons;
• an order for the seizure and sale of goods; and
• an order for the appointment of a receiver.

From a practical standpoint, the enforcement of any foreign judgment or arbitration award in the BVI is only effective if the judgment debtor has assets in the BVI against which the foreign judgment or arbitration award can be enforced. This will usually be in the form of shares in a BVI company. The most common way to enforce is to seek a charging order over the shares in the relevant BVI company owned by the judgment debtor. Procedurally, this is done by joining the BVI company to the proceedings and applying for a provisional charging order (“PCO”). The PCO can then be made final. The application for the PCO does not need to be served on the judgment debtor but the order (once granted) needs to be served. It should be noted that the judgment debtor can oppose the PCO being made final. If in the event that the PCO is made final, the judgment creditor can apply for the appointment of a receiver and an order for sale.

Notwithstanding the above, the judgment creditor can instead apply to appoint a liquidator over the judgment debtor (where the latter is a BVI company) to wind up the judgment debtor on the basis that the foreign judgment or arbitration award is unpaid. The liquidator can then apply the proceeds of the liquidation to the satisfaction of the judgment debtor’s debts, including the relevant foreign judgment or arbitration award. It is normal to serve a statutory demand on the judgment debtor company first in such a situation (although this is not strictly required under the laws of the BVI).

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com

A series financing transaction is a type of equity investment deal where an investor injects cash into a business in exchange for preferred shares. Irrespective of whether the investor is a venture capitalist, an angel investor or a private equity house, the issuance of preferred shares to the investor by the relevant company is typically documented by a share subscription agreement between the investor and the company. A shareholders’ agreement (“SHA”) is also entered into among the investor(s) and the relevant company to govern the rights and responsibilities of the parties, and the memorandum of association and articles of association of that company (collectively, the “M&AA”) are typically amended and restated to incorporate relevant provisions of the SHA to ensure that there are no inconsistencies between the contractual provisions of the SHA and the constitution of the company.

A distinction is often drawn between different rounds of series financing transactions. For example, series A financing refers to the first round of venture capital funding for a startup which typically follows a company’s seed round. A series B financing usually follows thereafter if the company is successful. In general terms, while a series A investment usually provides a startup with sufficient capital to develop its products and team and to commence the execution of a go-to-market-strategy, a series B investment is designed to accelerate a company’s growth. Series C financing transactions and other “late-stage” investments generally occur at a subsequent stage to support an initial public offering (IPO) or in anticipation of an acquisition.

Although investors’ key commercial drivers will vary depending on circumstances and between different rounds of series financings, many of the local law issues that arise from a BVI and a Cayman Islands law perspective are materially the same with some nuances, however. For example, there may be differences, such as in relation to board and observer appointment rights, the payment of dividends and the rights in a winding-up, that BVI or Cayman Islands legal counsel (as appropriate) will be able to advise upon.

There are various features of BVI and Cayman Islands law which make these jurisdictions attractive to startups and other early-stage companies, such as:

1. 1. Cost-effective and quick to incorporate. BVI and Cayman Islands companies are inexpensive to incorporate and to maintain in comparison with companies in other premium offshore jurisdictions. BVI companies are typically incorporated within 1-2 business days of submitting an incorporation application and Cayman Islands companies may be incorporated within 3-5 business days or on a same day express basis for an additional fee.
   2. Corporate governance is efficient. Non-regulated entities may have a sole shareholder and a sole director (which may be the same person) and there are no nationality and/or residency requirements with respect to those roles. Corporate director(s) and/or corporate shareholder(s) may also be appointed. There is no requirement to appoint a company secretary and/or to prepare audited financial statements.
   3. Flexibility. There is significant flexibility in tailoring the M&AA of the relevant company to accommodate the issuance of different classes of shares and the rights and restrictions attaching to them, board and shareholder reserved matters and other provisions pertaining to corporate governance issues.
   4. Tax neutrality. There is no corporation tax, capital gains tax, income tax, profits tax and/or share transfer tax as a matter of BVI and Cayman Islands law. Additionally, there is no withholding tax from a local law perspective.
   5. Investor familiarity. Private equity houses and venture capital investors are familiar with the BVI and the Cayman Islands as jurisdictions which are helpful in facilitating investment decisions.
   6. Secured creditor friendly. The BVI and the Cayman Islands are widely recognized as creditor friendly jurisdictions, which are helpful in the context of facilitating any debt financing that an early-stage company may require. The BVI also has a straightforward system of publicly registering security interests which is attractive to secured creditors.

In our experience, most key investors opt to undertake local legal due diligence on a company into which an investment is proposed to be made or which otherwise forms part of the corporate structure.

From a BVI and a Cayman Islands law perspective, the due diligence exercise typically encompasses the following matters.

i.   Basic corporate information, M&AA, directors and shareholders

Whilst certain basic corporate information such as date of incorporation, company name and registered address, and the names of the current directors of a Cayman Islands company are a matter of public record, its constitutional documents and statutory registers are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered office service provider to disclose them. This consent will invariably be provided as it is market practice for an investor’s Cayman Islands legal counsel to review these documents.

In contrast, a broader range of corporate information is publicly available in relation to a BVI company. Its certificate of incorporation and M&AA may be obtained from a company search, its register of members is only publicly searchable if the company has opted to make it public and it has therefore filed it with the BVI Registrar of Corporate Affairs (the “BVI Registrar”). All of the other statutory registers of a BVI company (such as its register of directors, register of members (to the extent the company opted to keep it private) and private register of charges) are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered agent to disclose it. Similar to the Cayman Islands, this consent will invariably be provided as it is market practice for an investor’s BVI legal counsel to review these documents.

The M&AA of a BVI company and a Cayman Islands company may reveal important information in the context of a series financing transaction. For example, it could assist in determining whether:

1. 1. any third-party consents are required to implement a series financing, or whether certain conditions need to be complied with prior to its consummation;
   2. there is an existing SHA in relation to the company (which could impose certain consent requirements on the parties with respect to the series financing);
   3. a series financing falls within the scope of any existing board and/or shareholder reserved matters;
   4. there are any most-favored nation provisions in favour of an existing investor;
   5. there are certain procedures which ought to be followed before the issuance of preferred shares, such as with respect to pre-emption rights; and/or
   6. the directors of the company may resolve to refuse or delay the registration of an issuance of shares in the company at their discretion.

ii.   Outstanding charges

Although the register of charges (if maintained) of a BVI company and the register of mortgages and charges of a Cayman Islands company are matters of private record, the register of registered charges of a BVI company is publicly searchable. The primary purpose of filing particulars of a charge in a BVI company’s register of registered charges is to protect the priority of the underlying security interests and to put third parties on constructive notice of them. An investor’s offshore legal counsel will invariably review the register of registered charges of a BVI company and request a copy of the register of charges or register of mortgages and charges (as applicable) to be provided to ascertain whether a company’s assets are subject to existing security interests.

iii.   Good standing

In the BVI, “good standing” means that the relevant company is on the Register of Companies, has paid all fees, annual fees and penalties due and payable, has filed with the BVI Registrar a copy of its register of directors which is complete, and has filed its annual return in accordance with the BVI Business Companies Act (As Revised). Any BVI law firm can order a certificate of good standing from the BVI Registrar with respect to a BVI company which confirms that the relevant company is in good standing as a matter of BVI law.

A Cayman Islands company is deemed to be in good standing if all fees and penalties under the Cayman Companies Act (As Revised) (the “Cayman Act”) have been paid and the Registrar of Companies of the Cayman Islands has no knowledge that the company is in default under the Cayman Act. Only the registered office service provider of a Cayman Islands company can order a certificate of good standing from the Cayman Registrar which confirms that the relevant company is in good standing as a matter of Cayman Islands law.

An offshore law firm that is conducting due diligence on a BVI company or a Cayman Islands company will order or request to be provided (as applicable) a certificate of good standing to ascertain whether the relevant company is in good standing.

iv.   Litigation

In the BVI, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Eastern Caribbean Supreme Court, the Court of Appeal (Virgin Islands) and the High Court (Civil and Commercial Divisions) at the time of the search.

In the Cayman Islands, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Grand Court of the Cayman Islands at the time of the search.

These searches will invariably be completed by an investor’s offshore legal counsel.

v.  Certificate of incumbency

An investor’s offshore legal counsel will usually review an up-to-date certificate of incumbency issued by the registered office service provider or registered agent (as applicable) of the relevant company. Most certificates of incumbency typically confirm that the applicable company is in good standing, as well as its name and company number, registered office address, the identities of the director(s) and shareholder(s) and share capital (if applicable). It is usually also possible to request a confirmation from the registered office service provider or the registered agent (as applicable) that it is not aware of any proceedings which are pending or which have been threatened against the relevant company, and that, to its knowledge, no receiver has been appointed over the assets of the company.

vi.  Books and records

Every Cayman Islands company must maintain, or cause to be maintained, proper books of account including information (including contracts and invoices with respect to, assets and liabilities) as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.

Every BVI company must maintain, or cause to be maintained, records and underlying documentation of the company in such form as (i) are sufficient to show and explain the company’s transactions; and (ii) will, at any time, enable the financial position of the company to be determined with reasonable accuracy. This includes keeping copies of invoices, contracts and similar documents. A BVI and a Cayman Islands company must also keep copies of all resolutions of its directors and shareholders and minutes of any meetings.

Whether a review of a BVI or a Cayman Islands company’s books and records is necessary will depend on a variety of factors, including the risk appetite of the investor and the activities of the relevant BVI or the Cayman Islands company. To the extent that any commercial agreements have been entered into by the company, an investor may request these to be reviewed to identify any consent requirements in relation to a proposed series financing and any change of control and/or termination provisions which could be triggered by an issuance of preferred shares. We have generally seen an increase in these types of requests which is reflective of a more cautious approach that is currently being adopted by many investors.

The following is an indicative list of local law issues that we frequently encounter in series financing transactions.

i.  Inconsistencies between the SHA and the M&AA

As noted above, it is important to ensure that there are no inconsistencies between the contractual provisions of the SHA and the M&AA of a BVI or a Cayman Islands company. Although there is no prescriptive approach as to the incorporation process as a matter of BVI and Cayman Islands law, certain types of provisions in the SHA will invariably be included in the M&AA for legal, commercial and other reasons. Examples of such provisions include rights and restrictions with respect to the shares (such as provisions with respect to pre-emption, drag-along and tag-along rights), matters which are reserved to the board of directors and/or the shareholders, distribution rights, share transfer restrictions and other matters that impact the corporate governance of the company (such as provisions with respect to board and shareholder meetings). While the approach that is taken will vary as between BVI and Cayman Islands companies because, as noted above, the M&AA of a BVI company is a matter of public record, whereas the M&AA of a Cayman Islands company is a matter of private record, there may be advantages of incorporating commercially important provisions into the M&AA for the following reasons:

1. 1. new shareholders are automatically bound by the M&AA, whereas only shareholders that execute the SHA or a deed of adherence to it are bound by the SHA;
   2. there are statutory remedies available for a breach of the M&AA, whereas only contractual remedies will be available for a breach of the SHA; and
   3. an amendment to the SHA typically requires the consent of all of the parties, whereas the M&AA of a BVI company may usually be amended by a majority of the directors or shareholders (depending on the nature of the amendment) and the M&AA of a Cayman Islands company may be amended by a special resolution (which ordinarily requires at least two thirds of the votes cast by shareholders).

To address any potential conflict between the provisions of the SHA and the M&AA of a company, the SHA typically provides that its provisions will prevail in the event there is any conflict with the M&AA. This provision is potentially unenforceable against a BVI or a Cayman Islands company which, in the first hand, is bound by its constitutional document, the M&AA. For that reason, the conflicts provision in the SHA should be amended to limit its application to the shareholders and to impose a covenant upon them to amend the M&AA to resolve any such conflict(s). In practice, the circumstances of the conflict and the interpretation of the documents may determine which document takes precedence over the other. For example, in Dear and another v Jackson¹ , where an SHA obliged the parties to ensure that a shareholder would be periodically re-appointed as a director but the M&AA permitted the other directors to remove him, the Court of Appeal of England and Wales ruled that there was no conflict: the SHA was to be read as if it did not purport to affect the removal provisions in the M&AA, especially because some of the directors had no knowledge of the terms of the SHA and were entitled to take the M&AA at face value and to assume that the removal article would work. This underscores the importance of appointing local law counsel in a series financing transaction to ensure that any agreed commercial terms are duly incorporated into each of the SHA and the M&AA.

ii.   Covenants with respect to group companies

Given that BVI and Cayman Islands companies typically serve as holding vehicles, it is relatively usual to see covenants imposed upon them in the SHA with respect to the activities and conduct of their operating subsidiaries. Such covenants usually prescribe that the relevant BVI or Cayman Islands company must procure that its subsidiaries do not take specified corporate actions without meeting the same consent requirements that are applicable to the company. Whether the relevant company is in a position to comply with such procurement obligations is ultimately a matter of fact that will depend on case-specific circumstances, but in practice the company may be unable to do so with respect to any indirect subsidiaries over which it does not exercise direct control. There are different approaches to drafting which may be taken in the SHA to address this issue that local law counsel can advise upon.

iii  Directors that are appointed by key investors

It is relatively common for key investors to be given the right to appoint directors to the board of the relevant company. An SHA typically states that such directors need to comply with the instructions that are given by the appointing shareholder(s).

Under BVI and Cayman Islands law, the directors of a company generally owe their common law and fiduciary duties to the company and not to other parties, such as any individual appointing shareholder(s).² There are certain exceptions to this. For example, where a company is insolvent or potentially insolvent, the duties of a company’s directors may extend to the company’s creditors.³ A BVI company that is carrying out a joint venture may also act in a manner which is in the best interests of a shareholder or shareholders, even if it is not in the best interests of the company, so long as this is expressly permitted by that company’s M&AA.⁴

Absent any exceptions of the above nature, any provisions which seek to curtail the discretion of the directors should be carefully reviewed as they may render the directors unable to comply with their fiduciary duties and may therefore be unenforceable as a matter of local law. Depending on the circumstances, it may be possible to include drafting in the relevant M&AA and SHA to clarify that the directors shall only comply with instructions provided by the appointing shareholder(s) to the extent that they are compatible with BVI or Cayman Islands law (as applicable), including the fiduciary duties of the directors.

iv.   Statutory fetters

A statutory fetter is a restriction that is imposed on the ability of a company or its shareholder(s) to exercise certain rights or powers granted under statute. This is relevant in the context of a series financing transaction because it is relatively common for an SHA and, in turn, the M&AA, to prescribe a list of matters in relation to the company that are reserved to the directors and/or the shareholders. Typical examples of such matters include the alteration of a company’s share capital, the issuance of shares, a change to the name of the company, and amendments to the M&AA. While shareholders may enter into such contractual agreements in the SHA among themselves as they please, any provisions which constitute a statutory fetter that purport to bind the company will be potentially invalid and unenforceable. Offshore legal advice should be sought to identify the most effective solutions with respect to these types of issues.

v.  Definitions and concepts that are incompatible with BVI and Cayman Islands law

As most SHAs are based on precedents that are governed by English or Hong Kong law, it is important to remain alert to any drafting that is incompatible with BVI and Cayman Islands law. Common examples include:

1. 1. share issuance and transfer provisions which purport to pass title to the shares upon delivery of share certificates, as opposed to when the register of members of the relevant company is updated;
   2. conditions precedent and/or conditions subsequent to closing that include items which are not necessary from a local law perspective (such as bought and sold notes) and/or which have no particular meaning from a BVI or Cayman Islands point of view (such as endorsing share certificates);
   3. references to “share capital” with respect to BVI companies, despite the fact that this concept is no longer applicable to most BVI companies; and
   4. definitions that do not meet the minimum requirements of BVI or Cayman Islands law (such as in relation to the thresholds for passing resolutions at a meeting or in writing, or the declaration of a dividend).

These types of issues highlight the importance of seeking local law advice in series financing transactions.

The following items are typically provided to a key investor at closing from a BVI and a Cayman Islands law perspective in connection with a series financing transaction:

1. 1. a copy of the constitutional documents and statutory registers of the relevant company;
   2. an up-to-date certificate of good standing of the relevant company;
   3. an up-to-date certificate of incumbency of the relevant company;
   4. duly executed resolutions of the board of directors and shareholders of the relevant company approving, as applicable and among other customary matters, the issuance of the preferred shares, the updates to the company’s register of members, the issuance of share certificates (to the extent that share certificates are to be issued), the appointment of any new director(s), any updates to the company’s register of directors or register of directors and officers (as applicable), and the amendments to the company’s M&AA;
   5. a certified, updated copy of the relevant company’s register of members showing the investor as the holder of the applicable preferred shares;
   6. a certified, updated copy of the relevant company’s register of directors or register of directors and officers (as applicable) showing the appointment of any new director(s) by the investor;
   7. new share certificates (to the extent that share certificates are to be issued); and
   8. a stamped copy of the amended and restated M&AA in relation to a BVI company (noting that delivery of a stamped copy of the amended and restated M&AA in relation to a Cayman Islands company is usually a post-closing obligation).

Additional documentation may also be necessary if the parties undertake to complete other key actions as part of the closing process, such as changing the registered office service provider or registered agent (as applicable) of the relevant company. Furthermore, to the extent that the relevant company’s M&AA (or any agreements to which the relevant company is a party) impose additional requirements in relation to an issuance of shares, additional deliverables may need to be provided to the relevant investor.

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¹    [2013] EWCA Civ 89
²   Percival v Wright [1902] 2 Ch421
³   Walker v Wimborne (1976) 50 ALJR 446 (High Court of Australia)
⁴   Section 120(4) of the BVI Business Companies Act, 2004 (As Amended)

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

It is important appreciate that not all activities of a BVI entity which involve virtual assets will necessarily fall within the VASP Act. For example, dealing, arranging deals in, or managing investments, providing investment advice, custodian and/or administration services with respect to investments, and operating an investment exchange may regulated under the BVI Securities and Investment Business Act (“SIBA”) if the virtual asset constitutes an “investment” under SIBA.

The key features of the VASP Act include:

1. details of the application and approval requirements for registration as a VASP, including additional specific requirements for VASPs seeking to provide virtual assets custody services or operate a virtual assets exchange;
2. the requirement for VASPs to appoint authorised representatives;
3. particulars of the functions of an authorised representative and the requirement for authorised representatives to be approved by the Financial Services Commission (the “Commission”) to act in relation to VASPs;
4. the requirement for VASPs to appoint an auditor approved by the Commission and the obligations of the auditor to the Commission;
5. details of the information that a registered VASP must report to the Commission on an ongoing basis;
6. the process to be adopted for disposing or acquiring a significant or controlling interest in a VASP;
7. the establishment of measures to protect clients’ assets;
8. prohibitions on making or issuing misleading advertisements;
9. AML/CFT and other regulatory compliance matters; and
10. the legal mechanism for a VASP to participate in the Regulatory Sandbox.

The benefits and advantages of establishing virtual assets businesses in the BVI include:

1. Stability and reliability. As an autonomous British Overseas Territory that applies English common law rules and principles, it has a well-tested and efficient judicial system, with a final right of appeal to the Privy Council.
2. Incorporation and maintenance costs. BVI companies are cheap to incorporate and maintain in good standing.
3. Tax neutrality. No income, corporate, capital gains or wealth taxes, withholdings or other similar taxes are imposed on BVI companies as a matter of BVI law.
4. Exchange controls. There are no exchange controls and restrictions as a matter of BVI law.
5. Confidentiality. Shareholders and directors of a BVI business company are generally a matter of private record.
6. Corporate flexibility. The objects, capacity and powers of a BVI company are generally unrestricted. Most decisions can be taken by the board of directors of the relevant company, with only certain matters requiring shareholder approval. There is considerable flexibility to tailor the memorandum of association and articles of association to meet a client’s requirements.

Subject to certain limitations, a ‘virtual asset’ is defined in the VASP Act as: “a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes“. This is a broad definition and will cover all types of virtual assets, including non-fungible tokens.

The VASP Act provides that a company may apply to the Commission to be regulated as a VASP in one or more of the following categories:

1. carrying on the business of providing a virtual asset service;
2. engaging in the business of providing a virtual assets custody service; and
3. operating a virtual assets exchange.

The term “virtual assets service” is defined in the VASP Act as the business of engaging, on behalf of another person, in the following activities:

1. exchange between virtual assets and fiat currencies;
2. exchange between one or more forms of virtual assets;
3. transfer of virtual assets, where the transfer relates to conducting a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another;
4. safekeeping or administration of virtual assets or instruments enabling control over virtual assets; and
5. participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset.

The VASP Act also states that the following activities would also be considered to be the provision of a virtual assets service:

1. hosting wallets or maintaining custody or control over another person’s virtual asset, wallet or private key;
2. providing financial services relating to the issuance, offer or sale of a virtual asset; and
3. providing kiosks (such as automatic teller machines, bitcoin teller machines or vending machines) for the purpose of facilitating virtual assets activities through electronic terminals to enable the owner or operator of the kiosk to actively facilitate the exchange of virtual assets for fiat currency or other virtual assets.

The above lists may be expanded by subsequent guidelines or regulations.

Rather helpfully, the BVI VASP Act sets out a non-comprehensive list of some of the services which are specifically excluded from its remit and these are as follows:

1. providing service as a software developer or provider of unhosted wallets whose function is only to develop or sell software or hardware;
2. solely creating or selling a software application or virtual asset platform;
3. providing ancillary services or products to a virtual asset network, including the provision of services like hardware wallet manufacturer or provider of unhosted wallets, to the extent that such services do not extend to engaging in or actively facilitating as a business any of those services for or on behalf of another person;
4. solely engaging in the operation of a virtual asset network without engaging or facilitating any of the activities or operations of a VASP on behalf of customers;
5. providing closed-loop items that are non-transferable, non-exchangeable and which cannot be used for payment or investment purposes; and
6. accepting virtual assets as payment for good or services (such as the acceptance of virtual assets by a merchant when effecting the purchase of goods).

The issuance by a BVI company of virtual assets is not included in the definition of virtual assets service. This is the opposite of the position in the Cayman Islands. Accordingly, to the extent that a BVI company is involved in a crypto project solely as the issuer of tokens, the VASP Act would not require the entity to be regulated in respect of that activity.

A VASP must at all times have the following functionaries:

1. an authorised representative;
2. an auditor; and
3. an individual approved by the Commission who acts as compliance officer, to ensure compliance by the VASP with the provisions of the VASP Act and other applicable legislation.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

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