Subject to its memorandum of association and articles of association (the “M&A”), section 28 of the BVI Business Companies Act, 2004 (the “Act”) expressly permits a BVI Company to create security over any of its assets for the purposes of securing an obligation owed by it to another person. The Act does not provide that the security document must be in any particular form, but it should be in writing and be signed by, or with the authority of, the BVI Company.

BVI law recognizes various forms of security over assets, including legal mortgages, equitable mortgages, charges and assignments by way of security. The type of security interest that is created will depend on the type of asset to be secured.

BVI law does not prescribe a particular mode of execution with respect to security over the assets of a BVI Company and it is not necessary for such security to be certified, notarized or apostilled to make the security valid or enforceable from a BVI law perspective.

It is important to review the M&A of the relevant BVI Company to ensure compliance with any applicable signing formalities.

No regulatory approvals are necessary to create valid and enforceable security as a matter of BVI law in respect of security that is created over a BVI Company’s assets.

No stamp duty or taxes are payable with respect to the creation of security over the assets of a BVI Company or upon any transfer thereof in an enforcement as a matter of BVI law so long as the assets do not comprise land in the BVI, or shares in a subsidiary that has an interest in land in the BVI.

Section 161 of the Act expressly contemplates that security over the assets of a BVI Company may be governed by BVI or foreign law.

In cross-border finance transactions, it is relatively common for the governing law of a security document over the assets of a BVI Company to be aligned with the governing law of the principal finance documents or the lex situs of the secured asset. One advantage of adopting a foreign governing law clause in a security document is that it may make available certain additional remedies (such as appropriation) which are not available under BVI law. Care should however be taken to ensure that there are no conflicts of law issues where a security document is governed by foreign law. English, Hong Kong and Singapore law are frequently adopted to govern security over the assets of a BVI Company and no major conflicts of law issues are likely to arise.

Where the security document is governed by foreign law, the security document must comply with the requirements of its governing law and the remedies available to a secured party are governed by that governing law and the terms of the security document.

The BVI Company will typically be required to deliver the following documents to the secured party under the terms of the relevant security document and/or the other finance documents:

i. a certified copy of its register of charges showing the security created over the secured assets (see further below);

ii. a copy of the stamped particulars of charge and certificate of registration of charge issued by the BVI Registrar of Corporate Affairs (the “Registrar”) with respect to the security created over the secured assets (see further below); and .

iii. a copy of the board resolutions of its board of directors authorizing:

a. its entry into and execution of the security document;
b. the filing of the relevant particulars of charge with the Registrar; and
c. the updates to be made to its register of charges.

Register of charges

Pursuant to section 162 of the Act, a BVI Company must record particulars of the security created over any of its assets in its register of charges. The register of charges must include:

i. the date of creation of the charge;
i. a short description of the liability secured by the charge;
ii. a short description of the property charged;
iii. the name and address of the secured party;
iv. the name and address of the holder of the charge; and
v. details of any prohibition or restriction, if any, contained in the security document on the power of the BVI Company to create any future charge ranking in priority to or equally with the security.

There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security. In addition, where a change occurs in the relevant charges or in the details of the charges required to be recorded in a BVI Company’s register of charges, the BVI Company must, within 14 days of the change occurring, transmit details of the change to its registered agent. Any such variations and releases of charge should also be reflected in the register of charges.

A copy of the register of charges must be kept at the registered office of the BVI Company or at the office of its registered agent and is a private record that is not open to inspection by the public.

A BVI Company which does not comply with the aforementioned provisions commits an offence and is liable on summary conviction to a fine of US$5,000. This does not invalidate the validity, enforceability or the admissibility in evidence of the charge, however.

Registration of charges
Pursuant to section 163 of the Act, a BVI Company (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person authorized to act on its behalf) may lodge an application with the Registrar to register a charge created by the BVI Company by making a filing, specifying the particulars of charge, in the approved form. The security document itself is not filed or registered as part of the application. Whilst registration is not mandatory and does not affect the validity, enforceability or the admissibility in evidence of the charge, it is almost always completed in practice because it protects the priority of the charge as explained below and puts third parties on constructive notice of the existence of the security.

Once the Registrar is satisfied that all of the registration requirements have been complied with, it will register the charge in the BVI Company’s register of registered charges and issue a certificate of registration confirming the date and time of registration. The Registrar will also send a copy of the certificate to the BVI Company and the secured party. The certificate of registration of charge is conclusive proof that the registration requirements have been complied with and that the charge referred to in the certificate was registered on the date and time stated in the certificate.

The BVI Company’s register of registered charges is a public record that is open to inspection by the public.

Variation of registered charges
Where there is a variation in the terms of a charge registered under section 163 of the Act, the BVI Company (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person authorized to act on its behalf) may (and should) lodge an application for a variation of charge with the Registrar by making a filing in the approved form. The document varying the charge is not itself filed or registered as part of the application. Once the variation has been registered, the Registrar will update the BVI Company’s register of registered charges and issue a certificate of variation confirming the date and time of variation. The Registrar will also send a copy of the certificate to the BVI Company and the secured party. The certificate of variation of charge is conclusive proof that the variation referred to in the certificate was registered on the date and time stated in the certificate.

Satisfaction or release of registered charges
Where all liabilities secured by a charge registered under section 163 of the Act have been paid or satisfied in full, or a charge registered under section 163 of the Act has ceased to affect the property or any part thereof, a notice of satisfaction or release in the approved form may (and should) be lodged with the Registrar. Such notice may be filed by the BVI Company (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person qualified to act as the registered agent of a BVI Company, or a BVI legal practitioner, acting on behalf of the secured party). If the notice of satisfaction or release is filed by or on behalf of the BVI Company, it must be signed by the secured party (or a BVI registered agent, or a BVI legal practitioner, acting on behalf of the secured party) or be accompanied by a statutory declaration in the approved form verifying the matters stated in the notice. The document releasing the charge is not itself filed or registered as part of the application. Once the release has been registered, the Registrar will update the BVI Company’s register of registered charges and issue a certificate of satisfaction or release confirming the date and time on which the notice was filed. The Registrar will also send a copy of the certificate to the BVI Company and the secured party.

Priority of registered charges
The general rule is that a registered security interest will have priority over any later registered or unregistered security interest over the same asset. The exceptions to this rule are as follows:

i. a secured party may consent or agree to vary the priority of its security interest;
ii. a registered floating charge is postponed to a subsequently registered fixed charge unless the floating charge contains a prohibition or restriction on the power of the BVI Company to create any future charge ranking in priority to or equally with the floating charge; and
iii. a different regime applies to a security interest that was created by a company that was originally incorporated under the International Business Companies Act 1984 and re-registered under the Act.

The common law rules of priority continue to apply with respect to any unregistered security interests. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong

T: +852 5225 4920

E: peter.vas@loebsmith.com

www.loebsmith.com

Though the Covid-19 pandemic is continuing to take its toll on M&A markets worldwide, there are now clear signs that a recovery is underway. For example, although the number of M&A deals in Q1-Q3 2020 in Asia-Pacific (“APAC”) declined by 14% from 2019, deal value trends, on the other hand, moved in the opposite direction. In Q1-Q3 2020, M&A values across APAC rose by 31%, which was largely driven by megadeals involving Chinese energy companies and Japanese technology firms. Positive valuations, lower acquisition premiums and a growing mid-market, as well as private equity fund-backed transactions in the fintech, pharmaceutical and healthcare sectors, have also continued to assist with the recovery of M&A activity in APAC.

Interestingly, sponsor-backed transactions accounted for 26% of overall M&A activity in 2020, the highest proportion since pre-credit crunch. With private equity firms in possession of a record US$2.9 trillion in available capital at the end of 2020, we expect sponsor driven activity to continue.

British Virgin Islands (“BVI”) and Cayman Islands companies have continued to play a significant role in M&A transactions in APAC and beyond throughout the Covid-19 pandemic as they offer a flexible and well-tested means of deal structuring. The absence of exchange controls, tax neutrality and certain relatively recent changes in law designed to facilitate the electronic closing of transactions, among other things, have continued to drive the popularity of the BVI and the Cayman Islands as jurisdictions of choice for structuring M&A transactions.

In this article, we examine some of the recent trends and key issues that continue to impact M&A transactions in APAC in the context of the Covid-19 pandemic from a BVI law and a Cayman Islands law perspective, both from a substantive and process standpoint.

Deal timelines continue to be generally extended as a result of Covid-19 and we expect that this trend will continue until the pandemic is brought under control. These delays have resulted for a number of reasons, including the following key reasons:

i. Negotiations and meetings
Negotiations and meetings are continuing to take longer to complete due to the ongoing travel restrictions and social distancing restrictions which have been put in place. As video conferencing facilities evolve and become more popular, we expect that both buyers and sellers will continue to become more familiar with them which will expedite deal-making going forward.

BVI and Cayman Islands law are adaptable and well-suited to the current environment in which many meetings are being held virtually. As an example, subject to a BVI or a Cayman Islands company’s memorandum and articles of association (collectively, the “M&AA”), BVI and Cayman Islands law both permit meetings of a company’s board of directors and/or shareholders to be held by telephone or by other electronic means so long as those persons participating can hear each other. “Electronic means” typically includes video conferencing facilities, Skype, Zoom, Teams, WeChat, and any similar electronic service. Additionally, resolutions of the directors and the shareholders may also be passed in writing subject to a BVI or a Cayman Islands company’s M&AA. This flexibility has continued to drive the popularity of BVI and Cayman Islands vehicles in acquisition transactions throughout the Covid-19 pandemic.

ii. Due diligence

Due diligence is generally continuing to take longer to complete as ongoing travel restrictions and social distancing rules make site visits, meetings with senior management and financial projections, among other things, more challenging to organize and complete. Many buyers are also undertaking enhanced due diligence to address the specific risks brought about by the Covid-19 pandemic and we have elaborated on this in paragraph 2 below.

It should be noted that the BVI Registrar of Corporate Affairs (the “BVI Registrar”) and the Cayman Islands Registrar of Companies have continued to remain open throughout the pandemic with some relatively minor changes which has been helpful from a reliability point of view. Registered agents in the BVI and registered office service providers in the Cayman Islands are, on the whole, also operating normally.

iii. Regulatory and antitrust approvals

Regulatory and antitrust approvals are generally continuing to take longer to obtain from relevant authorities.

Although BVI and Cayman Islands regulatory approvals are not typically required with respect to M&A transactions, the change of control and/or management of a BVI or a Cayman Islands regulated entity (including its direct or indirect parent), such as a licensed trust company or a corporate service provider, does require the prior written approval from the BVI Financial Services Commission (the “BVI FSC”) or the Cayman Islands Monetary Authority (“CIMA”) (as applicable) and the timing of obtaining the requisite approval(s) needs to be factored into the acquisition timetable. It is usual practice to hold a preliminary meeting with the BVI FSC or CIMA (as applicable) to discuss the regulatory requirements of an acquisition involving a BVI or a Cayman Islands regulated entity and deal completion will be conditional upon approval being provided. Local law advice should be sought as early as possible as any BVI or Cayman Islands regulatory consent requirements will inevitably have an impact on the timing of a proposed acquisition.

It should be noted that recent years have seen a trend towards consolidation in the financial services industry and we expect to see further consolidation of licensed BVI and Cayman Islands trust companies, fund administrators, banks, and other regulated businesses as a result of the economic re-alignment brought on, to some extent, by the restrictive economic environment in which these businesses have been operating in for the last 12-15 months.

iv. Third-party consents

Third-party consents to M&A transactions are in some instances continuing to take longer than usual to obtain due to the effects of, among other things, lockdown restrictions during the Covid-19 pandemic.

From a local law standpoint, to the extent that any third party consents (such as from shareholders or creditors) need to be obtained under the M&AA of a BVI or a Cayman Islands buyer, seller or target company, or pursuant to the terms of any contract to which the relevant company is a party (such as a joint venture agreement or a shareholders’ agreement), the timing implications should be evaluated and appropriately reflected in the transaction timetable.
In certain circumstances, it may be possible for the requisite consents to be provided post-closing and this is a matter which BVI or Cayman Islands legal counsel (as appropriate) will be able to advise upon.

v. Acquisition agreements

Acquisition agreements in APAC are evolving and we have seen an increase of completion accounts and earn-out mechanisms which is indicative of the current more cautious, buyer-friendly environment. We have also seen considerable interest in material adverse change conditions. There is also a pattern of M&A transactions being delayed where there are difficulties in completing valuations and/or if the buyer wants to apportion a greater degree of closing risk and/or indemnity risk to the seller.

BVI and Cayman Islands law are flexible on these types of terms and mechanisms, which will ultimately be a commercial matter for the parties to agree upon.

Many buyers are continuing to undertake enhanced due diligence to assess the ongoing effects of the Covid-19 pandemic on the target company’s business. Whilst the specific concerns will vary depending on the nature of business that is being undertaken by the target company, some typical examples include:

1. Are there heightened liquidity and/or solvency risks?
2. What is the financial condition of the target company’s business and its key customers? Has the target company’s financial condition recently deteriorated?
3. What insurance is in place to mitigate any losses and does it extend to financial loss owing to Covid-19?
4. Is the target company overexposed to suppliers that are particularly vulnerable to the effects of Covid-19?
5. Has the target company recently breached the terms of any financial covenants and/or the term of any debt instruments or security documents?
6. What are the termination rights under key contracts and has the target company recently defaulted under any contracts?
7. Is there any ongoing litigation?
8. Are there sufficient business continuity plans and crisis management procedures in place?

From a BVI and a Cayman Islands law standpoint, buyers will be reassured that offshore legal counsel typically undertakes a wide-ranging review encompassing the following matters:

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

Whilst certain basic corporate information and the identities 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 it. This consent will invariably be provided as it is market practice for 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 also be obtained from a company search, and its register of members is also publicly searchable to the extent that it has been filed with the BVI Registrar. All of the other statutory registers of a BVI company (such as its register of directors and register of charges) are generally a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered agent to disclose it. This consent will invariably be provided as it is market practice for BVI legal counsel to review these documents.

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

1. 1. any third party consents are required to implement a proposed acquisition, or whether certain conditions need to be complied with prior to its consummation;
   2. there is any security over the sale shares of the target company that needs to be discharged prior to the proposed acquisition;
   3. there is a shareholders’ agreement in relation to the target company (which could impose certain consent requirements on the parties with respect to the acquisition);
   4. an acquisition falls within the scope of any board and/or shareholder reserved matters;
   5. there are certain restrictions on the transfer of the sale shares, such as drag-along or tag-along rights which are triggered by the proposed acquisition; and/or
   6. the directors of the company may resolve to refuse or delay the registration of a transfer of sale shares in the target company at their discretion.

The register of members of a BVI company and a Cayman Islands company may also reveal information that is important in the context of an M&A transaction, such as whether:

1. 1. the sale shares are fully paid;
   2. the sale shares are certificated; and
   3. any share security is in place.

ii. Outstanding charges

Although the register of charges (if any) 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. Broadly speaking, the purpose of filing particulars of 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. Offshore legal counsel will 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 any of the target 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 and has filed with the BVI Registrar a copy of its register of directors which is complete. A 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 can be conducted to verify whether there are 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 can be conducted to verify whether there are 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 offshore legal counsel.

v. Certificate of incumbency.

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 directors and shareholders and share capital (if applicable). It is usually also possible to request a confirmation from the registered agent or the registered office service provider (as applicable) that it is not aware of any proceedings which are pending or which have been threatened against the relevant company, and that no receiver has been appointed to its knowledge.

vi. Books and records.

Every BVI and Cayman Islands company must maintain books and records that are sufficient to show and explain that company’s transactions, as well as 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 buyer and the activities of the relevant BVI or the Cayman Islands company. To the extent that there are any agreements, the buyer may request these to be reviewed to identify, among other things, any consent requirements in relation to a proposed acquisition and any termination provisions which could be triggered by a change of control. We have generally seen an increase in these types of requests which is reflective of the cautious approach that is currently being adopted by many buyers.

Both buyers and sellers need to continue to be mindful of the impact that the Covid-19 pandemic may have on the accuracy of the representations and warranties which are provided in an acquisition agreement. For example, a customary representation that the seller has operated its business in the ordinary course consistent with past practice may require the seller to disclose actions it has taken to address the pandemic as it relates to its business.

The trend of shorter and less detailed warranty schedules in acquisition agreements in APAC, compared to international equivalents, has generally continued. We have not recently seen any material changes to the relatively standard representations and warranties given by the seller in relation to the sale of shares in a BVI or a Cayman Islands target company. These will usually confirm, among other things:

1. the due incorporation, valid existence and good standing of the target company;
2. the target company’s solvency;
3. the power of the target company to own its assets and carry on such business as is being conducted;
4. the due authorization of the acquisition;
5. the due authorization and valid issuance of the sale shares, and the sale shares being fully paid up, unencumbered and freely transferable;
6. any litigation or arbitration proceedings involving the target company;
7. whether the target company has any direct or indirect interest in any land in the BVI or the Cayman Islands; and
8. the target company’s compliance with relevant laws (including the provisions of the applicable economic substance regime).

To build on the points above, the following additional matters should be noted:

1. The definition of solvency in the BVI and the Cayman Islands is divergent. In short, the BVI definition includes balance sheet and cash flow tests, whereas the Cayman Islands position is limited to a cash flow test. Of course, the parties to an acquisition agreement may, and commonly do, agree upon a broader definition for the purposes of the applicable warranty.
2. To the extent that the seller is a BVI company, it may need to obtain shareholder approval with respect to the disposal. This will depend on the M&AA of the seller and the value of the disposition. Please refer to paragraph 2 of our guide entitled “Avoiding BVI law and Cayman Islands law pitfalls in banking & finance and corporate transactions”for further details in relation to this.
3. If a BVI or a Cayman Islands company has any direct or indirect interest in any land in the BVI or the Cayman Islands, material stamp duty may be payable in connection with a transfer of its shares. Please refer to paragraph 4 of our guide entitled “Avoiding BVI law and Cayman Islands law pitfalls in banking & finance and corporate transactions” for further details in relation to this.
4. From time to time, the acquisition agreement may contain a representation from the seller which provides that a restrictions notice has not been issued by the registered office service provider of the Cayman Islands target company with respect to the sale shares. A restrictions notice may be issued by the registered office service provider of a Cayman Islands company to a shareholder in connection with his/her/its shares if certain requirements of the beneficial ownership regime have not been complied with. The consequences of a restrictions notice include, among other things, that a transfer of the relevant shares is void and that no rights are exercisable in relation to the shares. A restrictions notice may be withdrawn where the underlying obligation is complied with, there was a valid reason for failure to comply with a notice or the rights of a third party in respect of the relevant shares are being unfairly affected by the restrictions notice.

We have recently seen the list of conditions precedent (“CPs”) becoming shorter on APAC M&A transactions despite the more buyer-friendly environment. Traditionally, the list of CPs on APAC deals has been longer than the standard short, legal and regulatory focused CPs in more developed markets which demonstrates a willingness among Asian parties to accept more execution risk.

From a BVI and a Cayman Islands legal perspective, we have not recently seen any material changes to the CPs and share transfer deliverables that are customarily provided in an M&A transaction. These items are relatively standardized and typically include the following documents:

1. the constitutional documents, statutory registers and all books and records (including financial and accounting records) of the target company;
2. a fully executed share transfer form with respect to the sale shares in the form prescribed by the relevant target company’s M&AA;
3. duly executed resolutions of the board of directors and shareholders, if required, of the target company approving, among other customary matters, the transfer of the sale shares, the updates to the company’s register of members and the cancellation and issuance of share certificates (to the extent that share certificates have, or will be, issued);
4. a certified, updated copy of the target company’s register of members showing the purchaser as the holder of the sale shares; and
5. new share certificates and evidence that the existing share certificates have been cancelled (to the extent that share certificates have, or will be, issued).

Additional documentation may be necessary if the parties agree to undertake other key actions as part of the closing process, such as changing the board of directors and/or the registered office service provider or registered agent (as applicable) of the target company. In addition, to the extent that the target company’s M&AA (or any agreements to which the target company is a party) imposes additional requirements in relation to a transfer of shares, this needs to be factored into the list of CPs to be provided.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

View Full PDF
Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong
www.loebsmith.com

The terms of a well-drafted BVI law governed security document with respect to Secured Shares in a Secured Company and the principal finance document will usually require the security provider to deliver the following documents to the secured party to assist with an enforcement:

i. any original share certificate(s) with respect to the Secured Shares in the Secured Company;

ii. an undated share transfer form with respect to the Secured Shares in the Secured Company – the secured party may date this and insert details of the transferee in an enforcement for the purposes of transferring the Secured Shares to itself or a nominee;

iii. an undated resignation letter from each director of the Secured Company – the secured party may date these in an enforcement for the purposes of removing the existing directors of the Secured Company;

iv. a letter of authorization from each director of the Secured Company authorizing the secured party to date each undated letter of resignation upon the occurrence of a default under the security document;

v. an irrevocable proxy with respect to the Secured Shares in the Secured Company in favor of the secured party – this can assist the secured party in taking control of the Secured Company before a transfer of Secured Shares in the Secured Company has been completed;

vi. a letter of instruction to the Secured Company’s registered agent containing, among other things, directions to register a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document;

vii. a letter of acknowledgement from the registered agent with respect to the instructions contained in the letter of instruction; viii. if the security provider is a BVI business company, a certified copy of its register of charges showing the security created over the Secured Shares in the Secured Company – refer to our guide entitled “Granting and protecting security over shares in a BVI business company” for further details;

ix. if the security provider is a BVI business company, a copy of the stamped particulars of charge and certificate of registration of charge with respect to the security created over the Secured Shares in the Secured Company – refer to our guide entitled “Granting and protecting security over shares in a BVI business company” for further details;

x. a certified copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company if commercially agreed – refer to our guide entitled “Granting and protecting security over shares in a BVI business company” for further details;

xi. a copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company stamped by the BVI Registrar of Corporate Affairs (the “Registrar”) if commercially agreed – refer to our guide entitled “Granting and protecting security over shares in a BVI business company” for further details;

xii. if the security provider is a BVI business company, a copy of the board resolutions of its board of directors authorizing:

a. its entry into and execution of the security document;
b. the filing of the relevant particulars of charge with the Registrar; and
c. the updates to its register of charges;

xiii. a copy of the board resolutions of the Secured Company authorizing:

a. its entry into and execution of the security document (if it is a party);
b. its register of members to be annotated and the filing thereof with the Registrar (if commercially agreed); and
c. a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document; and

xiv. a resolution passed by the Secured Company with respect to certain changes to its M&A, if required – refer to our guide entitled “Granting and protecting security over shares in a BVI business company” for further details.

A well-drafted share mortgage will include an irrevocable power of attorney granted by the security provider in favor of the secured party enabling it to date and complete the share transfer form in respect of the Secured Shares in the Secured Company and the other documents requiring completion on enforcement.

Section 66 of the BVI Business Companies Act, 2004 (the “Act”) expressly contemplates that security over Secured Shares in a Secured Company may be governed by BVI or foreign law. One advantage of adopting a foreign governing law clause in a security document is that it may make available certain additional remedies (such as appropriation) which are not available under BVI law.

BVI law governed equitable share mortgage
Statutory enforcement rights and remedies

Where the security document is governed by BVI law, subject to any limitations or provisions to the contrary therein, the Act specifies that the secured party is entitled to the following remedies in the event of a default by the security provider until such time as the security has been discharged:

i. the right to sell the Secured Shares in the Secured Company; and
ii. the right to appoint a receiver who may:

a. vote the Secured Shares in the Secured Company;
b. receive distributions in respect of the Secured Shares in the Secured Company; and
c. exercise other rights and powers of the security provider in respect of the Secured Shares in the Secured Company.

These remedies may be expressed to become exercisable immediately on a default occurring in the applicable security document. If no such timeframe is specified, the default provisions in the Act apply which specify that the remedies are not exercisable until:

i. a default has occurred and has continued for a period of not less than 30 days, or such shorter period as may be specified in the security document; and
ii. the default has not been rectified within 14 days or such shorter period as may be specified in the security document from service of the notice specifying the default and requiring rectification thereof.

Subject to any provisions to the contrary in the security document, all amounts that accrue from the enforcement of the security document are applied in the following order of priority:

i. firstly, in paying the costs incurred in enforcing the security document;

ii. secondly, in discharging the sums secured by the security document;

iii. and thirdly, in paying any balance due to the security provider.

If the secured party has concerns that the security provider may transfer the Secured Shares in the relevant Secured Company to a third party or pay a distribution with respect to them in breach of the terms of the security document before any enforcement action has been completed, it may be possible to obtain a stop notice or a stop order.

Stop notices
A stop notice does not require a court hearing and is obtained from the Registrar of the High Court (the “Registrar of the Court”). Upon a successful application, the Registrar of the Court issues a stop notice requiring 14 days’ notice to be given to the secured party before any transfer of Secured Shares in the relevant Secured Company or any payment of a distribution with respect to them can occur.

Stop orders
A stop order prohibits the transfer of Secured Shares in the relevant Secured Company or any payment of a distribution with respect to them. This requires an order of the court.

To the extent that the registered office service provider of a Secured Company is uncooperative in updating the register of members of that Secured Company to reflect a transfer of Secured Shares, the secured party may apply to court to rectify the register on the grounds that there has been an unnecessary delay in entering it as a new shareholder.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong
T: +852 5225 4920
E: peter.vas@loebsmith.com
www.loebsmith.com

Section 66 of the BVI Business Companies Act, 2004 (the “Act”) expressly permits the creation of security over Secured Shares in a Secured Company. The Act provides that the security does not need to be in any specific form, but that:

i. it must be in writing;
ii. the security document must be signed by, or with the authority of, the security provider; and
iii. the security document must clearly indicate the intention to create security over the Secured Shares in the relevant Secured Company and the amount secured or how that amount is to be calculated.

BVI law recognizes various forms of security over assets, including equitable mortgages and charges which are most commonly taken over Secured Shares in a Secured Company.

BVI law does not prescribe a particular mode of execution with respect to security over Secured Shares in a Secured Company and it is not necessary for such security to be certified, notarized or apostilled to make the security valid or enforceable from a BVI law perspective. That being said, in practice, a security document with respect to Secured Shares in a Secured Company is customarily executed as a deed.
From an execution standpoint, it is important to review the memorandum of association and articles of association (the “M&A”) of the relevant security provider and the relevant Secured Company, to the extent it is a party to the security document, to ensure compliance with any applicable signing formalities.
Unless security is being taken in a Secured Company which is a “regulated person”, such as a bank or a mutual fund, no regulatory approvals are necessary to create valid and enforceable security as a matter of BVI law.

No stamp duty or taxes are payable with respect to the creation or enforcement of security over Secured Shares in a Secured Company as a matter of BVI law so long as the Secured Company and its subsidiaries do not have an interest in land, or any shares, debt obligations or other securities of any body corporate which has an interest in land, in the BVI.

Section 66 of the Act expressly contemplates that security over Secured Shares in a Secured Company may be governed by BVI or foreign law.

In cross-border finance transactions, it is relatively common for the governing law of a security document over Secured Shares in a Secured Company to be aligned with the governing law of the principal finance documents. One advantage of adopting a foreign governing law clause in a security document is that it may make available certain additional remedies (such as appropriation) which are not available under BVI law. Care should however be taken to ensure that there are no conflicts of law issues where a security document is governed by foreign law. English, Hong Kong and Singapore law are frequently adopted to govern security over Secured Shares in a Secured Company and no major conflicts of law issues are likely to arise.

BVI law governed security document
Where the security document is governed by BVI law, subject to any limitations or provisions to the contrary therein, the Act specifies that the secured party is entitled to the following remedies in the event of a default by the security provider until such time as the security has been discharged:

i. the right to sell the Secured Shares in the Secured Company; and
ii. the right to appoint a receiver who may:

a. vote the Secured Shares in the Secured Company;
b. receive distributions in respect of the Secured Shares in the Secured Company; and
c. exercise other rights and powers of the security provider in respect of the Secured Shares in the Secured Company.

These remedies can be expressed to become exercisable immediately on a default occurring in the applicable security document. If no such timeframe is specified, the default provisions in the Act apply which specify that the remedies are not exercisable until:

i. a default has occurred and has continued for a period of not less than 30 days, or such shorter period as may be specified in the security document; and
ii. the default has not been rectified within 14 days or such shorter period as may be specified in the security document from service of the notice specifying the default and requiring rectification thereof.

The secured party may also take possession of the Secured Shares in the Secured Company, subject to redemption by the security provider upon the settlement of the debt.

If the secured party acquires legal title to the Secured Shares in the Secured Company, it also has a right of foreclosure. This remedy extinguishes the security provider’s legal and beneficial title to the Secured Shares in the Secured Company but not its obligation to pay any secured and unpaid sums. Foreclosure involves a time-consuming and costly court process and is not usually exercised in practice given its draconian nature.

For further details regarding the enforcement of security over Secured Shares in a Secured Company, please refer to our guide entitled “Enforcing security over shares in a BVI business company”.

Foreign law governed security document
Where the security document is governed by foreign law, the Act specifies that the:

i. security document must comply with the requirements of its governing law to be valid and binding on the Secured Company;
ii. remedies available to a secured party are governed by the governing law and the terms of the security document; and
iii. rights between the secured party as a member of the Secured Company and the Secured Company are governed by the Secured Company’s M&A and the Act

Subject to any provisions to the contrary in the security document, all amounts that accrue from the enforcement of the security document are applied in the following order of priority:

i. firstly, in paying the costs incurred in enforcing the security document;
ii. secondly, in discharging the sums secured by the security document; and
iii. thirdly, in paying any balance due to the security provider.

The terms of a well-drafted BVI law governed security document with respect to Secured Shares in a Secured Company and the principal finance document will usually require the security provider to deliver the following documents to the secured party to assist with an enforcement:

i. any original share certificate(s) with respect to the Secured Shares in the Secured Company;
ii. an undated share transfer form with respect to the Secured Shares in the Secured Company;
iii. an undated resignation letter from each director of the Secured Company;
iv. a letter of authorization from each director of the Secured Company authorizing the secured party to date each undated letter of resignation upon the occurrence of a default under the security document;
v. an irrevocable proxy with respect to the Secured Shares in the Secured Company in favor of the secured party;
vi. a letter of instruction to the Secured Company’s registered agent containing, among other things, directions to register a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document;
vii. a letter of acknowledgement from the registered agent with respect to the instructions referenced in the letter of instruction;
viii. if the security provider is a BVI business company, a certified copy of its register of charges showing the security created over the Secured Shares in the Secured Company (see further below);
ix. if the security provider is a BVI business company, a copy of the stamped particulars of charge and certificate of registration of charge with respect to the security created over the Secured Shares in the Secured Company (see further below);
x. a certified copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company (if commercially agreed – see further below);
xi. a copy of the Secured Company’s register of members annotated to show the security created over the Secured Shares in the Secured Company stamped by the BVI Registrar of Corporate Affairs (the “Registrar”) (if commercially agreed – see further below);
xii. if the security provider is a BVI business company, a copy of the board resolutions of its board of directors authorizing:

a. its entry into and execution of the security document;
b. the filing of the relevant particulars of charge with the Registrar; and
c. the updates to its register of charges;

xiii. a copy of the board resolutions of the Secured Company authorizing:

a. its entry into and execution of the security document (if it is a party);
b. its register of members to be annotated and the filing thereof with the Registrar (if commercially agreed); and
c. a transfer of Secured Shares in the Secured Company upon the occurrence of a default under the security document; and

xiv. a resolution passed by the Secured Company with respect to certain changes to its M&A stamped by the Registrar, if required (see further below).

Register of charges of a BVI security provider
Pursuant to section 162 of the Act, if the security provider is a BVI company, it must record particulars of the security created over any Secured Shares in a Secured Company in its register of charges. The register of charges must include:

i. the date of creation of the charge;
ii. a short description of the liability secured by the charge;
iii. a short description of the property charged;
iv. the name and address of the secured party;
v. the name and address of the holder of the charge; and
vi. details of any prohibition or restriction, if any, contained in the security document on the power of the security provider to create any future charge ranking in priority to or equally with the security.

There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security. In addition, where a change occurs in the relevant charges or in the details of the charges required to be recorded in a BVI company’s register of charges, the BVI company must, within 14 days of the change occurring, transmit details of the change to its registered agent. Any such variations and releases of charge should also be reflected in the register of charges.

Register of registered charges of a BVI security provider

Registration of charges
Pursuant to section 163 of the Act, if the security provider is a BVI company, the security provider (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person authorized to act on its behalf) may lodge an application with the Registrar to register a charge created by the security provider by filing an application, specifying the particulars of charge, in the approved form. The security document itself is not filed or registered as part of the application.
Whilst registration is not mandatory and does not affect the validity, enforceability or the admissibility in evidence of the charge, it is almost always completed in practice because it protects the priority of the charge as explained below and puts third parties on notice of the existence of the security.
Once the Registrar is satisfied that all of the registration requirements have been complied with, it will register the charge in the security provider’s register of registered charges and issue a certificate of registration confirming the date and time of registration. The Registrar will also send a copy of the certificate to the security provider and the secured party. The certificate of registration of charge is conclusive proof that the registration requirements have been complied with and that the charge referred to in the certificate was registered on the date and time stated in the certificate.
The security provider’s register of registered charges is a matter of public record.

Variation of registered charges
Where there is a variation in the terms of a charge registered under section 163 of the Act, the security provider (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person authorized to act on its behalf) may (and should) lodge an application for a variation of charge with the Registrar by filing an application in the approved form. The document varying the charge is not itself filed or registered as part of the application. Once the variation has been registered, the Registrar will update the security provider’s register of registered charges and issue a certificate of variation confirming the date and time of variation. The Registrar will also send a copy of the certificate to the security provider and the secured party. The certificate of variation of charge is conclusive proof that the variation referred to in the certificate was registered on the date and time stated in the certificate.

Satisfaction or release of registered charges
Where all liabilities secured by a charge registered under section 163 of the Act have been paid or satisfied in full, or a charge registered under section 163 of the Act has ceased to affect the property or any part thereof, a notice of satisfaction or release in the approved form may (and should) be lodged with the Registrar. Such notice may be filed by the security provider (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person qualified to act as the registered agent of a BVI company, or a BVI legal practitioner, acting on behalf of the secured party). If the notice of satisfaction or release is filed by or on behalf of the security provider, it must be signed by the secured party (or a BVI registered agent, or a BVI legal practitioner, acting on behalf of the secured party) or be accompanied by a statutory declaration in the approved form verifying the matters stated in the notice. The document releasing the charge is not itself filed or registered as part of the application. Once the release has been registered, the Registrar will update the security provider’s register of registered charges and issue a certificate of satisfaction or release confirming the date and time on which the notice was filed. The Registrar will also send a copy of the certificate to the security provider and the secured party.

Priority of registered charges
The general rule is that a registered security interest will have priority over any later registered or unregistered security interest over the same asset. The exceptions to this rule are as follows:

i. a secured party may consent or agree to vary the priority of its security interest;
ii. a registered floating charge is postponed to a subsequently registered fixed charge unless the floating charge contains a prohibition or restriction on the power of the security provider to create any future charge ranking in priority to or equally with the floating charge; and
iii. a different regime applies to a security interest that was created by a company that was originally incorporated under the International Business Companies Act 1984 and re-registered under the Act.

The common law rules of priority continue to apply with respect to any unregistered security interests. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created.

Register of members of the Secured Company
Section 66 of the Act permits a Secured Company to annotate its register of members to include:
i. a statement that security has been created over the Secured Shares;
ii. the name of the secured party; and
iii. the date on which the statement and secured party’s name are entered in its register of members.

Section 43A of the Act also permits a Secured Company to file a copy of its register of members with the Registrar. If it does so, the Secured Company is bound by the contents of the copy register until such time as it files a notice electing to cease changes with the Registrar. Prior to filing any such notice, the Secured Company must continue to file any changes to its register of members with the Registrar.

Although it is optional to annotate a Secured Company’s register of members with details of any security that has been created or to file the same with the Registrar, these steps put third parties that inspect the register on notice of the security. Therefore, a secured party usually insists on this. Most Secured Companies typically push back on the public filing in particular as they do not want legal title to the Secured Shares to become a matter of public record.

M&A of the Secured Company
A secured party will usually request the Secured Company to make certain changes to its M&A to ensure, among other things, that there are no restrictions on the transfer of Secured Shares in the Secured Company which may impede enforcement action. Any changes to the Secured Company’s M&A should be made by passing shareholder resolutions and the amendments take effect once the amended M&A and/or the amendment resolutions (as applicable) have been filed with the Registrar. It is therefore important for a secured party to obtain a stamped copy of the amended M&A and/or the amendment resolutions (as applicable).

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong

T: +852 5225 4920

E: peter.vas@loebsmith.com

A SPAC is a shell company which is specifically incorporated by its initial sponsors for the purpose of raising capital through an IPO for use in the acquisition of a target company. The SPAC does not have any operating assets or operations and is commonly a BVI or a Cayman Islands company.

The acquisition by a SPAC of a target company is usually referred to as a de-SPAC. Most SPACs typically have between 18 and 24 months in which to identify a target company and complete an acquisition. If an acquisition is not completed within that timeframe, the proceeds of the IPO need to be returned to the investors. Investors can also redeem their shares prior to the de-SPAC if they do not want to participate in the acquisition. 

The SPAC sponsor typically receives shares for nominal consideration at the time the SPAC is incorporated. These shares normally represent around 20% of the SPAC equity following the SPAC IPO, which predominantly serves as a “finder’s fee” for identifying a target company, conducting due diligence and closing the de-SPAC transaction. Coupled with the current extended low-interest rate environment, these highly favorable economic returns have continued to attract sponsors to invest in SPACs.

SPACs have various distinctive features as follows:

i. SPAC trust account: The proceeds of a SPAC IPO cannot be used for any purpose other than to fund the relevant de-SPAC transaction or to redeem the shares sold to the investors in the IPO. The funds that are raised from the IPO are held in an interest-bearing trust account.

ii. IPO units and classes of shares: Each unit that is sold to a public investor in a SPAC IPO typically comprises a class A share and a fraction of a warrant to purchase a class A share in the future. The units typically become separable 52 days after the IPO, at which point the component securities can trade separately. In contrast, class B shares are purchased by the sponsor at the formation of the SPAC which typically convert into class A shares at the time of the de-SPAC transaction on a 1:1 basis. Unlike the class A shares, the class B shares are usually subject to transfer restrictions and are not subject to redemption. The class B shareholders also typically have the right to appoint and remove directors prior to the closing of the de-SPAC transaction.

iii. No acquisition target at the time of the IPO. A SPAC may (and commonly does) identify certain geographic areas and/or specific industries in which it will pursue a target company in order to de-SPAC in its IPO prospectus. That being said, a SPAC cannot identify its acquisition target prior to the closing of the IPO and there are typically disclosures regarding this in the relevant prospectus.

iv. Structuring of a de-SPAC: A typical de-SPAC is usually structured as a merger transaction, but the specific method that is used to acquire a target company will depend on where it is incorporated, tax considerations, whether the target company is also a listed entity and the methods of merger that are available in the applicable jurisdictions to complete the de-SPAC transaction. Typically, the target company will merge with a wholly-owned subsidiary of the SPAC and the shareholders of the target company will receive new shares in the SPAC in consideration for their shares in the target company. Both the BVI and the Cayman Islands have straightforward and well-tested statutory merger regimes which are conductive to de-SPAC transactions and familiar to corporate lawyers.

SPACs have arguably unlocked various advantages over more traditional structures used by private equity firms for investment. For example, SPAC investors benefit from the liquidity of publicly traded securities and have limited risk exposure as they are entitled to a return of their funds held in the trust account if the SPAC fails to complete an acquisition or the investor does not want to participate in one. In addition, there is typically no cash compensation paid to the management team of the SPAC pending completion of the de-SPAC transaction and their reward will depend on the success of the acquisition.

Yes, a SPAC IPO will be speedier to bring to market because it will not be necessary to complete due diligence on an existing operating company. As a direct consequence of this, some SPACs can complete an IPO within 8-12 weeks versus 12 months (or more) for a traditional IPO.

Asia-based sponsors and investors have demonstrated a keen interest in SPAC IPOs on US stock exchanges, particularly in the technology sector. In response to this, the Singapore Exchange announced new rules on 2 September 2021 to enable SPACs to list on the Main Board of the Singapore Exchange. This is a welcome development that may also revive Singapore’s lagging IPO market which saw only 3 IPOs in the first half of 2021 . Other stock exchanges in Asia, such as in Hong Kong, are also considering lifting their long-standing prohibitions on raising funds for unspecified purposes. Whilst Asia’s more conservative approach to SPACs is unlikely to match the level of deal-flow or capital raising seen in the US in the short or medium term, Asia’s financial markets are reliant on a steady-stream of IPOs to remain competitive so we foresee that key financial centers in Asia will develop a suitable regulatory framework for SPACs. It should also be noted that a number of SPACs are currently exploring de-SPAC opportunities in China and South Asia where an abundance of private equity backed companies with promising growth prospects are located.

Many SPACs issue new shares to institutional investors in a PIPE – which stands for private investment in public equity – that closes concurrently with the de-SPAC transaction in order to raise additional funding. These PIPEs are important in ensuring the completion of the de-SPAC transaction in the event there are significant redemptions and they also provide third-party validation of the terms and valuation of the acquisition.

The sponsor or institutional investors may also enter into forward purchase arrangements with the SPAC to commit to purchase new shares of the SPAC concurrently with closing of the de-SPAC transaction.

Most SPACs pursuing US targets continue to be incorporated in Delaware, although the BVI and the Cayman Islands also remain popular. We expect the popularity of BVI and Cayman Islands incorporated SPACs to increase as SPAC activity picks up in Asia because BVI and Cayman Islands companies are widely used across the region and familiar to stock exchanges, regulators and other relevant market participants.

Cayman Islands SPACs are currently more popular than BVI SPACs, probably because the Cayman Islands continues to be the jurisdiction of choice for listed companies and private equity funds. That being said, BVI companies may confer certain advantages in the context of SPAC transactions. For example, the shareholder approval thresholds in a de-SPAC transaction for a statutory merger are typically lower in the BVI than the Cayman Islands.

There are various features of BVI and Cayman Islands law which make these jurisdictions attractive for SPACs, including:

i. Unlimited objects. BVI and Cayman Islands companies may have unlimited objects and purposes which is important because SPACs will, in our experience, describe their target in terms that are as broad as possible in their IPO prospectus.

ii. Flexibility. There is significant flexibility in tailoring the articles of association of the relevant SPAC to accommodate the issuance of warrants and different classes of shares, as well as the incorporation of defensive takeover tactics.

iii. Capital maintenance. The rules on capital maintenance (where applicable) are flexible, permitting distributions and share redemptions from a wide range of sources subject only to the usual solvency tests.

iv. No takeover code. There is no takeover code or legislation that is specifically applicable to listed companies (with the exception of the Cayman Islands Code on Takeovers and Mergers that is only applicable to companies whose securities are listed on the Cayman Islands Stock Exchange).

v. Foreign private issuer. BVI and Cayman Islands companies that are listed on a US stock exchange may be able to qualify as a “foreign private issuer”, thereby taking advantage of reduced disclosure and reporting requirements.

vi. Statutory merger regime. Both the BVI and the Cayman Islands have well-established and straightforward statutory merger regimes which are conductive to de-SPAC transactions.

vii. Secured creditor friendly. The BVI and the Cayman Islands are widely recognized as creditor friendly jurisdictions, which is helpful in the context of facilitating a financing that a SPAC may require to consummate a de-SPAC transaction. The BVI also has a straightforward system of registering security interests which is attractive to secured creditors.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas

Partner

Loeb Smith Attorneys

Hong Kong

T: +852 5225 4920

E: peter.vas@loebsmith.com

www.loebsmith.com