With the price of oil sinking on a daily basis, instability in key areas such as Russia and the Middle-East, a push to develop renewal energy sources and the ghost of the recent market crash still hanging over the major economies of the world, the oil and gas industry is in the midst of uncertain times.
However, there is still a clear need and market for oil and gas products and that means that there are opportunities. Well-capitalized companies and private equity players have turned to the oil and gas market seeing opportunities to acquire both companies and assets and to invest in emerging jurisdictions. In order to facilitate these complex investments that can bring together funding from multiple countries, parties can benefit from using investment and joint venture vehicles in international finance centres with which they are familiar and which allow for flexibility of structuring, ease of use and speed of incorporation. The British Virgin Islands (BVI) and the Cayman Islands offer all of these advantages and more and are the jurisdictions of choice for savvy investors.
Start with a Strong Foundation
Whilst the commercial aims of the joint venture may be well established, consideration needs to be given to the mechanics of "hard- wiring" the parties' intentions within the documentation. These vary deal to deal but common points include:
- Share rights: Are the shares to have special rights and/or restrictions attached? For example, voting rights, varying entitlements to dividends and rights to appoint board members. If so, what are the parameters for them?
- Transfers/sale of shares: Will there be restrictions and/or any rights of first refusal granted to the other joint venture parties if an exit is proposed by another partner? How should exits be structured?
- Reserved matters: Are there any instances which would require higher voting thresholds or bespoke approval arrangements eg, investments in certain assets, borrowing thresholds or undertaking a merger/acquisition.
- Board versus shareholders: What matters, if any, can the board deal with independently of the shareholders and what will require shareholder consent? How is the board to be formed and who will be on it? Occasionally independent directors are used in conjunction with those appointed by the joint venture partners.
Select a Jurisdiction Designed for Complex Business Transactions
In some jurisdictions, it is possible to incorporate a company over the internet very quickly, even without the involvement of lawyers. While this may save costs at the outset – which is, of course, at the top of many clients' lists – smart investors look for the type of company and jurisdiction that allows the joint venture to be built for the long-term. That means assuring coverage in three areas:
(i) decision making; (ii) future funding options; and (iii) expansion.
Both the BVI and the Cayman Islands are internationally recognised as well regulated jurisdictions with robust and creditor-friendly legal systems that actively engage and cooperate with foreign governments and supra national bodies to ensure that their regulations meet international standards.
The key piece of legislation in each jurisdiction are:
- The BVI Business Companies Act 2004 (Business Companies Act). The Business Companies Act is regarded as modern and progressive and BVI business companies are commonly used as they are so familiar to international investors, particularly those based in Asia.
- The Companies Law (2013 Revision) of the Cayman Islands (Companies Law). The Companies Law is the primary source of regulation for companies in the Cayman Islands and is continually being developed to keep in step with the increasing demands of the international markets. An example of this has been the development of the merger law contained in Part XVI of the Companies Law which is now used in many merger and acquisitions involving Cayman Islands companies. The Companies Law also allows for the surrender of shares for no consideration. This is interesting in the context of oil exploration as it could allow for a class of shares to be issued to finance a specific exploratory drill site. If the well produces a return, profits can be distributed amongst investors by way of dividend but if it is dry, investors can surrender their shares for no consideration and such shares will be cancelled.
The Joint Venture Advantages of a BVI or Cayman Islands Company
There are certain key attributes of BVI or the Cayman Islands for structuring companies, such as a joint venture, that provide significant benefits to investors.
- Decision making: Compared to other jurisdictions, BVI offers a huge degree of freedom in choosing whether decisions are to be made by the directors or shareholders. It is possible to disapply numerous provisions of the Business Companies Act and there are therefore few statutory shackles. It is also possible (but not required) to specify different thresholds for different shareholder votes (eg 50 per cent, 75 per cent, 90 per cent). Unlike other jurisdictions, there is no statutory requirement for certain actions to be approved by a special resolution of the shareholders.
- Corporate governance: Unlike other jurisdictions, the BVI Business Companies Act permits a director to act in the interests of its appointing shareholder when carrying out a joint venture, even though it may not be in the best interests of the company. In the Cayman Islands, directors have a fiduciary duty to act in the best interests of the shareholders as a whole.
- Directors: There are no requirements for directors to be resident in the BVI or the Cayman Islands. That allows the joint venture parties to appoint directors based on their expertise in oil and gas ventures or other relevant experience and not solely on geography.
- No or minimal share capital and can have no par value shares: Unlike other jurisdictions, share capital is an outdated concept in the BVI. A BVI company will simply have a maximum number of shares it can issue. It is also possible for a BVI company's shares to have no par value. These aspects help make the determination of the number of shares for the Investor and the issue price very straightforward. A Cayman Islands company needs only to have one shareholder and there is no minimum or maximum amount prescribed for authorised issued or paid up share capital. No par-value shares are also permitted in the Cayman Islands.
- Simple to make distributions and dividends: In BVI, the Business Companies Act provides a simple regime for making dividends. Subject to the company's memorandum and articles of association, the directors may authorise a distribution if they resolve that they are satisfied on reasonable grounds, that immediately after the distribution, the value of the company's assets will exceed its liabilities and the company will be able to pay its debts as they fall due. So the focus is on solvency, rather than on making dividends out of distributable profits, reserves, premium or surplus, which is frequently the case in other jurisdictions. Payment of dividends is also straightforward in the Cayman Islands. Provided the Cayman Islands company can pay its debts as they fall due both before and after the dividend payment, dividends can be paid out of sums standing to the credit of the company's share premium account even if no profits are available. Shares in a Cayman Islands company may also be redeemed or repurchased out of capital, subject to solvency considerations.
- Easy to restructure: The Business Companies Act and the Companies Law makes restructuring a BVI or Cayman Islands company very straightforward. Shares can easily be divided or combined. It is possible to migrate companies in and out of the BVI and the Cayman Islands
- Tax neutral: Both a BVI and a Cayman Islands company are tax neutral vehicles. Both jurisdictions also continue to negotiate and sign tax information exchange agreements with foreign governments ensuring they continue to be recognised internationally as transparent, well regulated jurisdictions.
- Speed and cost efficiency: Companies can be incorporated quickly and easily and set-up and annual fees are comparatively inexpensive in both BVI and the Cayman Islands.
- Experience and skill: The BVI and the Cayman Islands offer a highly skilled workforce of lawyers, accountants, corporate administrators and insolvency experts, many of whom have trained or worked in onshore financial centres and have considerable experience in establishing complex joint venture and funding arrangements.
With uncertainty comes opportunity. To take advantage of these opportunities, flexibility, speed and precision are all vital. BVI and Cayman Islands vehicles provide investors with all three factors, allowing them to explore acquisitions and expansion in the oil and gas sector with companies that can be adapted for their needs.
A version of this article first appeared in Oil + Gas monitor on 13 May 2015.