Under the BVI Business Companies Act, 2004 (as amended,1 the Companies Act) there is no requirement for a company to have a stated authorised share capital. Consequently the rules relating to reduction of capital, acquisition by the company of its own shares, distributions and dividends have been greatly simplified, with the company only needing to satisfy a two limb solvency test (the solvency test):
- that the company’s assets exceed its liabilities (the “balance sheet” test); and
- that it is able to pay its debts as they fall due after the relevant event (the “cash flow” test).2
This Guide focuses on the main issues and changes regarding shares in general and registered shares in particular. Issues relating to bearer shares are considered in the Guide on Bearer Shares under the BVI Business Companies Act, 2004.
2. Companies that can issue shares
Not all types of companies that can be incorporated under the Companies Act can issue shares. Only companies limited by shares, companies limited by guarantee and authorised to issue shares and unlimited companies authorised to issue shares can do so.3 Restricted purposes companies4 and segregated portfolio companies5 must be companies limited by shares.
3. No concept of authorised share capital or share capital
Authorised share capital, particularly in the context of most private companies, is now regarded as an obsolete and meaningless concept, for it bears no relation to the company’s actual capitalisation, its net asset position or its profitability, and at worse is liable to mislead. The Companies Act removes this concept altogether, even in respect of shares with par value.
It is generally accepted that the concept of share capital is unnecessary; companies do not need to have share capital in order to trade (as demonstrated by companies limited by guarantee without shares and unlimited companies without shares which can be trading companies). A company needs working capital to trade but working capital can be (and for private companies commonly is) introduced in a number of ways other than by the issue of shares, for example, by a debt financing. Furthermore, in many cases the actual amount of share capital may be nominal and bear no relation to the actual capital needs of the company.
The only matter that must be stated in a company’s memorandum of association (memorandum) is the maximum number of shares that it is authorised to issue or that it is authorised to issue an unlimited number of shares.6 Companies may issue shares with or without a par value in any currency and need only indicate in its memorandum the maximum number of shares that it is authorised to issue.7 Companies are therefore not required to indicate the par value of shares with par value, the aggregate value of such shares, the currency of the shares or the amount to be represented by shares without par value. The consideration obtained for the issue of a share is not designated as capital. Indeed, there is no definition of “capital” or “share capital” in the Companies Act.8
Further, as discussed below, there is no special treatment of the consideration received on issue of a share, and no special restrictions placed on the company’s ability to deal with it. Accordingly, the Companies Act also has no specific provision dealing with the increase or reduction of capital.
4. Types of shares that a company can issue
Companies may issue registered shares and bearer shares. However a company cannot issue bearer shares or convert or exchange a registered share to or for a bearer share unless specifically authorised to do so by its memorandum.9 Segregated portfolio companies are prohibited from issuing bearer shares or converting or exchanging registered shares to or for bearer shares.10 But a company can at any time convert or exchange a bearer share to or for a registered share, notwithstanding any provision to the contrary in the memorandum or articles of association (articles).11
Shares can be issued as (i) redeemable shares,12 (ii) preference shares,13 (iii) shares with no rights to distributions,14 (iv) shares with special voting rights, or only limited or conditional voting rights,15 or even no voting rights16 and (v) shares that entitle participation only in certain assets of the company.17 Companies may, subject to the memorandum and articles, issue bonus shares, partly paid up shares and nil paid shares18 or fractional shares19 and may also hold shares as treasury shares (i.e. where the company has acquired its own shares but not cancelled them).20
5. Classes of shares
A company can issue shares of different classes21 and in one or more series if expressly authorised by its memorandum to do so.22 The rights, privileges, restrictions and conditions attaching to each class must be specified in the memorandum.23
6. Issue of shares
Subject to the memorandum and articles, the issue of shares is at the discretion of the directors, who may determine the consideration and terms of any issue.24 However, the consideration for a share with par value must not be less than the par value.25 Contravention of this provision renders the person to whom the share was issued liable to pay the difference.26
Shares can be issued for non-money consideration (such as consideration in kind, including a promissory note or other written obligation to contribute money or property, goodwill, know-how, services rendered and a contract for future services),27 but the directors must first pass a resolution stating:
- the amount to be credited for the shares;28
- their determination of the reasonable cash value of the consideration;29 and
- that in their opinion the cash value is not less than the amount to be credited.30
If a company issues partly paid shares or nil paid shares,31 the memorandum or articles, or the terms on which shares are issued, may provide for the forfeiture of shares that were not fully paid for on issue.32
Shares are deemed to be issued when the name of the shareholder is entered in the register of members,33 and title to the shares is prima facie evidenced by an entry in the register of members.34 The company must state in its articles whether share certificates will be issued,35 but companies may issued uncertificated shares. If share certificates are issued, they must be signed by at least one director or by such person who may be authorised by the memorandum or articles to sign them, or be under the common seal of the company with or without the signature of any director.36
7. Treatment of the consideration received for shares
The Companies Act does not have a concept of surplus or share premium. A dividend payment or other distribution can only be made if the directors determine that after the payment of the dividend or the other distribution the company would satisfy the solvency test.37 There is no requirement to demonstrate surplus or any other form of distributable reserves.
Under the Companies Act there is no multiple designation of the consideration received for the issue of shares: it is not divided between capital and share premium or surplus, and there are no special restrictions placed on the use of the consideration. It is simply treated as an asset of the company.
8. Transfer of registered shares
The transfer of a registered share under the Companies Act is by a written instrument of transfer signed by the transferor and containing the name and address of the transferee.38 However, the instrument must also be signed by the transferee if registration would impose a liability on the transferee to the company.39 The instrument must be sent to the company for registration,40 and the company must enter the transferee’s name in the register of members.41 The transfer is effective when the name of the transferee is entered in the register.42 However, the directors may refuse or delay registration,43 but only if permitted by the Companies Act or the memorandum or articles,44 for example, if the holder of the shares has failed to pay an amount due in respect of them.45
9. Rights and liabilities in respect of shares
The default rights which a share confers on its holder are:
- the right to one vote;46
- an equal share in any dividend;47 and
- an equal share in the distribution of surplus assets.48
However, where expressly authorised by its memorandum, a company may issue shares subject to terms that negate, modify or add to those statutory rights.49
Liability as shareholder is limited to any amount unpaid for the shares,50 any liability expressly provided for in the memorandum or articles51 and the liability to repay a distribution that was made in breach of the solvency requirements.52
10. Maintenance and reduction of capital
The mere fact that there is no concept of share capital under the Companies Act does necessarily mean that the rules on maintenance and reduction of capital are redundant, for the purpose of these rules is to restrict the circumstances in which the company’s assets may be returned to members in priority to creditors. There are no special or specific rules requiring the maintenance of capital or restricting the circumstances in which capital may be reduced. A distribution can only be made if, after the distribution, the company satisfies the solvency test. This is discussed in more detail below.
11. Acquisition by a company of its own shares
The statutory provisions regulating the acquisition by a company of its own shares relate not just to the purchase of its own shares but also to redemption of shares and to any other mode of acquisition of shares.53
11.1 Two regimes for acquisition of shares
A company can purchase, redeem or otherwise acquire its shares in accordance with two distinct regimes: either in accordance with sections 60, 61 and 62 of the Companies Act54 or in accordance with provisions set out in its own memorandum and articles.55 This gives a company the flexibility to “contract out” of the statutory mechanism and specify its own mechanism for the purchase or redemption of its shares in its memorandum or articles, and in that event sections 60 to 62 do not apply to the extent that they are modified, negated or inconsistent with the provisions in the memorandum or articles.56
11.2 Solvency test
Whether the acquisition is under the statutory regime or otherwise, there is one important restriction on the company’s ability to purchase its own shares: it is subject to the solvency test for distributions.57 Thus, the directors must be satisfied on reasonable grounds that the company will satisfy the solvency test for a distribution58 immediately after the acquisition.59 The directors must authorise the acquisition by resolution, and must expressly state that in their opinion the company will satisfy the solvency test immediately after the distribution.60
If the acquisition is pursuant to either (i) section 62,61 (ii) a shareholder’s right to have his shares bought,62 or (iii) section 179 (the right of a dissenting shareholder to payment of fair value for his shares),63 it is deemed not to be a distribution and consequently there is no requirement that the solvency test be satisfied.
11.3 Statutory regime under sections 60 to 62 of the Companies Act
The mechanism under section 60 is initiated by an offer by the directors to acquire the shares. The offer may be either to all the shareholders64 or to one or more shareholders.65 An offer to all the shareholders must be one which if accepted would leave the relative voting and distribution rights of all shareholders unaffected66 and must give each shareholder a reasonable opportunity to accept.67 Such an offer can allow the company to acquire additional shares from a shareholder to the extent that another shareholder either does not accept the offer or only accepts it in part.68
Under section 61 an offer to one or more shareholders can only be made in certain restricted circumstances (i.e. if all the shareholders have consented in writing69 or if the memorandum or articles permit it).70 In the latter situation the directors must have passed a resolution stating that in their opinion the acquisition is for the benefit of the remaining shareholders71 and the offer and consideration are fair and reasonable to the company and the remaining shareholders.72 The resolution must also set out the reasons for the directors’ opinion.73 A shareholder (usually one to whom the offer has not been made) is given the right to apply to the Court to restrain the proposed acquisition on the grounds that it is not in the best interests of the remaining shareholders74 or that the terms of the offer and the consideration are not fair to the company or the remaining shareholders.75
The above mechanisms deal with the situation where the acquisition is at the option of the company. Section 62, by contrast, deals with the situation where shares are redeemable either at the option of the shareholder or where they are redeemable on a specified date. Where shares are redeemable at the option of the shareholder, the mechanism is initiated by the shareholder giving the company proper notice of his intention to redeem the shares.76 If he gives such a notice, the company must redeem them - it has no discretion in the matter. It must redeem them on the date specified in the notice or, if no date is specified, then on the date the notice is received.77 If shares are redeemable on a specified date, either by virtue of the terms on which they were issued or pursuant to the memorandum or articles, then the company must redeem them on that date; and it will have no discretion in the matter.78
From the date of redemption, the former shareholder ranks as an unsecured creditor of the company for the sum payable on the redemption,79 however, the former shareholder is not able to claim in the liquidation of the company for the sum if the company goes into liquidation before he is paid.80 The shares are deemed cancelled unless held as treasury shares.81
12. Distributions and dividends
“Distribution” is widely defined as encompassing the direct or indirect transfer of any asset to or for the benefit of a member, or the incurring of a debt to or for the benefit of a member, including the purchase of an asset, the purchase, redemption or other acquisition of shares, the transfer of indebtedness and dividends.82 Thus the rules for payments to members have only one test, irrespective of whether the payments are of a capital nature or of an income nature.
Note that the definition of distribution in section 56(b) (i.e., “…the direct or indirect transfer of an asset, other than the company’s own shares…” (emphasis added)) appears to exclude dividends paid by way of share issues which means that the solvency test would not need to be satisfied before shares are issued as dividends.
The directors must be satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test83 and this must be stated in the directors’ resolution authorising the distribution.84
Any distribution made at a time when the company did not, immediately after the distribution, satisfy the solvency test may be subject to a “claw-back” by the company.85 However, the company cannot recover such a distribution against a member if three conditions are satisfied:
- if he received it in good faith and without knowledge of the company’s failure to satisfy the solvency test;86
- he has altered his position in reliance on the validity of the distribution;87 and
- if it would be unfair to require repayment.88
In this situation the directors are personally liable to repay to the company so much as was unrecoverable from the members if, before the distribution, the director ceased to be satisfied that the company would satisfy the solvency test but failed to take reasonable steps to prevent the distribution being made.89 However, if the company could have made a distribution of a lesser amount that satisfied the solvency test, the court may permit a member to retain that amount or relieve a director of liability in respect of that amount.90
13. Mortgage or charge over shares
A charge or mortgage91 over a company’s shares must be in writing signed by or with the authority of the registered holder of registered shares or the holder of bearer shares, as the case may be,92 but otherwise it is not required to be in any specific form as long as it clearly indicates an intention to create the security and the amount secured or how that amount is to be calculated.93 For registered shares, a statement can be entered in the register of members that the shares are mortgaged or charged94 together with the name of the mortgagee/chargee95 and the date on which they are entered.96
To create a mortgage or charge over bearer shares the share certificates must be deposited with a custodian.97 Otherwise the mortgage or charge will not be valid or enforceable.
The parties can choose a law other than British Virgin Islands law to govern the mortgage or charge in which case the charge must comply with that law in order to be valid and binding on the company,98 and the remedies available to the mortgagee or chargee shall be governed by the governing law and the instrument creating it.99 This may result in a British Virgin Islands court being asked to implement remedies which are unknown to British Virgin Islands law.100 If no law is specified, then the mortgage or charge will be construed in accordance with British Virgin Islands law.
If British Virgin Islands law applies to the mortgage or charge, the remedies available to the mortgagee/chargee (subject to any limitations in the instrument creating the security) under the statute include the right to sell the shares101 and the right to appoint a receiver over the shares102 who may vote them,103 receive dividends104 or exercise other rights or powers of the mortgagor/chargor.105 Those statutory rights are concurrent with any rights which may arise under other statutes,106 the common law or under the terms of the instrument.
However, the statutory remedies under the Companies Act are not exercisable unless two conditions are satisfied: there has been a default which has continued for a period of 30 days or any lesser period specified in the instrument creating the charge,107 and the default has not been rectified within 14 days, or any shorter period specified in the instrument creating the charge, from service of a notice of default.108 However, those restrictions do not appear to affect concurrent rights under other statutes or the common law. The Companies Act also expressly allows the parties to specify that the Conveyancing and Law of Property Act shall not apply to the mortgage or charge.109