This briefing is intended to provide a summary of some of the legal requirements and considerations applicable to the use of an offshore company for listing on the Alternative Investment Market (“AIM”). It is not, however, intended to be comprehensive in its scope and it is recommended that a client seeks legal advice on any proposed transaction prior to taking steps to implement it.
Offshore jurisdictions have become increasingly attractive as the place to incorporate an issuer seeking to raise funds on AIM. This is particularly the case for businesses which have their primary operations outside the United Kingdom.
Jersey, Guernsey, Cayman and the British Virgin Islands (or “BVI”), in particular, are increasingly popular as jurisdictions in which to incorporate a listing vehicle. Reasons for this include the facts that they:
- are recognised as stable international finance centres with top-tier reputations;
- are amongst the largest offshore jurisdictions and have numerous lawyers and accountants with experience of listed entities (from both an onshore and offshore perspective);
- offer an extremely favourable tax environment;
- have well-developed corporate laws which use concepts familiar in English law and which are both robust and flexible.
This briefing looks specifically at the British Virgin Islands and considers the advantages that this jurisdiction has to offer.
Many AIM businesses do not operate in, or bring income into, the United Kingdom and so do not automatically fall within the United Kingdom tax net. These businesses often seek to incorporate, manage and control their listing vehicle in a tax neutral jurisdiction.
In the British Virgin Islands there is no income tax, no corporation tax and no capital gains tax.
In addition, no stamp duty is payable on share transfers in the British Virgin Islands.
The corporate laws in the British Virgin Islands are to a large extent modelled on, and use many of the same concepts as, English law. This is important for investors since an offshore listing vehicle will generally “look and feel” very much like its English-incorporated counterparts with which investors are familiar.
However, just as importantly, the corporate laws in these offshore jurisdictions, whilst robust, frequently offer a degree of flexibility not afforded by English law. Some examples of this flexibility are considered below:
Repurchase and redemption of shares
The shares of a company incorporated in the British Virgin Islands can be repurchased or redeemed from any sources, subject to the company being able to meet a balance sheet and cash-flow solvency test immediately after the redemption/repurchase.
For a British Virgin Islands company, there are no restrictions on the making of distributions, provided that the directors are satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy balance sheet and cash-flow solvency tests.
There is no concept of unlawful financial assistance in the British Virgin Islands. Indeed, a company incorporated in the BVI is expressly permitted under the BVI Business Companies Act 2004 to give financial assistance to any person in connection with the acquisition of its own shares.
Investor protection and corporate governance
As mentioned above, it is typically beneficial with regards to investor perception for elements of an offshore AIM listed issuer to resemble its English counterparts. This is particularly the case in terms of investor protection and corporate governance.
There are no statutory pre-emption rights under BVI law, unless specifically included in the company’s constitutional documents. Directors of companies incorporated in this jurisdictions will generally have the power, subject to there being sufficient authorised but unissued shares available, to issue new shares on a non pre-emptive basis.
In order to meet general investor expectations, therefore, the articles of association of an offshore company seeking to list on AIM are often amended so as to require the directors to offer new shares on a pre-emptive basis to the existing shareholders.
In addition, in the British Virgin Islands, where amending the company’s memorandum is within the remit of the directors rather than the shareholders, the articles of association are generally amended so as to require a prior shareholders’ resolution to approve any intended increase in the maximum number of shares that the company is authorised to issue. Note that amendments to the memorandum and articles of association of a BVI company are only effective once filed with the Registrar of Corporate Affairs in the BVI.
Non-UK issuers on AIM are not required to comply with DTR5 (Vote Holder and Issuer Notification Rules) of the Disclosure and Transparency Rules (found in the UK’s Financial Services Authority Handbook). This means that shareholders of AIM companies incorporated in the British Virgin Islands are not ordinarily subject to any requirement to disclose their interests in voting rights in those companies.
However, as a matter of best practice, it is now commonplace for the provisions of DTR5 and section 793 of the UK’s Companies Act 2006 (enabling a company to serve a notice requiring the disclosure of interests in its shares) to be incorporated by reference into an offshore AIM company’s articles of association. This can be supported by additional provisions in the articles allowing the company to withhold dividends, suspend voting rights and prohibit transfers of shares held by a person who has not complied with these disclosure obligations.
It is, of course, almost a prerequisite for the shares in a company applying to list on a stock market to be capable of being traded in uncertificated form.
BVI laws are silent as regards the ability for a BVI company to have uncertificated securities and therefore, where a company is to be used for a listing, it is usual to provide for uncertificated securities in the articles of association.
As regards trading, AIM listed shares in BVI companies are typically traded in depositary receipts.
City Code on Takeovers and Mergers
The UK’s City Code on Takeovers and Mergers now has statutory effect in the UK, Isle of Man and Channel Islands. Although not directly applicable for BVI companies, it is usual (and arguably best practice) to include provisions in their articles of association prohibiting or restricting the acquisition of shares in the circumstances envisaged by the City Code on Takeovers and Mergers (i.e. Rule 9) and giving the directors wide powers (commensurate to the extent possible with those vested in the Takeover Panel) to deal with a breach of any such prohibition or restriction.