Nicholas Kuria, Partner, Conyers
One benefit of incorporating a JV in BVI is that of neutrality, as none of the joint venture parties will hold particular influence. Tax neutrality is another benefit; there is no corporation, capital gains, wealth, or any other tax applicable to a business company, and they are specifically exempted from income tax.
The principal statute governing the formation and operation of a BVI business company is the Business Companies Act 2004 (the BC Act), which is a modern and flexible companies statute. The principal corporate documents are the joint venture agreement (JVA) and the memorandum and articles of association (M&A) of the BVI company. The M&A is a public document registered with the Registrar of Corporate Affairs of the BVI.
Sometimes shareholders’ agreements are incorporated by reference into the M&A, but there is some doubt as to whether this reference is effective. It has been suggested that instead of this, to the extent that the shareholders’ agreement deals with matters that are governed by the M&A, those provisions need to be expressly set out in the M&A.
Some particular provisions of the JVA must be in the M&A under BVI law. It is important to avoid inconsistencies between the JVA and the M&A, and seeing as the M&A will necessarily be governed by BVI law, interested parties are advised to have the JVA governed by BVI law too.
Under BVI law, consideration for the issue of shares can be in any form and shares may be issued with or without par value. It is not uncommon for at least one party to a JVA to contribute non-cash considerations to the BVI company.
The BC Act provides for different share classes and it is recommended that separate classes are used to cater for matters such as the right to appoint directors and also to avoid naming shareholders in the M&A.
All power to manage a BVI company is allocated to the directors, unless otherwise allocated to the shareholders. Any purported attempt in the M&A to allocate such power to a third party is likely unenforceable.
Section 120(4) of the BC Act allows a director of a company that is carrying out a joint venture between the shareholders, to act in a manner which he believes is in the best interests of a shareholder or shareholders, even though it may not be in the best interests of the company.
Under the BC Act, the payment of distributions is subject to a statutory solvency test encompassing both cash-flow solvency and balance sheet solvency. Parties should seek legal advice if the JV provides that payment of distributions to shareholders will be restricted as this may be an improper fetter on the statutory discretion of the directors to declare and pay dividends.
One term of a deal may be that shares may be forfeited as a consequence of a breach of the JVA. However, forfeiture is not a known BVI corporate law concept other than in connection with failing to pay up less than fully paid shares. Alternatively, the shares of the defaulting party could be redeemable at the option of the company for a nominal amount or an option (along with a power of attorney) available to the non-defaulting shareholder(s) to purchase the defaulting shareholder’s shares for a nominal amount in the event of a breach of the agreement. BVI law advice should be taken to ensure that any such forfeiture does not constitute a penalty.
Rule of law is often a consideration for parties seeking to ensure that the law will be disinterestedly and consistently enforced. The BVI’s legal system is founded on English law and provides a neutral and secure legal environment. The Judicial Committee of the Privy Council in the United Kingdom is the highest court for any review.
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