Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
The non-prescriptive corporate legislation, tax-neutral status and stable regulatory environment have made the British Virgin Islands (BVI) a popular jurisdiction for the incorporation of holding companies in a wide range of industries. As a consequence, the BVI sees a wide range of private equity transactions, including management and leveraged buyouts, venture capital, growth capital and public-to-private transactions.
Both BVI target companies and special purpose companies set up to acquire such targets will be incorporated within the BVI as ‘business companies’, being companies limited by shares. Although less utilised in the BVI than other jurisdictions, there is an increasing number of BVI-registered limited partnerships, with or without legal personality, pursuant to revised legislation for the same.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or later become public companies?
All BVI business companies must comply with the BVI Business Companies Act 2004 (as amended) (the BCA), which grants flexibility on how entities are governed. Unlike other offshore jurisdictions (eg, the Cayman Islands, Bermuda or the Channel Islands), there are currently no stock exchanges located in the BVI. BVI companies are, however, frequently listed on stock exchanges outside the BVI, including the New York Stock Exchange, NASDAQ, the London Stock Exchange (both the Main Market and, more frequently, AIM), the Tokyo Stock Exchange and the Hong Kong Stock Exchange. The advantages of going private, and the effects on corporate governance on becoming a public company, will be subject to the rules imposed by the relevant exchange. Of particular interest to private equity funds and with the consent of any minority shareholders, directors of BVI companies are permitted to act in the interests of their parent company, allowing investor-appointed directors to act in the interests of their respective investors.
Issues facing public company boards
What are some of the issues facing boards of directors of public companies considering entering into a going-private or other private equity transaction? What procedural safeguards, if any, may boards of directors of public companies use when considering such a transaction? What is the role of a special committee in such a transaction where senior management, members of the board or significant shareholders are participating or have an interest in the transaction?
There are no stock exchanges operating within the BVI. As a result, there are no particular rules in the BVI that govern the boards and actions of public companies. BVI companies listed overseas must comply with their obligations as directors under BVI law (which apply to directors of both public and private companies) and any further obligations under the provisions of the exchange (eg, under the Listing Rules and Market Abuse Regulation if listed on the London Stock Exchange).
The board must, however, give thought at all times to their fiduciary duties as directors of a BVI entity. Under BVI law, the main duties of directors have been codified into the BCA, being:
- to act honestly and in good faith and in what the director believes to be in the best interests of the company;
- to exercise powers for a proper purpose, including not acting, or agreeing to act, in a manner that contravenes the BCA or the constitutional documents of the company; and
- to exercise their powers and perform their duties with the level of care, diligence and skill that a reasonable director would exercise in the same circumstances, taking into account, among other things:
- the nature of the company;
- the nature of the decision; and
- the position of the director and the nature of the responsibilities undertaken by him or her.
These statutory duties are not exhaustive, and may be supplemented by any duties imposed by common law. For common law duties applicable in the BVI, the BVI court will make reference to decisions of English courts and courts in other Commonwealth jurisdictions, despite such decisions not being binding on BVI courts. In light of their duties, boards of BVI companies should consider additional safeguards that would not otherwise be required under BVI law, for instance, fiduciary outs to any no-shop or shareholder recommendation provisions and limits on any break fees.
Where a director is interested in a transaction, interests must be disclosed to the board, except where a transaction is between the director and the company or where the transaction is in the ordinary course of business and on usual terms. Nevertheless, it is prudent for directors to always disclose any interest in a transaction. Where an interest has been disclosed, and provided the constitutional documents of the company do not provide otherwise, the director will be permitted to attend meetings and vote on the transaction. This avoids the need for any special committees of independent directors, unless this is viewed as beneficial for shareholder optics or required under the listing rules of the relevant exchange.
Are there heightened disclosure issues in connection with going-private transactions or other private equity transactions?
Save for the disclosure of directors’ interests and any procedural notices required pursuant to the chosen takeover method, there are no specific BVI disclosure requirements in connection with going-private transactions. Minimum disclosure requirements will instead be governed by the rules of the relevant exchange.
What are the timing considerations for negotiating and completing a going-private or other private equity transaction?
There are four main methods that can be used to take a publicly listed BVI company private, each involving different timing considerations. The use of each method must be analysed alongside the takeover and listing regulations of the relevant exchange.
1. Merger or consolidation
Mergers and consolidations both involve the target and the purchasing entity merging into one surviving single entity, held by the purchaser. A merger results in one of the constituent companies being the surviving entity, whereas a consolidation results in the target and the purchasing entity being consolidated into a new company.
To effect a merger or consolidation, the board of each merging or consolidating company must approve a written plan of merger or consolidation, which is circulated to all shareholders of each company (whether or not entitled to vote thereon). There is a great deal of flexibility as to how the existing shares of the target can be treated upon the merger or consolidation, including the ability to exchange target shares for shares in the purchaser or debt obligations or to cancel target shares in exchange for payment. Shares of the same class can be treated differently – allowing for certain key stakeholders’ or managers’ shares to be converted into shares in the purchasing or new entity or into debt obligations, while other shares are exchanged for cash.
Subject to the articles of association of the company, the plan must be approved by a simple majority (over 50 per cent of those issued shares represented at the meeting or, if by written resolution, of the issued shares entitled to vote) of each class of shareholder entitled to vote. A minimum of seven days’ notice must be given for any shareholder meeting (unless waived by 90 per cent of the shareholders), subject to any longer notice period (or higher waiver threshold) set out in the company’s articles of association or the rules of the relevant exchange.
Once approved, articles of merger or consolidation must be filed at the BVI Registry of Corporate Affairs. The plan will be binding when registered by the BVI Registrar or at such later date as specified in the plan (up to 30 days after approval).
The low threshold for approval makes a merger or consolidation an attractive option for takeovers. Where a merger is used, shareholders are able to exercise dissent rights but this will not delay the point at which control is transferred.
2. Tender offer for all issued shares
Provided sufficient shareholder approval can be obtained, a further option is a contractual offer to shareholders, with the squeeze-out of any remaining minority. Subject to the constitutional documents of the BVI company, shareholders holding 90 per cent of the outstanding shares entitled to vote may direct the company, in writing, to redeem the shares held by the remaining shareholders. Similarly, shareholders holding 90 per cent of a class of shares entitled to vote may direct the company, in writing, to redeem the shares held by the remaining shareholders in that class. The company
must comply with such direction, whether or not the remaining shares are, by their terms, redeemable and irrespective of whether the directors agree with this approach.
A BVI company is required to give written notice to each shareholder whose shares are to be redeemed, but the law does not specify any further requirements for the redemption (for instance, the minimum length of notice or the price at which shares are to be redeemed). This flexible timetable means that, once the requisite 90 per cent approval is met, complete control can be transferred quickly.
Where the squeeze-out procedure is used, shareholders are able to exercise dissent rights but this will not delay the point at which control is transferred.
3. Schemes and plans of arrangement
A scheme of arrangement requires the sanction of the BVI court and the approval of a majority in number of shareholders representing 75 per cent in value present and voting. The requirement to obtain court approval can significantly lengthen the takeover process. Depending on court availability, arrangements can take up to four months to complete.
A plan of arrangement (which follows the Canadian model) also requires the sanction of the BVI court, but can be proposed to the court with only the prior approval of the directors (and not shareholders) of the BVI company. The court will then prescribe which persons the company is to notify and obtain consent. Given that the court is likely to take a conservative stance on which consents should be obtained, plans of arrangement are likely only feasible where all concerned parties (including shareholders) have approved the plan in advance, but where a court sign-off is desired to give legitimacy to any complicated structuring issues.
Once approved, the scheme or plan of arrangement is binding on all members. While taking longer and requiring a higher threshold than a merger or consolidation, dissent rights only apply to a court-sanction arrangement if expressly permitted by the court. This provides additional certainty to the takeover process.
4. Asset sales
A purchaser wishing to cherry pick certain assets from the target, rather than assuming all assets and liabilities of the business (which would be the case under the above methods) is likely to structure the acquisition as an asset sale. While the process for the transfer of each asset will depend on the nature of such asset, the sale would usually be governed by an overarching asset purchase agreement. The governing law of such agreement may be BVI but is likely to be determined in accordance with the location of the assets being transferred.
Unless disapplied by the BVI company’s constitutional documents or in the ordinary course of business (which may be the case, for instance, for private equity funds or other entities in the business of buying and selling assets), any disposal by a BVI company of more than 50 per cent in value of its assets requires shareholder approval by a simple majority. On such a disposal (regardless of whether the shareholder approval requirement has been disapplied), shareholders are entitled to dissent, save no right arises, among other things, where the disposition is for money on terms that require all or substantially all of the net sale proceeds to be distributed to shareholders pro rata within a year of the sale. The exercise of dissent rights will not prohibit or delay the transfer of assets.
Hostile takeovers are rare in the BVI, but purchasers would, in all practicality, need to reach the squeeze-out threshold, due to the need for cooperation of the target for other acquisition methods. To note, there is no prohibition on the inclusion of poison-pill mechanisms in a BVI entity’s constitutional documents.
Dissenting shareholders’ rights
What rights do shareholders of a target have to dissent or object to a going-private transaction? How do acquirers address the risks associated with shareholder dissent?
A shareholder is entitled to payment of the fair value of his or her shares if he or she dissents from a merger (where the company is not the surviving company) or consolidation, a redemption of his or her shares through a squeeze-out, an arrangement (only where permitted by the court) or a disposition by the company of more than 50 per cent of its business (subject to certain exemptions).
Compared with many jurisdictions, the dissent process is relatively quick and finite and upon formal notice of their intent to dissent from an action, shareholders cease to have any shareholder rights, save for the right to be paid the fair value for the shares by the company. Such fair value is to be agreed between the company and shareholder within a statutory time frame or, if no agreement can be reached, by jointly appointed appraisers.
There are no restrictions under BVI law on obtaining prior undertakings from shareholders to commit to a transaction, providing the purchaser with greater comfort that any required approval threshold can be met. Such undertakings can be irrevocable, or can be softer (eg, falling away in the event of a more attractive bid), depending on the purchaser’s bargaining power, and could include an undertaking not to exercise dissent rights. The obligation to pay the fair value, should this prove greater than the original offer, can be shared through indemnities or post-closing price adjustments. Stake-building and break fees, both of which are not restricted under BVI law, may also provide further certainty and comfort.
What notable purchase agreement provisions are specific to private equity transactions?
The BVI entity usually forms part of a much wider cross-border corporate structure. Consequently, purchase agreements are commonly governed by the laws of onshore jurisdictions such as England and Wales or New York, rather than the BVI, and purchase agreements will follow the forms commonly used in those jurisdictions. However, even in routine transactions, BVI counsel should always be consulted to ensure that there is nothing in the target’s articles or arising as a result of the target’s business that would require greater tailoring of the purchase agreement from a BVI perspective.
Subject to its constitutional documents, any disposal by a BVI company of more than 50 per cent in value of its assets requires shareholder approval. This does not apply in relation to any disposition by way of security, or to any disposals made in the usual or regular course of the business of the company.
Participation of target company management
How can management of the target company participate in a going-private transaction? What are the principal executive compensation issues? Are there timing considerations for when a private equity acquirer should discuss management participation following the completion of a going-private transaction?
It is common in private equity transactions that management are offered an incentive plan. The flexibility of BVI law allows for a range of potential ‘sweet’ equity, ratchet share or similar plans, the terms of which should be reflected in the constitutional documents of the relevant BVI company.
For the vast majority of BVI-registered companies, it would be rare for any employees to be situated in the BVI, unless the company had local operations. Where there are BVI employees and practicable to do so, employees should be given at least one month’s notice of the change in ownership. Where the purchaser intends to terminate three or more employees on the grounds of redundancy, they must notify the BVI Labour Commissioner not less than one month prior to the effective date of termination, except in exceptional circumstances.
What are some of the basic tax issues involved in private equity transactions? Give details regarding the tax status of a target, deductibility of interest based on the form of financing and tax issues related to executive compensation. Can share acquisitions be classified as asset acquisitions for tax purposes?
As a tax-neutral jurisdiction, the BVI operates a zero-rated income tax regime for all entities incorporated in the BVI. There is no capital gains tax payable on any gains realised with respect to any shares, debt obligations or other securities of a BVI company. Further, no withholding tax on interest or dividends is paid by BVI entities.
Employees within the BVI will be subject to a payroll tax of between 10 and 14 per cent (8 per cent being paid by the employee, and the remainder paid by the employer) on remuneration (including severance pay, bonuses and money paid under a profit-sharing scheme) for services rendered wholly or mainly in the BVI. Contributions are also required to social security and national health insurance. Given that most BVI entities operate as holding companies only, it is rare that a BVI company will have employees who are resident within the territory.
The transfer of shares in a BVI company will only attract BVI stamp duty where that entity holds, directly or indirectly, real estate situated within the BVI. Stamp duty is charged at a rate of 4 per cent for ‘belonger’ entities and 12 per cent for ‘non-belonger’ entities, in each case on the appraised value of the land. Non-belonger companies, in simplified terms, are those with over one-third of their members being non-BVI citizens or with any directors that are not BVI citizens.
During 2019, in response to concerns from the European Union, the BVI enacted economic substance requirements for certain entities claiming tax residency in the BVI. While these requirements only capture certain types of businesses, consideration should be given to the target’s compliance with these requirements prior to the acquisition (and ensure that sufficient information is collated to enable future filings) and whether board meetings or other aspects of the target’s business should be held physically in the BVI following the acquisition.
Debt financing structures
What types of debt financing are typically used to fund going-private or other private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction? Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests?
While senior financing remains the most regularly used form of financing, private equity transactions may involve bonds, notes and mezzanine debt. Existing indebtedness of the target would typically be refinanced upon completion of the acquisition.
There are no financial assistance, upstream loan, margin loan or other notable restrictions on the use of debt financing in the British Virgin Islands (BVI). Subject to its articles, a BVI company may, by an instrument in writing, create a mortgage, charge or other encumbrance over any of its assets situated in any part of the world in accordance with the laws of any jurisdiction of the company’s choice, and the mortgage, charge or other encumbrance will be binding on the company to the extent, and in accordance with the requirements, of the chosen law. A BVI limited partnership with legal personality may also grant security over its assets.
Legal title to shares in BVI entities is transferred when the transferee’s name is entered on the register of members. Such outright transfer would require greater involvement of a lender in terms of exercising voting rights and passing on notices received, making a transfer of legal title of shares to lenders by way of security a less attractive option. Further, pledges of BVI shares are not of any meaningful effect, as the transfer of the share certificate does not equate to a transfer in legal title. As such, charges over shares in BVI companies are normally taken as equitable mortgages or charges, rather than legal mortgages or pledges, but safeguards will be put in place to ensure that legal title transfers to the lender upon enforcement.
There is no statutory concept of a legal assignment in the BVI. Purported assignments, governed by BVI law, will take effect in equity (the principal downfalls of which are that the assignor will need to be joined to any action to enforce any assigned debt and the risk of overreaching). Consideration should be given to structuring any proposed assignment as a novation, to include powers of attorney to allow enforcement on the assignor’s behalf or to otherwise ensure the assignor will cooperate in the event of any enforcement. Where existing security is novated, consideration should be given to the restarting of hardening periods on the underlying security.
There are no further notable restrictions on the granting of security interests.
Debt and equity financing provisions
What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements for private equity transactions? What other documents typically set out the financing arrangements?
It is rare that debt financing agreements are governed by BVI law, with the exception of security agreements over shares in a BVI company or over any assets situated within the BVI. More commonly used are the laws of England and Wales or New York, depending on the location of the lenders, the debt market or the main corporate affairs of the company, and debt financing agreements will follow the forms commonly used in those jurisdictions including, as is often the case, forms published by the Loan Market Association.
Fraudulent conveyance and other bankruptcy issues
Do private equity transactions involving debt financing raise ‘fraudulent conveyance’ or other bankruptcy issues? How are these issues typically handled in a going-private transaction?
Under the BVI Conveyancing and Law of Property Act 1961, any conveyance with intent to defraud creditors shall be voidable at the instance of any person prejudiced by such conveyance. It is not required that the transferring company is insolvent or in financial difficulty at the time of the conveyance and no limitation period is specified, but no avoidance should prejudice any person who receives property in good faith and without notice of the intent to defraud. This provision has been little reviewed by the BVI courts, and thus BVI courts would likely refer to English and other Commonwealth case law in interpreting. There is further commentary that suggests that the English Fraudulent Conveyances Act 1571, which is again wider in scope, could apply in the BVI, but this has not been confirmed by BVI courts.
There are further statutory provisions under BVI insolvency law for avoiding transactions at undervalue, where such transaction is entered into when the company is insolvent, or causes the company to become insolvent. The transaction must be entered into in the period commencing six months prior to the appointment of the administrator or liquidator or, if it is a transaction with a connected person, two years prior to such appointment. Comfort is normally provided to buyers through solvency representations and warranties in the purchase agreement.
Shareholders’ agreements and shareholder rights
What are the key provisions in shareholders’ agreements entered into in connection with minority investments or investments made by two or more private equity firms or other equity co-investors? Are there any statutory or other legal protections for minority shareholders?
British Virgin Islands law allows for great flexibility in corporate governance and shareholder agreements. Save for certain exceptions and subject at all times to the constitutional documents of the company, all shareholder decisions can be passed with a simple majority.
Where a member considers that the company’s affairs are being, have been or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to that member, they may apply to the court for relief. The court may make such orders as they feel fit, which may include, among other things, payment of compensation, requiring the company or another person to acquire the member’s shares, the appointment of a liquidator or receiver or regulating the affairs of the company.
Shareholders can also dissent to certain corporate actions. Further, shareholders have the ability to apply for a court order to prevent any activity by a company or its directors that contravenes the Business Companies Act 2004 or the company’s constitutional documents and, with leave of the court, can bring derivative proceedings in the name of the company.
Acquisitions of controlling stakes
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company?
Provided that the entity is not regulated within the British Virgin Islands (BVI) and does not hold BVI land, there are no legal requirements that may impact the ability of a private equity firm to acquire control of a BVI entity, provided that the purchaser is able to obtain the agreement of the requisite percentage of shareholders for their chosen takeover method.
Entities that are regulated within the BVI are subject to additional rules that may require the prior consent of the BVI financial regulator (the BVI Financial Services Commission) and, in certain cases, minimum contributed capital. BVI- regulated entities include, among other things, investment managers, brokers and dealers, registered agents, banks and trusts, each operating in or from within the BVI. Businesses that operate physically within the BVI and that are not regulated by the BVI Financial Services Commission will also generally hold a trade licence under the Business Professions and Trade Licenses Act 1990, and will need to comply with any conditions attached to that licence.
Non-belonger purchasers of entities that hold, directly or indirectly, land in the BVI will need to obtain a landholder’s licence.
There is no BVI takeover code (or similar legislation) in force and there are no mandatory takeover offer rules in the BVI.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company? In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity acquirer?
Save for where the company is regulated within the BVI or holds BVI land, there are no key limitations on the ability of a private equity firm to sell its stake in a BVI portfolio company, or conduct an IPO.
There are no specific BVI matters that would affect the post-closing recourse for the benefit of a private equity or strategic buyer and requests will typically follow the trends in the jurisdiction of the purchase agreement (ie, indemnities, escrow agreements and the increased trend towards warranty and indemnity insurance).
Portfolio company IPOs
What governance rights and other shareholders’ rights and restrictions typically survive an IPO? What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO?
The governance of a BVI entity following an IPO would be predominantly influenced by the rules imposed by the relevant exchange. It would, however, be rare for shareholder rights and restrictions (such as board appointment rights or veto rights) to survive an IPO.
Similarly, lock-up restrictions would depend on the market and the commercial terms agreed between the parties. Where a large stake is to be sold following an IPO, private equity sponsors will most commonly dispose of this off- market in a ‘block trade’ at a discount to market price, in a bid to minimise the effect on the market. Smaller stakes are commonly sold ‘on market’ at the prevailing trading price.
Target companies and industries
What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in industry focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
The BVI is used as a jurisdiction for holding companies in a wide range of industries and, consequently, potential targets are varied and market trends mirror those onshore.
Where an entity is regulated within the BVI, prior approval of the BVI Financial Services Commission may be required prior to completion of a transaction. This has not historically, however, deterred private equity investors, as shown by recent takeovers by private equity firms of regulated fiduciary service companies (eg, the takeover of TMF by CVC Capital Partners in 2018).
What are the issues unique to structuring and financing a cross-border going-private or other private equity transaction?
There are no issues unique to the British Virgin Islands (BVI) that would result in a cross-border transaction being structured or financed in a particular way. There are no foreign investment or financial assistance restrictions, and the tax-neutral status alleviates many tax structuring concerns.
Club and group deals
What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?
There are no key considerations required from a BVI perspective for syndicated deals. BVI law offers a great deal of flexibility to accommodate any commercial requirements of club members.
Issues related to certainty of closing
What are the key issues that arise between a seller and a private equity acquirer related to certainty of closing? How are these issues typically resolved?
Aside from obtaining the requisite shareholder support for any ‘take-private’ transaction and any BVI regulatory approvals, certainty of closing will often depend on factors outside the BVI, such as merger control or other regulatory approvals.
As a practical point, under BVI law, shares in non-listed entities are not transferred until the new holder is registered in the company’s register of members as the holder of those shares. As the register of members is usually kept by the company’s registered agent, the registered agent should be kept informed of, and involved with, completion.
Key developments of the past year
Have there been any recent developments or interesting trends relating to private equity transactions in your jurisdiction in the past year?
No updates at this time.
*First published in The Lexology Private Equity (Transactions): Global overview 2023.
Corporate, Fund Finance, Fund Governance, Funds & Investment Services, Mergers & Acquisitions (M&A)
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