GETTING THE DEAL THROUGH | BVI – PRIVATE EQUITY: FUND FORMATION

Originally published by Appleby, written by Andrew Jowett, Rebecca Jack

1. FORMS OF VEHICLE

WHAT LEGAL FORM OF VEHICLE IS TYPICALLY USED FOR PRIVATE EQUITY FUNDS FORMED IN YOUR JURISDICTION? DOES SUCH A VEHICLE HAVE A SEPARATE LEGAL PERSONALITY OR EXISTENCE UNDER THE LAW OF YOUR JURISDICTION? IN EITHER CASE, WHAT ARE THE LEGAL CONSEQUENCES FOR INVESTORS AND THE MANAGER?

Private equity funds in the British Virgin Islands (BVI) have historically favoured establishment as a company. Since 2017, however, it has been possible to use a limited partnership structure very similar to those in other jurisdictions and this is becoming increasingly popular.

COMPANIES

A BVI company is incorporated under the BVI Business Companies Act 2004 with separate legal personality. As at 30 June 2019, there were 396,932 active companies registered in the BVI. A BVI company for use as a private equity fund will typically have a range of share classes, allowing for the shares held by the manager (or its affiliates) to have different rights from those of investors. Shares can be issued with or without a par value. As shareholders in a BVI company, investors’ and managers’ liability will be limited to the extent outlined in question 5.

SEGREGATED PORTFOLIO COMPANIES

Previously limited to certain regulated entities and open-ended funds, the Segregated Portfolio Companies (BVI Business Company) Regulations 2018, which came into force on 1 October 2018, allow closed-ended funds and other BVI entities to be structured as segregated portfolio companies (SPCs). An SPC is a single company whose assets and liabilities can be allocated and ring-fenced between separate sub-funds or segregated portfolios, similar to the concept of ‘protected cell’ or ‘segregated account’ companies in other jurisdictions. Shares may be issued in respect of a certain portfolio, and investors will be entitled to receive distributions from that portfolio alone. Similarly, creditors may contract with a particular portfolio, and only have recourse to assets from that portfolio. This development allows private equity funds to house multiple funds within one centralised body, providing cost and administration savings.

LIMITED PARTNERSHIPS

While a common structure for funds in other jurisdictions, the limited partnership (LP) has traditionally been underused in the BVI partly as a result of outdated and imprecise legislation. The BVI’s Limited Partnership Act 2017 (the LP Act), which came into force on 11 January 2018, sought to address this by introducing commercial and flexible provisions, aimed at both private equity and open-ended mutual funds. As at 30 June 2019, there were 833 active limited partnerships registered in the BVI.

Under the LP Act, an LP can be established either with or without separate legal personality, making them suitable for both funds and carried interest distribution vehicles. For LPs established after the LP Act, the choice of whether or not the LP has legal personality is irrevocable. All LPs in existence prior to the new LP Act coming into force may be re-registered with or without legal personality, at the election of the general partners.

Investors join as limited partners. Subject to the fund’s limited partnership agreement (LPA), a limited partner may, but is not required to, make a contribution to the LP. Save in circumstances where limited liability is lost (as described in question 5), a limited partner’s liability for the debts and liabilities of the LP will be limited to the amount of the limited partner’s contribution or unpaid commitment to the LP, if any.

An LP must also have at least one general partner, often controlled by the fund manager, who will be responsible for managing the partnership. The general partner is liable for the unpaid debts and liabilities of the LP incurred while they are a general partner. Where there are multiple general partners, each general partner is jointly and severally liable.

Provided the LPA does not provide otherwise, a general partner will only be liable for the debts and liabilities of the LP to the extent that the LP cannot itself pay those debts or liabilities.

In most cases, the general partner will be a company with limited liability, acting as a ‘liability blocker’ to prevent liability from flowing higher up the chain of ownership. There is no requirement for the general partner to be established within the BVI.

OTHER STRUCTURES

Unit trusts are recognised under BVI trust law. Unit trusts are not separate legal entities and are established by way of a deed of trust. The principal benefit of offshore unit trusts for private equity vehicles (being that units could be redeemed without issuing new shares) has been reduced with the ability of companies to issue shares with no par value.

2. FORMING A PRIVATE EQUITY FUND VEHICLE

WHAT IS THE PROCESS FOR FORMING A PRIVATE EQUITY FUND VEHICLE IN YOUR JURISDICTION?

INCORPORATION OF AN ENTITY

Once the constitutional documents (being memorandum and articles for a company, and a written LPA for an LP) and any other commercial matters are agreed between any interested parties, a company or an LP can be established relatively quickly (normally within one to two working days). The incorporation of a company will require the filing of the following with the BVI Registrar:

·         memorandum and articles; and

·         a document from the proposed registered agent, consenting to their appointment.

If the company is to be incorporated as an SPC, prior approval from the BVI Financial Services Commission (FSC) must be obtained. We would expect this to take one to two weeks.

The formation of an LP will require the filing of the following with the BVI Registrar:

·         a statement confirming the LP’s name, address, registered agent, name and address of each general partner and

·         a confirmation of whether the LP has an unlimited duration or a fixed term;

·         if desired, an election by the general partners for the LP to be formed without legal personality (the default position being an LP with legal personality); and

·         a document from the proposed registered agent, consenting to their appointment.

The LPA is not filed and is not otherwise made public.

A registered agent within the BVI will need to be engaged in order to establish either a company or an LP. Only a registered agent is permitted to file registration documents with the BVI Registry. Provided the BVI Registrar is satisfied that the registration requirements for the company or LP (as applicable) have been complied with, it shall issue a certificate of registration, being conclusive evidence that the requirements have been met and that the company or LP (as applicable) has been established.

BVI entities will need to pay a fee to the BVI Registrar on registration and an annual fee each year thereafter. Registry fees for a company will depend on the number of shares the company is authorised to issue. For companies authorised to issue 50,000 or fewer shares, the initial registration fee is currently USD450, with an annual fee of the same amount thereafter. For companies authorised to issue over 50,000 shares, the initial registration fee is currently USD1,200 and the annual fee the same thereafter. Non-regulated SPCs must pay an additional application fee to the FSC of USD450,

plus an additional US$400 for each segregated portfolio and US$250 on approval, and annual fees of USD450 for the company and USD400 for each segregated portfolio for each year thereafter.

For LPs, registry fees are currently US$500 and the annual fee the same thereafter. Additional costs (such as legal fees and fees for the registered agent) will depend on the complexity of the transaction, including the level of negotiation for the formation documents, the timescale and the number of parties involved.

Closed-ended funds (whether companies or LPs) do not have any minimum capital requirements.                            

RECOGNITION OF THE FUND

Prior to 2020, closed-ended funds were not regulated in the BVI. On 31 December 2019, the BVI amended legislation in order to bring closed-ended funds within the regulatory regime. As such, as of 31 December 2019, closed-ended funds will be required to obtain recognition from the FSC (see question 10 for further details).

In order to obtain recognition, the fund will need to submit to the FSC an application in the approved form, accompanied by copies of:

·         the fund’s constitutional documents, register of directors (where applicable) and certificate of incorporation,

·         formation or registration;

·         the fund’s valuation policy;

·         the fund’s offering document or term sheet, where the fund intends to issue such document; and

·         CVS or biographies of each director, general partner or trustee, or the underlying individuals where such entities are bodies corporate.

Where the fund does not intend to issue an offering document or term sheet, the fund must provide its reasoning for doing so and explain how investors will receive pertinent information concerning the fund. Any offering document or term sheet must include information prescribed by the Private Investment Fund Regulations (the PIF Regulations) (including a disclaimer, the investment objectives and details of any fees).

Application fees for recognition of a private investment fund are currently USD700, with a further USD1,000 (or, if approved after 30 June in any year, USD500) payable upon approval. Renewal fees thereafter are currently USD500 per annum. On approval, the fund shall be issued with a certificate of recognition, which will remain valid until cancelled or revoked by the FSC.

Once an entity is incorporated, it can operate as a private investment fund for a period of 14 days before submitting the application to the FSC for recognition, provided that:

·         the fund is lawfully incorporated;

·         the fund’s constitutional documents contain the statement described in question 11; and

·         the fund otherwise meets the requirements of the PIF Regulations, which are detailed throughout this chapter

3. REQUIREMENTS

IS A PRIVATE EQUITY FUND VEHICLE FORMED IN YOUR JURISDICTION REQUIRED TO MAINTAIN LOCALLY A CUSTODIAN OR ADMINISTRATOR, A REGISTERED OFFICE, BOOKS AND RECORDS, OR A CORPORATE SECRETARY, AND HOW IS THAT REQUIREMENT TYPICALLY SATISFIED?

FUNCTIONARIES AND BOARD

As of 31 December 2019 (or 1 July 2020 for existing funds), BVI closed-ended funds are required to nominate entities or individuals (known as appointed persons) responsible for undertaking:

·         the management;

·         the valuation; and

·         the safekeeping, each of fund property.

Such appointed persons can be the directors, partners or trustees of the fund, the fund manager or other appointed functionaries, independent third parties or both.

The person responsible for managing fund property must be independent from the person responsible for valuations, save that one person may be appointed for both if the fund:

·         identifies, manages and monitors any potential conflicts of interest that may arise; and

·         discloses to its investors that one person fulfils both roles, and provides details of how conflicts will be managed.

The safekeeping arrangements required will depend on the type of assets held. The FSC guidance provides that the appointment of a traditional custodian or prime broker would not be considered necessary for private equity investments, provided that a sufficiently experienced person is responsible for ensuring that documentation with respect to the fund’s ownership of such assets is maintained and safeguarded.

A private equity fund vehicle (as with any BVI-registered company or a limited partnership) is required to maintain both a registered agent and a registered office in the BVI. In almost all circumstances, the registered office of the entity will be that of the registered agent, who will be one of a number of registered agents operating and licensed in the BVI. There is no requirement to maintain a corporate secretary.

As of 31 December 2019 (or 1 July 2020 for existing closed-ended funds), BVI closed-ended funds are required to appoint an authorised representative who will act as an intermediary between the fund and the FSC. The authorised representative must be licensed and is usually provided by the fund’s registered agent.

A private investment fund established as a company is required to appoint at least two directors, one of whom must be an individual.

BOOKS AND RECORDS

As of 31 December 2019 (or 1 July 2020 for existing closed-ended funds) and unless an exemption is granted by the FSC, BVI closed-ended funds must file audited accounts. The FSC has indicated a number of scenarios in which an exemption may be considered appropriate including:

·         where the fund has limited business activities (generally a net asset value of less than US$1 million, with less than 30 investors); and

·         where the fund is a feeder fund, investing all assets into a master fund that produces audited accounts.

Closed-ended funds are required to keep such records and underlying documentation that are sufficient to:

·         show and explain its transactions;

·         enable, at any time, the financial position of the fund to be determined with reasonable accuracy; and

·         make such filings as are outlined above. Such records must be maintained for at least five years.

All BVI companies are required to maintain their registers, memorandum and articles and all notices and other documents filed by the company in the past 10 years (in each case, or copies thereof) at the office of its registered agent. BVI LPs are required to maintain their registers (or copies thereof) at the office of its registered agent.

Click here to read the full article