New IBC legislation in BVI

Although you may have heard rumours about these changes, the actual amendment details only became available this week from the government. We wanted to have these ‘in hand’ before commenting, in order to insure accuracy. We felt this was especially important since these changes have been the object of much speculation over the past several weeks.

First and foremost we wish to make clear that the amendments are not yet law and they cannot be implemented until they are passed into law. Further, there is no date as yet for when the amendments may become law and revisions to other laws (notably the Financial Services Commission Act 2001) are likely required before they can become law.

We will further advise you when we know the precise date the amended IBC Act will take effect. Therefore, nothing has actually changed as of this date. Even when the legislation becomes law, there is an extensive transition period for all existing IBC'S before any of the amendments have effect.

New incorporations will be effected immediately upon the passage into law however. We will have additional information for you in the weeks to come on revisions to our standard Memorandum and Articles of Association (M&AA) to incorporate the changes for new incorporations.

The main features of the Amendments are :

I. BEARER SHARES

A. Increase in registration and annual fees

Once the amended IBC Act takes effect, new IBCs formed with M&AA that permit the issuance of bearer shares will have to pay a registration fee of US$1,000. This is an increase from the current fee of US$300 if authorized capital did not exceed US$50,000.

Annual Fees will also be US$1,000 for companies whose M&AA permit bearer shares. However, for companies already in existence when the Act comes into effect, this fee provision will not come into effect until December 31st, 2004. Existing companies will have until that time to amend their M&AA to prohibit the issuance of bearer shares, if they wish to avoid paying this higher annual fee.

B. Immobilisation

• After the Act comes into effect, any newly incorporated company that issues bearer shares will be required to deliver those shares to an acceptable custodian.

• Companies already in existence when the Act comes into effect will have until December 31st, 2004 to either cancel all existing bearer shares and replace them with registered shares, or deliver any outstanding bearer shares to an acceptable custodian.

• The revisions to the Act refer to two types of acceptable custodians. These are defined as being as described in Sections 50(a) and 50(b) of the Financial Services Commission Act 2001. However, at this point Sections 50(a) and 50(b) of that Act do not exist! This is one factor which will delay passage of the revised IBC Act into law.

In the absence of a definition in the new legislation, we turn to the “Aide Memoire” released by the Financial Services Commission (FSC) some time ago. This suggests that there will be two types of acceptable custodians.

“Authorised Custodians” will be Trust Companies such as ourselves, or Banks, duly licensed in the BVI by the FSC. Current thinking is that only holders of General Licenses would be eligible to act as custodians, so Restricted Trust Licensees and Management Companies are not likely to be eligible.

“Recognised Custodians” will be of two types. Category I will be existing investment or securities industry participants who provide specialised custodial services and who are specifically designated by the FSC. This will include custodians in USA, Europe, UK and Hong Kong, as well as others. Category II will be regulated financial institutions from regulated jurisdictions who are recognised by the FSC as Recognised Custodians. For example, an IBC’s bank might be ablke to act as custodian for its bearer shares.

II. REGISTER OF DIRECTORS

• All companies will be required to maintain an updated Register of Directors at the office of the Registered Agent in the BVI. Existing companies will have a period of twelve months to establish the register, which must date back at least to the date of the enactment of the new Act.

As noted, the Directors Register, like the Share Register, will be retained at the office of the Registered Agent of the Company not at the Companies Registry. Consequently, these Registers are obviously not subject to public search, disclosure or other casual examination.

• New companies will be required to appoint a director within 30 days of the date of incorporation.

We would also take this moment to remind you that the existing IBC Act already requires that a Share Register be maintained at the office of the Registered Agent in the BVI (Section 29(4) of the existing IBC Act). Many clients have been somewhat negligent to provide these Share Registers, but with the passage of this new legislation it might be reasonably assumed that this existing requirement will be more closely monitored. If you have not already filed Share Registers for your companies you should begin the process of doing so.

SUGGESTED ALTERNATIVES IN VIEW OF THE AMENDMENT TO THE IBC ACT

The new $1,000 government fee for companies using Bearer Shares will make such companies far more expensive than they currently are. In addition, the ‘immobilisation’ requirements for Bearer Shares, whereby they must be lodged with a custodian, will make such shares somewhat less useful.

We believe that clients should seriously consider incorporating all new companies with M&AA that prohibit the issuance of Bearer Shares. Where Bearer Shares are permitted by the M&AA of existing companies, we further believe that clients should consider amending these over the next 12 to 18 months to prohibit the issuance of Bearer Shares. This would also require the re-issuance of all Bearer Shares by the Company as Registered Shares, or some other elimination of those Bearer Shares - e.g. returning the shares to the company for some consideration.

The above suggestion will not inconvenience many clients, who already have only Registered Shares. However, some clients have business requirements which make Bearer Shares useful.

For such clients we have some possible alterative that may have appeal, depending on the reasons for utilising Bearer Shares.

• Issue the shares in your name or the name of a controlled company, which may itself be an IBC from either the BVI or elsewhere. This will still provide privacy, since the identity of the shareholder will be kept only at our offices and will not be accessible to the public.

• Register the shares in the name of a trustee, who will hold them for you in a Bare Trust.

The shares would then be distributed to you or your heirs as per the terms of the trust.

You could continue to manage and operate the company as its manager.

We will be able to provide an appropriate Bare Trust at a nominal cost, although we are still working out the details of this. Fortunately, a Bare Trust set up in the BVI is specifically exempted from the normal $50 stamp duty on Trusts by Section 92 of the Trust Act. A BVI Trust is also not required to be registered in any way with the BVI government; it is a private arrangement between the Parties to the Trust. As a result, we believe this will make such a strategy a viable alternative for many clients.

• Issue the shares to a nominee shareholder provided by us.

• If Bearer Shares are a requirement and you wish to avoid payment of the US$1000 fee, continuing the current company in a new jurisdiction is an alterative. We are currently investigating alternate jurisdictions and hope to provide you with a short list of recommendations shortly and will be able to assist with such re-domiciling of the company.

As stated earlier, you will have until December 31st, 2004 to make a decision about existing companies. However, you will wish to begin considering this matter well before then to insure that you have sufficient time to make your final decision.

We will be providing additional information in the next few days, specifically on the Bare Trust option described above and possible alternative jurisdictions to the BVI. Please advise us if we can be of further assistance.