"A comprehensive due diligence exercise should include a detailed review of the fund documents, particularly the offering document and the memorandum and articles of association as well as all service provider agreements to ensure that the terms are consistent with BVI law, usual commercial terms and to spot any "red flags" or unusual provisions."
"Advisory warnings and public statements are issued by the BVI Financial Services Commission to warn consumers of companies not registered in the BVI or entities not licensed to carry on financial services business in the BVI."

Due diligence in the BVI - simple but effective

17 Jun 2013

In the aftermath of the financial crisis of 2008, there has been greater emphasis placed on effective due diligence on investments and acquisition targets. Important lessons should have been learnt from the many high profile hedge fund frauds and failures occurring at the height of the fallout. Many investors could have avoided substantial losses if relatively straightforward due diligence had been carried out prior to investing. Best practice dictates that detailed due diligence must occur prior to and on an ongoing basis following an investment.

Due diligence is a relatively simple and cost effective exercise to undertake early in a transaction and can serve to highlight at a preliminary stage potential issues that could prove costly if not discovered until later. While it is common to engage offshore counsel toward the end of a transaction to provide the customary legal opinion, involving offshore counsel at an early stage often makes for a more cost effective and smooth transaction.

The purpose of this briefing is to highlight key areas of a due diligence exercise where a transaction involves a BVI company.

Investment in BVI funds
Proper checks should be carried out to ensure that the target BVI fund is duly incorporated, properly constituted and in good standing. This will necessitate a search of the public records at the Companies Registry and a review of the funds constating documents for compliance with BVI law. A search should also be conducted of the records at the Registry of the High Court of Justice and the Commercial Court Division to confirm that there are no pending actions or judgments filed by or against the target fund. The Companies Registry search should also show whether notice of, or resolutions for the appointment of a voluntary liquidator have been filed.

Regulated funds have various statutory requirements and on-going obligations to satisfy. This is particularly the case in relation to notifications required by the BVI Financial Services Commission (“FSC”) for common corporate actions. Activities such as an amendment to the memorandum and articles of a BVI fund require FSC notification. Therefore a thorough review is important to ensure compliance with these requirements.

A comprehensive due diligence exercise should include a detailed review of the fund documents, particularly the offering document and the memorandum and articles of association as well as all service provider agreements to ensure that the terms are consistent with BVI law, usual commercial terms and to spot any "red flags" or unusual provisions.

Share purchases
Where a transaction involves the disposition and acquisition of shares, additional concerns arise to ensure that the target shares have been properly issued and recorded on the books of the company. An early analysis can ensure the seller holds the number of shares they think they do and that they were validly obtained. If there are any questions raised at an early stage of a transaction, remedial action should be straightforward. Following any share sale, rectification can be far more problematic. Remembering the doctrine caveat emptor (let the buyer beware) a prudent purchaser should always ensure the company books are in order and up to date prior to the transfer, and good due diligence will assist in making sure this is the case.

A search of the Companies Registry may also identify charges over a target company's assets and/or the shares in the target.

During and after a share purchase, effective due diligence should ensure that the formalities of the share transfer are complied with and that the underlying entity has approved and accurately updated its books and records to reflect the share transfer.

Asset purchases
Should the transaction involve the disposition or acquisition of an asset owned by a BVI company, care needs to be taken to ensure that proper procedures are followed and any statutory requirements are satisfied in order to formalize and authorize the acquisition or disposition. Often in substantial asset sales and purchases, minority share rights arise and these need to be effectively dealt with at an early stage.

Regulatory status
A transaction with a regulated entity brings certain special considerations into play. Whether the governing statute is the Securities and Investment Business Act 2010, as amended ("SIBA") or the Banks and Trust Companies Act, each statute has its own specific requirements and prohibitions that need to be addressed at an early stage in any proposed transaction.

Even where the entity is not regulated, it is important to review the business and activities of the target. SIBA contains very broad definitions and encompasses a number of activities that until its introduction in 2010 were not regulated in the BVI.  Confirmation of the regulatory status, or lack thereof, is important as the remedial work involved with respect to an unauthorised entity can be substantial.

Advisories
Advisory warnings and public statements are issued by the BVI Financial Services Commission to warn consumers of companies not registered in the BVI or entities not licensed to carry on financial services business in the BVI. For completeness, these warnings and advisories should be monitored.

In our experience, due diligence exercises undertaken on BVI companies at an early stage have routinely assisted in identifying issues and concerns that are easily addressed with the luxury of time. Identifying concerns or confirmation of no concerns, early in a transaction avoids eleventh hour scrambles and enables the parties to focus on the commercial terms of the transaction.