Knowledge

Asia is a dynamic region in terms of investment, deal flow and potential.  Asia is comprised of 48 countries, many of which are developing, with large demand for international capital.  This offers growth opportunities and new markets for international investors. 

However, Asia has a diverse range of laws, cultures and political systems, presenting investors with uncertainty, complexity and risk.  To mitigate such risks, investment structuring is critical, and the choice of jurisdiction for the investment vehicle is a key consideration.

Investment in Asia can take many forms, ranging from initial funding in the start-up phase, late-stage investment, or acquisitions of regional targets.  Alternatively, investment can be structured through collaboration with local partners, and joint ventures are a popular means of investing in Asia.

Some key reasons for structuring investment through a joint venture include:

Lack of familiarity with the local jurisdiction

Many international investors may have a lack of familiarity or experience with the target jurisdiction.  Consequently, an investor may wish to invest through a joint venture, by partnering with a local enterprise.  This permits access to local talent and allows the investor to benefit from their partner's market knowledge and customer base.

The need for access to international markets and experience

Many Asian enterprises have constraints on growth, either through local or regional market limitations, or a lack of international experience or technology.  An international partner can provide the local firm with capital, knowledge and access to new markets.

The need for legal certainty 

Asia is a diverse continent, with differing laws (both civil and common law), languages, regulations and standards.  Given the cultural and legal diversity, investors prefer to structure investments through an offshore company, which is more familiar to investors and provides certainty and predictability based on common law principles.

Local investment restrictions

Many jurisdictions may have local investment restrictions in place, which may restrict or prevent a majority interest or full acquisition.  Joint venture vehicles are often chosen as an alternative means of investment, allowing control and oversight to be established at the joint venture level.

Commonly, when forming a joint venture in Asia, a BVI company is the joint venture vehicle of choice.

Advantages of BVI companies for Asian joint ventures

There are many ways of structuring a joint venture, such as through an informal contractual relationship, a partnership or a corporation.  Ordinarily, a company is chosen to structure the investment, and this briefing will therefore focus on the use of companies. 

A BVI company is frequently used for the following reasons:

Cost effective and tax neutral

A key consideration in setting up a joint venture is that the vehicle does not give rise to high administration costs or result in additional layers of taxation. 

A BVI company is inexpensive to incorporate and maintain, thereby providing cost efficiency.  Furthermore, a BVI company is tax neutral, with no additional layer of tax being applied on dividends, transfers or disposals.  This allows the joint venture parties to structure their investment in a cost neutral and tax efficient manner.

Flexible structuring

Joint venture parties frequently have deal specific structuring needs.  They require a vehicle which is capable of being tailored to the deal. 

There is minimal prescription under BVI corporate law as to the structure or administration of a BVI company.  Consequently, the parties can tailor the constitutional documents to reflect the commercial terms of the venture.  The constitutional documents of BVI companies can provide for different share classes, rights and restrictions on transfer, voting and economic rights, reserved matters, and termination provisions, with minimal statutory prescription.  As such, parties can form and operate a BVI company in a manner that reflects their commercial intent.

Legal certainty

Given the multitude of legal systems in Asia, it is critical that the joint venture parties establish a vehicle which provides clarity, certainty and legal protection.

The BVI is founded on common law principles, with a dedicated commercial court.  The ultimate court of appeal is the UK Supreme Court.  As such, the BVI provides a legally certain framework for the operation of companies and resolution of disputes.  By structuring a joint venture vehicle in the BVI, the parties have certainty as to remedies and due process.

Light touch regulation

When structuring a joint venture, it is essential that the vehicle does not impose additional layers of administrative or regulatory burden. 

In many cases, it is unrealistic to utilise a vehicle incorporated in the UK, US or EU, as this would risk importing additional layers of regulation or taxation into the structure at the joint venture level.  This may not be commercially viable in the context of an Asian joint venture.  As an incorporation jurisdiction, whose purpose is to serve international markets, the BVI offers a light touch regulatory platform and does not impose heavy layers of additional regulation.

Flexible accounting treatment

Joint ventures are frequently driven by financial and accounting considerations, which may impact on the ultimate choice of vehicle.

BVI companies offer considerable flexibility at the accounting level, permitting free choice of accounting standards, with no requirement to consolidate accounts at the BVI level.  This provides joint venture parties, who may have different jurisdictional and/or economic requirements, to employ a level of accounting flexibility in structuring their investment.

Flexible investment structure

Joint venture parties frequently need to consider the manner of investment, for instance, whether they will be contributing assets or cash, and whether any funding is provided by loan or equity.

Unlike many other jurisdictions, the BVI does not have any thin capitalisation rules or capital maintenance requirements.  Consequently, there is considerable flexibility as to the nature and extent of the investment, and parties can structure their contributions in line with their needs.

Flexible share structure

Joint venture parties frequently need to consider financial matters when subscribing for equity in the joint venture, and do not wish to be constrained by needless red tape.  Issues may arise in jurisdictions which have legal prescriptions on valuation (such as in the case of contributions) or have prohibitions on issuances at a discount.

There is no concept of share capital in the BVI and companies are permitted to issue minimal or no par value shares.  This provides the parties with a level of freedom, as it may simplify questions about valuation, non-cash contribution, or issuing shares at a discount.

Minority protections

Where a joint venture reflects a power imbalance between the parties, the minority shareholder will seek to ensure that they have protection, whether under contract or the corporate laws of the jurisdiction of formation.

It is common practice to build shareholder protections into the joint venture agreement and/or constitutional documents of a BVI company.  Such protections can take an array of forms, ranging from anti-dilution rights, corporate governance rights, or shareholder restrictions in relation to certain reserved matters.  Similarly, the BVI corporate statute provides for a suite of shareholder remedies, including unfair prejudice actions and derivative actions, supported by a strong body of case law.

Ease of distributions

The joint venture parties will wish to ensure that they can realise value and a return on their investment.

BVI companies are designed to facilitate the return of capital with ease, as distributions can be made from any source, and may either be in cash or other property, under very simple and understandable rules.  Additionally, there are no foreign exchange restrictions in the BVI, meaning that funds can be returned without impediment at the BVI level.

Ease of migration

A joint venture may last for many years.  This can raise the risk of changes in regulation, taxation or the commercial environment during the investment period, all of which may impact on the joint venture structure.

Unlike many jurisdictions, it is possible to re-domicile a company both into and out of the BVI (many other jurisdictions prohibit both, or only permit migration in).  This permissive approach provides for operational flexibility, should the need to change the jurisdiction of the joint venture arise, as a result of adverse legal, financial, regulatory or commercial changes.

Ease of termination

A critical consideration for joint venture parties is when, or under what circumstances, the joint venture will terminate, and how the assets will be realised. 

A company may be wound up efficiently in the BVI with minimal administrative restrictions, thereby allowing for the fast and efficient realisation of value on the conclusion of the joint venture.

Permissive choice of law

For transactional reasons, the parties may wish for the joint venture agreement to be governed by the laws of another jurisdiction.  Similarly, the parties may have a preference to resolve disputes in a specific forum.

The BVI permits free choice of law in entering into contracts and, additionally, the constitutional documents of a BVI company can be made subject to arbitration.  This enables parties to deploy their preferences as to the choice of contract law or their desired forum. 

English language

English is commonly used in international business transactions, and joint venture parties will wish for documentation and/or dispute resolution to be held in the English language.

As an English language jurisdiction, contracts can be drafted in English.  The parties therefore have certainty as to the terms of their agreement and the resolution of any disputes. 

Practical legal considerations 

When forming a BVI joint venture, it is essential to engage counsel at an early stage.  A non-exhaustive list of matters that require legal advice will include:

• The joint venture agreement.  As the joint venture or shareholder agreement will set out the contractual relationship between the parties, it is essential to engage BVI counsel at an early stage, to ensure that the agreement adequately captures the terms of the commercial deal and protects the parties or (where the role of BVI counsel is to review the agreement) to ensure that it complies with BVI law.
•  The memorandum and articles of association.  The constitutional documents of the company will contain the critical terms of the venture, particularly in relation to share rights and corporate governance.  It is therefore critical that the constitutional documents reflect and are aligned with the joint venture agreement, to avoid any risk of ambiguity or conflict between the documents.
• Ancillary documents.  Each joint venture is different and may require further contractual documentation to ensure the success of the venture.  This may include the initial term sheet or memorandum of understanding, as well as substantive contracts, such as management agreements, licensing agreements, service agreements, supply agreements or property agreements.  In each instance, the advice of counsel should be sought at an early stage.
• Protection of technology, trade secrets and intellectual property.  A joint venture involves a degree of good faith between the venture parties, as well as the possible sharing or transfer of knowledge.  It is therefore critical to consider areas of legal risk and what protections may be required, as well as what form of confidentiality restrictions may be needed.
• Reporting and oversight.  Although the joint venture can be carefully constructed at the BVI level, investors should be mindful of risks at the local level.  These can include risks relating to the acts of agents or the risk of dissipation. It is therefore critical to consider whether reporting or oversight provisions are required, and whether any specific contractual sanctions or protections will be needed.
• Compliance undertakings.  A frequent concern for international investors is that the local joint venture party complies with international standards, such as any applicable anti-bribery legislation.  This may be a concern where the local party has different cultural norms and standards.  In such cases, consideration should be given to potential risks, and mitigation strategies.  This can include educating the local venture party or instituting policies or controls (the latter of which, if documented and enforced, may serve as a defense to the investor in the case of breach).

Although it is possible to mitigate risk, protect the parties, and record the terms of the venture at the BVI level, any Asian joint venture will necessarily require the advice of local counsel in the target jurisdiction. 

A non-exhaustive list of matters which may require local guidance are:

• due diligence on the local venture partner;
• due diligence on any local property that may be contributed or acquired, and analysis of any related rights or restrictions;
• review of any regulations that may be triggered by the joint venture or approvals that may be required;
• an analysis of any foreign exchange controls;
• guidance on the powers and rights of any local manager (including whether there is a company seal and who controls the seal); and
• guidance on rights, remedies and enforcement under the laws of the local jurisdiction.

Bedell Cristin has been operating in Asia for over 12 years.  We have significant expertise in forming joint ventures for Asian clients, as well as a deep understanding of the region.  Additionally, we have a wide network of relationships with local and international law firms, and work in close conjunction with Asian counsel on a wide array of corporate, finance, funds and regulatory matters, including the formation of joint ventures.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.