Life and sole

Shortly after the International Business Companies Act (the Act) came into force in 1984, the British Virgin Islands (BVI) became one of the world’s most utilised jurisdictions for the incorporation of international business companies. These companies have been especially popular in Asia, Latin America and the Middle East, and many of them have been, and still are, incorporated as personal asset-holding vehicles. In 2004, the Act was replaced by a more sophisticated statute, the BVI Business Companies Act 2004 (the BCA).

Many international practitioners will have encountered structures involving BVI companies. Indeed, this is perhaps unsurprising, as the BVI has over 350,000 active companies on its register and a significant number of these have a sole individual shareholder who also serves as the sole director. Unfortunately, in the case of many BVI companies (even those with a sole shareholder/director), too little attention has been given to succession planning. As readers will appreciate, it is prudent for advisors to encourage shareholders to focus their minds on their succession-planning options at the earliest opportunity, particularly as they age. Naturally, as is the case with any other asset, succession planning needs to be considered by all individual shareholders of BVI companies, no matter how many shareholders or directors they may have. That said, the main focus of this article is on the many BVI companies that have a sole shareholder/director.

Background

What happens if a shareholder dies holding shares in their sole name?

If no succession planning has been undertaken, then following the shareholder’s death, an application for a BVI grant of representation will be required. The application will be one for probate if the shareholder leaves a valid will disposing of the shares and appointing executors who are both capable of making and are prepared to make the application. If the shareholder has not left a will disposing of the shares, these will devolve pursuant to the intestacy rules of the jurisdiction in which the shareholder dies ‘domiciled’, and an application for a BVI grant of letters of administration will be needed. Domicile is a technical concept that is not always the same as residence or nationality and laws of the domicile will by-and-large also determine who is entitled to make the application for the BVI grant.

The application for a grant of representation would need to be one for a BVI grant, rather than a grant from the jurisdiction in which the testator dies resident or domiciled, although the resealing of a non-BVI grant in the BVI may be possible.

If no other estate-planning steps have been taken, it would usually be prudent for the shareholder to execute a BVI will by appointing executors chosen by the shareholder to administer the estate and by setting out who is to receive the shares (and on what terms, e.g., on attaining a specified age). This would generally be essential if the shareholder or their spouse has a second family or young/vulnerable relatives or, as will often be the case, if the relevant intestacy laws do not reflect the shareholder’s wishes. Such a will’s ‘essential’ and ‘formal’ validity would be determined in accordance with the law of the domicile; this could impact on such issues as the ability of the testator to dispose of the shares (e.g., if forced-heirship provisions are applicable) and the manner in which the will is executed.

On the death of a sole shareholder who is also the sole director (i.e., unless a ‘reserve director’ has been appointed), a further court application involving a short court hearing is also needed after the BVI grant has been obtained. This hearing is required so that the company’s shareholder register may be updated to reflect the transfer of the shares into the names of the personal representatives or beneficiaries. If, conversely, a ‘reserve director’ has been appointed pursuant to the provisions of the BCA, this will obviate the need for this post-grant hearing. If none of the three options described below is taken up, the appointment of a reserve director should be seriously considered in addition to the execution of a will.

Those shareholders who prefer to avoid the cost, delay, inflexibility and potential lack of confidentiality involved in making an application for a grant are advised to take up one of the three probate avoidance options described below. These three options apply both to companies with only one shareholder/director and to companies with multiple shareholders/directors.

First option

The establishment of a lifetime trust

As most practitioners appreciate, the establishment of a lifetime trust is often considered the best available succession-planning mechanism. If the terms of the trust are crafted appropriately no grant will be needed, and the provisions of the trust can be tailored to meet the short- and long-term succession-planning needs of the shareholder. The BVI has a much-used alternative trust regime known as the VISTA trust regime,[1] which caters specifically for trusts over shares in BVI companies and allows these companies to continue to be run by their directors without inappropriate trustee involvement. The ‘office of director rules’ in the trust instrument will serve as a unique succession-planning vehicle for directorships.

If a lifetime trust is properly structured, the ‘firewall’ provisions in the BVI’s Trustee Act should assist in countering any forced-heirship challenges.

Second option

Amending the company’s memorandum and articles

If the establishment of a lifetime trust is considered inappropriate, another popular probate avoidance mechanism is to amend the company’s memorandum and articles so that the company has two or more classes of shares. The shareholder would continue to own the ‘A’ shares in the company, which would retain all the voting and economic rights during the A shareholder’s lifetime. ‘B’ shares would, however, be issued to the shareholder’s intended beneficiaries. These B shares would have no economic or voting rights until the A shareholder dies, following which the B shares would have such rights; the A shares would then lose their economic and voting rights and, in effect, become valueless.

Such corporate restructuring should avoid the need for a BVI grant of representation but does not provide the same flexibility as the establishment of a lifetime trust. If circumstances change, the consent of the B shareholders would invariably be needed before relevant changes to the company’s shareholdings and/or constitutional documents can be effected. Further, such restructuring may be inappropriate if any intended shareholder is a minor or lacks capacity. Potential divorce and creditor claims might further make this probate avoidance option unattractive.

Option three

Holding the shares as equitable joint tenants

The third means of avoiding the need to apply for a grant is for the shareholder to transfer the shares into their name and the name of others so that they then hold these as ‘beneficial joint tenants’. On the death of the first co-owner the shares would pass, by virtue of the doctrine of survivorship, to the other co-owner/s without any need for a grant. A potential disadvantage of this option is that any co-owner can ‘sever’ the joint tenancy without the consent of the other/s, i.e., so that each of them holds undivided interests in the shares and the doctrine of survivorship ceases to apply. Additionally, care must be taken to ensure that everything is properly documented, e.g., to prevent the legal ‘presumption of a resulting trust’ from applying. This mechanism is, moreover, not considered to be effective as a long-term solution since, at best, it will only postpone the need to obtain a BVI grant until the death of the surviving co-owner.

Non-solutions

Practitioners should avoid suggesting various other BVI estate-planning mechanisms, which some advisors have promulgated in the past. These non-solutions include holding the shares in the name of a nominee: this can in fact sometimes exacerbate existing problems since not only will a BVI grant be needed before the beneficial interest in the shares can be disposed of on the death of the beneficial owner, but a BVI grant would be needed if the nominee dies. Another solution that should be avoided is relying on provisions in a company’s memorandum and articles to the effect that non-BVI grants of representation can be relied on; such provisions, which are fraught with potential problems, were commonplace in the past but are nowadays encountered much more rarely.