Post by congregatio on Jan 29, 2016 7:32:34 GMT 4
Security over the shares of a BVI company will typically be either by way of mortgage (which may be legal, although usually equitable) or charge.
Legal mortgage
A legal mortgage involves the transfer of legal title to the shares of the BVI company into the name of the secured party, subject to the mortgagor's equity of redemption. The transfer of legal title confers maximum protection against competing interests in that it is not vulnerable to being defeated by a third party who acquires legal title to the shares in good faith, for value and without notice of a pre-existing equitable interest. It also means that upon enforcement the secured party will already be registered as the member of the company. This avoids the need, at a time of potential dispute, to have the register of members updated by the company or by a service provider who, in either case, may not be cooperative.
However, a legal mortgage over shares of a BVI company is rare. Shareholders will typically be reluctant to transfer the legal title to the shares (even by way of security) prior to the occurrence of an enforcement trigger event, meaning a legal mortgage is usually not commercially acceptable. It also has certain potential disadvantages which may result in the secured party preferring equitable security. These include, among other things: (i) potential liability for calls by the BVI company in the event that the shares are not fully paid; (ii) the administrative burden of the secured party receiving documents and dividends and being required to pass onto the mortgagor; (iii) the potential for it to appear that the secured party is taking 'control' of the BVI company; and (iv) requiring the secured party to consolidate the shares of the BVI company on its books for accounting and regulatory purposes.
Equitable mortgage or charge
By far the most common form of security interest in relation to the shares of a BVI company is an equitable mortgage or charge. This equitable security interest does not involve the transfer of legal title of the shares of the BVI company, although its terms would usually provide that in certain circumstances (typically not until the occurrence of an agreed enforcement trigger event) the equitable mortgage or charge can be converted to a legal mortgage.
When taking an equitable mortgage or charge, there are two areas in particular which should be addressed to the secured party's satisfaction which do not tend to arise where a legal mortgage is taken. These relate to priority and enforcement (in particular, ensuring that the secured party can, in the event enforcement becomes necessary, transfer title to the shares and enforce its security interest out of court).
To ensure that the secured party obtains valid security, ranking in priority and enforceability the following steps should be taken. Initially review the BVI company's memorandum and articles of association obtained from the registrar to ensure that there are no provisions that prohibit the creation of security or might negatively impact on the enforcement of the security (for example, restrictions on transfers, liens in favour of the company and directors' discretion to refuse to register share transfers).
Also, inspect the BVI company's register of members to ensure that the security provider is the registered shareholder of the shares it is granting security over, free of any notation of existing security, and (if such details are noted in the register) evidence whether the charged shares have been issued fully paid.
Furthermore, if the security provider is also a BVI company, conduct a search of the records maintained by the Registrar in respect of such BVI company to, among other things, reveal any existing security filings which might have priority over the new share security.
Ancillary documentation to accompany the equitable mortgage
Irrespective of the governing law of the share security, there are a number of documents that secured lenders are advised to take as part of the security package to facilitate enforcement. These include: (i) undated share transfer forms – on enforcement the share transfer form will be dated and given to the BVI company's registered agent who will updated the register of members; (ii) original share certificates (if any – BVI law does not require share certificates to be issued); (iii) a proxy to allow the secured party to vote the shares following an enforcement event; (iv) signed and undated letters of resignation from the directors of the BVI company and a letter from each director authorising the lenders to date the letters of resignation upon an enforcement event; (v) an irrevocable undertaking from the BVI company whose shares are charged to, among other things, register transfers of shares to the secured party or its nominee upon enforcement (if the BVI company is not party to the relevant share charge); (vi) undated resolutions of the directors of the BVI company which, among other things, instruct the registered agent to register transfers of shares to the secured party or its nominee upon enforcement in the register of members of the BVI company (if the BVI company is a party to the relevant share charge); and (vii) an undertaking from the registered agent of the BVI company to, among other things, keep the original register of members until the security is released and to update the same in accordance with the instructions of the secured party upon enforcement of the security. While registered agent undertakings are increasingly being accepted as part of market practice, commercial reality may mean that it is not possible to obtain such an undertaking for a particular transaction, in which case alternative options are available to address the relevant concerns. Although usually included in the charge or mortgage, rather than as a separate ancillary document, a power of attorney should also be granted by the security provider to enable the secured party to execute and complete documents on the security provider's behalf upon enforcement.
In addition, to the extent that provisions have been identified in the BVI company's memorandum and articles of association pursuant to the diligence process which may inhibit enforcement, amendments to such provisions should also be required.
Annotation of the BVI company's share register
When registering security over the shares of a BVI company, the following key points should be noted. The company's register of members may be annotated in accordance with section 66(8) of the BVI Business Companies Act, as amended (the Act). A notation may be made in the company's register of members that the relevant shares are subject to a mortgage or charge. The conventional view is that such notation constitutes actual notice of the security interest to anyone inspecting the register of members.
The company's register of members may be filed on the public register. A company may elect to file its register of members with the Registrar. Such filing is optional, and sometimes contested, although it is of benefit to lenders as it will provide actual notice of the security interest to anyone reviewing the public files of the company.
Registering a security interest (section 163 and 162 of the Act)
It is also worth noting that if a BVI company is charging the shares it holds in another company (whether that other company is a BVI company or not) then a registration can be made in accordance with section 163 of the Act. While registering the charge in the Register of Registered Charges kept by the Registrar with respect to the BVI company, charging the shares does not amount to perfection; it does provide constructive notice to third parties and can create priority over subsequent fixed charges taken over the same asset.
The BVI company which has charged in favour of the secured party the shares it holds, in addition to registering the particulars of charge in the Register of Registered Charges in accordance with section 163, will also be required to update its internal register of charges in accordance with section 162 of the Act register.
In summary
An equitable mortgage is the most common form of security over shares and usually involves the mortgagor delivering signed and undated instruments of transfer for the mortgaged shares, share certificates in relation to the mortgaged shares and an undated resignation letter signed by the directors of the BVI company. A prudent secured party will need to check the corporate and constitutional documents of the BVI company and be mindful of the registration and filing provisions of the Act
originating from
Elliott Doucy
Associate of Walkers Global
T +1 284 852 2208
M +1 284 346 0580
elliott.doucy@walkersglobal.com
Elliott Doucy is based in Walkers' BVI office and is an associate in the firm's Global Finance and Corporate Groups.
Elliott has broad corporate and commercial experience and advises clients on banking, security, general corporate and regulatory matters, as well as on mergers and acquisitions, takeovers, IPOs, joint ventures and shareholder agreements, private equity and corporate re-organisations.
Legal mortgage
A legal mortgage involves the transfer of legal title to the shares of the BVI company into the name of the secured party, subject to the mortgagor's equity of redemption. The transfer of legal title confers maximum protection against competing interests in that it is not vulnerable to being defeated by a third party who acquires legal title to the shares in good faith, for value and without notice of a pre-existing equitable interest. It also means that upon enforcement the secured party will already be registered as the member of the company. This avoids the need, at a time of potential dispute, to have the register of members updated by the company or by a service provider who, in either case, may not be cooperative.
However, a legal mortgage over shares of a BVI company is rare. Shareholders will typically be reluctant to transfer the legal title to the shares (even by way of security) prior to the occurrence of an enforcement trigger event, meaning a legal mortgage is usually not commercially acceptable. It also has certain potential disadvantages which may result in the secured party preferring equitable security. These include, among other things: (i) potential liability for calls by the BVI company in the event that the shares are not fully paid; (ii) the administrative burden of the secured party receiving documents and dividends and being required to pass onto the mortgagor; (iii) the potential for it to appear that the secured party is taking 'control' of the BVI company; and (iv) requiring the secured party to consolidate the shares of the BVI company on its books for accounting and regulatory purposes.
Equitable mortgage or charge
By far the most common form of security interest in relation to the shares of a BVI company is an equitable mortgage or charge. This equitable security interest does not involve the transfer of legal title of the shares of the BVI company, although its terms would usually provide that in certain circumstances (typically not until the occurrence of an agreed enforcement trigger event) the equitable mortgage or charge can be converted to a legal mortgage.
When taking an equitable mortgage or charge, there are two areas in particular which should be addressed to the secured party's satisfaction which do not tend to arise where a legal mortgage is taken. These relate to priority and enforcement (in particular, ensuring that the secured party can, in the event enforcement becomes necessary, transfer title to the shares and enforce its security interest out of court).
To ensure that the secured party obtains valid security, ranking in priority and enforceability the following steps should be taken. Initially review the BVI company's memorandum and articles of association obtained from the registrar to ensure that there are no provisions that prohibit the creation of security or might negatively impact on the enforcement of the security (for example, restrictions on transfers, liens in favour of the company and directors' discretion to refuse to register share transfers).
Also, inspect the BVI company's register of members to ensure that the security provider is the registered shareholder of the shares it is granting security over, free of any notation of existing security, and (if such details are noted in the register) evidence whether the charged shares have been issued fully paid.
Furthermore, if the security provider is also a BVI company, conduct a search of the records maintained by the Registrar in respect of such BVI company to, among other things, reveal any existing security filings which might have priority over the new share security.
Ancillary documentation to accompany the equitable mortgage
Irrespective of the governing law of the share security, there are a number of documents that secured lenders are advised to take as part of the security package to facilitate enforcement. These include: (i) undated share transfer forms – on enforcement the share transfer form will be dated and given to the BVI company's registered agent who will updated the register of members; (ii) original share certificates (if any – BVI law does not require share certificates to be issued); (iii) a proxy to allow the secured party to vote the shares following an enforcement event; (iv) signed and undated letters of resignation from the directors of the BVI company and a letter from each director authorising the lenders to date the letters of resignation upon an enforcement event; (v) an irrevocable undertaking from the BVI company whose shares are charged to, among other things, register transfers of shares to the secured party or its nominee upon enforcement (if the BVI company is not party to the relevant share charge); (vi) undated resolutions of the directors of the BVI company which, among other things, instruct the registered agent to register transfers of shares to the secured party or its nominee upon enforcement in the register of members of the BVI company (if the BVI company is a party to the relevant share charge); and (vii) an undertaking from the registered agent of the BVI company to, among other things, keep the original register of members until the security is released and to update the same in accordance with the instructions of the secured party upon enforcement of the security. While registered agent undertakings are increasingly being accepted as part of market practice, commercial reality may mean that it is not possible to obtain such an undertaking for a particular transaction, in which case alternative options are available to address the relevant concerns. Although usually included in the charge or mortgage, rather than as a separate ancillary document, a power of attorney should also be granted by the security provider to enable the secured party to execute and complete documents on the security provider's behalf upon enforcement.
In addition, to the extent that provisions have been identified in the BVI company's memorandum and articles of association pursuant to the diligence process which may inhibit enforcement, amendments to such provisions should also be required.
Annotation of the BVI company's share register
When registering security over the shares of a BVI company, the following key points should be noted. The company's register of members may be annotated in accordance with section 66(8) of the BVI Business Companies Act, as amended (the Act). A notation may be made in the company's register of members that the relevant shares are subject to a mortgage or charge. The conventional view is that such notation constitutes actual notice of the security interest to anyone inspecting the register of members.
The company's register of members may be filed on the public register. A company may elect to file its register of members with the Registrar. Such filing is optional, and sometimes contested, although it is of benefit to lenders as it will provide actual notice of the security interest to anyone reviewing the public files of the company.
Registering a security interest (section 163 and 162 of the Act)
It is also worth noting that if a BVI company is charging the shares it holds in another company (whether that other company is a BVI company or not) then a registration can be made in accordance with section 163 of the Act. While registering the charge in the Register of Registered Charges kept by the Registrar with respect to the BVI company, charging the shares does not amount to perfection; it does provide constructive notice to third parties and can create priority over subsequent fixed charges taken over the same asset.
The BVI company which has charged in favour of the secured party the shares it holds, in addition to registering the particulars of charge in the Register of Registered Charges in accordance with section 163, will also be required to update its internal register of charges in accordance with section 162 of the Act register.
In summary
An equitable mortgage is the most common form of security over shares and usually involves the mortgagor delivering signed and undated instruments of transfer for the mortgaged shares, share certificates in relation to the mortgaged shares and an undated resignation letter signed by the directors of the BVI company. A prudent secured party will need to check the corporate and constitutional documents of the BVI company and be mindful of the registration and filing provisions of the Act
originating from
Elliott Doucy
Associate of Walkers Global
T +1 284 852 2208
M +1 284 346 0580
elliott.doucy@walkersglobal.com
Elliott Doucy is based in Walkers' BVI office and is an associate in the firm's Global Finance and Corporate Groups.
Elliott has broad corporate and commercial experience and advises clients on banking, security, general corporate and regulatory matters, as well as on mergers and acquisitions, takeovers, IPOs, joint ventures and shareholder agreements, private equity and corporate re-organisations.