Key issues in series financing under BVI and Cayman Islands law

A series financing transaction is a type of equity investment deal in which an investor injects cash into a business in exchange for preferred shares. The issuance of preferred shares is typically documented by a share subscription agreement between the investor and the company. A shareholders’ agreement (SHA) is also entered into between the investor and the company to govern the parties’ rights and responsibilities. The company’s memorandum of association and articles of association (M&AA) are amended and restated to incorporate relevant provisions of the SHA. This is to ensure that there are no inconsistencies between the agreement’s contractual provisions and the company’s constitution.

Cost-effective and quick to incorporate. The British Virgin Islands (BVI) and Cayman Islands companies are not expensive to incorporate and maintain. BVI companies are typically incorporated within one to two business days, while Cayman companies are incorporated within five to seven business days, or on a same-day express basis for an additional fee.

Corporate governance is efficient. Non-regulated entities may have a sole shareholder and a sole director, who may be the same person. There are no nationality and/or residency requirements for these roles.

Flexibility. There is flexibility in tailoring the M&AA of the company to accommodate the issuance of different classes of shares, and the rights and restrictions attached to them.

Tax neutrality. There is no corporation tax, capital gains tax, income tax, profits tax and/or share transfer tax under BVI and Cayman law.

Investor familiarity. Investors are familiar with the BVI and Cayman as jurisdictions that help facilitate investment decisions.

Secured creditor friendly. The BVI and Cayman are widely recognised as creditor-friendly jurisdictions, which help in facilitating debt financing that an early-stage company may require.

Basic corporate information, M&AA, directors and shareholders. For Cayman companies, access to date of incorporation, company name and registered address is publicly available. Access to constitutional documents and statutory registers is not public and can only be obtained with the company’s consent, authorising its registered office service provider to disclose them.

The M&AA of a BVI and a Cayman company may reveal important information, such as whether:

1. 1. Any third-party consents are required to implement a series financing, or whether certain conditions need to be met prior to its consummation;
   2. There is an existing SHA in relation to the company (which could impose certain consent requirements on the parties with respect to the series financing);
   3. A series financing falls within the scope of any existing board and/or shareholder reserved matters; and
   4. There are any most-favoured-nation provisions in favour of an existing investor.

Outstanding charges. The register of charges (if maintained) of a BVI company and the register of mortgages and charges of a Cayman company are matters of private record. The register of registered charges of a BVI company is publicly searchable.

Good standing. In the BVI, a company is in good standing if it is on the register of companies, has paid all fees, annual fees and penalties due, has filed a complete register of directors with the BVI registrar, and has filed its annual return.

A Cayman company, meanwhile, is deemed to be in good standing if all fees and penalties have been paid, and the registrar of companies has no knowledge that the company is in default.

Litigation. In the BVI, a search may be conducted to verify whether there are or have been any actions against a company in the courts. In the Cayman Islands, a search may be conducted to verify whether there are or have been any actions against a company in a Cayman court at the time of the search.

Certificate of incumbency. It is prudent to review an up-to-date certificate of incumbency issued by the company’s registered agent.

Books and records. Every BVI and Cayman company must maintain books and records showing that company’s transactions, assets and liabilities, and enable the financial position of the company to be determined with reasonable accuracy.

This article was first published in the Asia Business Law Journal https://law.asia/key-issues-series-financing-bvi-cayman-islands-law/