Are You Prepared?: The Importance of BVI Succession Planning – what works and what doesn’t
There are close to 500,000 active BVI companies worldwide and a significant percentage of those have individual shareholders or have a single individual shareholder who is also appointed as sole director. So what happens when that individual shareholder passes away? And what happens when the single individual shareholder is also the only director? The answer to that depends on the succession planning which has taken place (if any). If a proper level of succession planning has been put in place, it can make life significantly easier for those who are left to deal with the affairs of the deceased. However, many such shareholders will have done little or no succession planning, or equally as negligent and careless, perceived planning that simply does not work.
This article will examine the issues that can arise as a result of the succession rules applying to shares in a BVI company, some misconceptions as to what works in relation to dealing with such issues and looks at some possible solutions.
If the deceased has died intestate (i.e. without a Will) or a foreign or BVI Will has been executed, a BVI grant of representation (“Grant”) will be required in order to deal with the BVI shares. Obtaining a Grant can be both costly and time-consuming (more so if a Grant has to be obtained based on having first obtained a foreign grant). During this period, the shares are effectively paralysed and can not be dealt with in any way until such time as the grant has been made in the BVI.
The abovementioned issue is magnified where the deceased is the sole shareholder and sole director. Not only are the shares paralysed but the continued operation of the company is also paralysed as a new director can not be appointed until such time as a Grant has been obtained.
In addition, if the deceased shareholder has died intestate the intestacy rules of the domicile of the deceased will apply. This may lead to the shares going to relatives that the deceased did not want or expect them to go to.
Misconceptions – What Does NOT Work!
- Undated share transfer form – any authority given to a person to date a share transfer ceases upon the death of the deceased shareholder. A transfer dated by such person will be invalid and open to challenge by disgruntled relatives and creditors, notwithstanding the date inserted into the transfer pre-dates the death of the shareholder;
- Using a power of attorney to effect the transfer – A power of attorney is revoked upon the death of the shareholder it is issued by. As such, any documents purportedly signed pursuant to such power of attorney following the death of the shareholder will be invalid and open to challenge as above;
- Nomineeship or bare trust – under such arrangements the beneficial ownership of the shares remains an asset of the deceased and will be part of the deceased’s estate. If the nominee purports to transfer the shares to another person pursuant to a verbal or written instruction or agreement, then the nominee risks liability for intermeddling in the estate of the deceased and such instruction or agreement may amount to an invalid testamentary disposition and consequently, the transfer being void; and
- Relying on provisions in the memorandum and articles of association of the company – many memorandum and articles purport to suggest that shares can be transferred without a Grant or that a foreign grant provides sufficient authority to allow the shares to be dealt with – persons involved in transferring the deceased’s shares, or the recipient of such shares or who assist in transferring such shares (N.B. a registered agent should consider its position before assisting even upon receipt of a directors resolution) risk potential exposure for intermeddling.
- BVI Will – this may work depending on the domicile of the deceased and the domicile question will need to be carefully examined in each specific case. If the Will is effective, it will still be necessary to obtain a Grant in the BVI and this gives rise to the cost and timing issues previously mentioned. In addition, certain information may become public if a Grant is sought and the assets of the deceased e.g. the shares will be available to creditors during the lifetime and after the death of the deceased;
- Joint tenancy – this is a simple solution for some clients, whereby shareholders initially co-own and hold the legal title to shares as joint tenants and later on a surviving joint tenant becomes entitled to the shares by operation of law. However, as a planning tool it is quite limited and the survivor will then have to face the same issues as have been detailed previously;
- Different classes of shares – contemplate a scenario where class A shares will have voting rights, dividend rights and rights to proceeds on a winding-up during the lifetime of the Class A shareholder. Class B shareholders do not have any of the rights held by the Class A shareholder while the Class A shareholder is alive but on the death of the Class A shareholder, all of the rights attached to the Class A shareholder automatically attach or kick into the Class B shares. As a corporate planning tool this can be used effectively to create a control and value switch between the Class A and B shareholders upon the death of the Class A shareholder without the need for a Grant;
- Reserve director – this is a partial solution where a company has a sole individual shareholder/director. In such a situation, under BVI law, a reserve director can be appointed, with the appointment becoming effective on the death of the shareholder/director. Appointing a reserve director does not solve the issues surrounding the transfer of shares after the death of the shareholder i.e. a Grant will still be required. It does, however, allow the company to avoid paralysis and to continue to operate while the Grant is being processed;
- Trust – a trust can be an ideal solution in the right circumstances. The shareholder transfers the shares to a trustee, who then has legal title to the shares and who has a fiduciary duty to protect and pass on the shares to the nominated beneficiaries of the shareholder. Moreover, the shares will generally not be available to the creditors of the former shareholder during or after the death of the former shareholder, there will be no need to obtain a Grant and all information in relation to the shares/company will remain confidential. A trust is also scalable – it can be set up simply as a Will substitute or it can be very tailored; and.
- PPLI- The use of Private Placement Life Insurance is another possible solution. In this scenario, the shares in the BVI company are actually owned by the life company on behalf of the insured (as opposed to them being owned by a sole individual shareholder as discussed in the other options), so upon the death of the insured, the life insurance company can either liquidate the BVI company and pay the proceeds to the beneficiary(ies) or transfer the shares of the company to the beneficiary (ies). It not only provides estate planning but also provides confidentiality and a level of asset protection during the life of the insured.
As can be seen from the above, it is important for any individual who owns shares in a BVI company to consider what is to happen to the shares upon their death. There is a range of options available in terms of succession planning but what is very clear is that clients and their advisors would be wise to consider utilising one or perhaps a combination of the options set out above to ensure that those with the responsibility of sorting out the affairs of the deceased, whilst perhaps also inheriting the shares, do not also inherit a “headache” trying to sort through the succession issues.
Finally, whilst the above comments have been made specifically with a BVI company in mind, similar provisions may apply to all privately held companies irrespective of their place of incorporation.
For more information or if you have any queries with respect to the contents of this article, please contact the following:
Barry N. Mitchell: firstname.lastname@example.org
About the Author
Barry Mitchell B Com, LLB, TEP
Barry Mitchell, a graduate of Auckland University, New Zealand, qualified as a barrister and solicitor of the High Court of New Zealand in 1982, as a solicitor of the Supreme Court of England and Wales in 2000 and as a solicitor of the Eastern Caribbean Supreme Court (British Virgin Islands), also in 2000. Before moving to the BVI in 1996, Barry worked for a number of large Auckland-based commercial law firms and then in 1996 took up a position as the managing director/in-house legal counsel for an international trust company when he moved to the BVI. Barry subsequently became a partner of a local BVI law firm in 1998, which subsequently merged with Maples and Calder in 2004. As part of the merger with Maples and Calder, Barry relocated to Hong Kong to head up the Maples BVI legal team for the Asia Region. Barry remained a partner of Maples and Calder until 2014 when he joined the AMS Financial Group as Group Legal Counsel and a partner in AMS Law, and oversees the Group’s Asia/Pacific corporate and trust teams. Barry remains based in Hong Kong.