Issues and Perspectives
part of our commitment to become better at communicating, both listening and responding,
we are looking to use as many information channels to keep you posted on recent
changes in legislation, threats, opportunities in the form of information updates
and regular briefings for special interest.
real dialogue must be a two-way conversation. Talk to us and let us know what
you think. REGISTER with us today so that we can send you our Current Issues and
Perspectives and let us know what you think about what we are doing, and how we
are doing it.
tightened on the use of BVI bearer shares
June 2003, the BVI government will enact a new regime tightening on the use of
BVI bearer shares and will also introduce a provision requiring details relating
to directors of an Business Company ("BC") to be maintained
at the Registered Office.
main features of the new bearer share regime are:
Companies may continue to issue bearer shares. However, the shares have to be
lodged with an Authorised or Recognised Custodian.
Existing companies will have until December 31, 2004 to deposit their bearer shares
with a Custodian, exchange the shares for registered shares or otherwise cancel
or redeem the shares.
Authorised Custodians are institutions that are licensed under the BVI Banks and
Trust Company Act.
Owners of bearer shares must provide to the Custodian:
The full name of the beneficial owner of the shares.
The full name of any other person having an interest in that share or a statement
to the effect that no other person has an interest in the share.|
Any other information as may be prescribed by the BVI Government.|
Bearer shares not deposited with an approved custodian will be deemed "disabled",
meaning the share does not entitle the right to vote, receive dividends or obtain
a share of the assets of the company on winding up or liquidation.
The BVI Financial Services Commission can apply to court to wind up a company
which does not comply with the new bearer shares.
The government incorporation and annual licence fee for a company with the right
to issue bearer shares will be US$1,300.
A company that wishes to avoid paying higher fees fro the right to issue bearer
shares must include to its M&A a prohibition against the issuance of bearer
shares. It is not yet known if existing companies will need to amend their M&A
to comply with this requirement.
The new rule will require that the Register of Directors be maintained at the
companies will be allowed a one year transition period in order to provide the
registers to the Registered Office. Companies incorporated after the effective
date of the new legislation will be required to comply with the new filing requirement
Only current director information will be required.
There will also be a requirement to appoint a director within 30 days of incorporation.
A number of alternative
ownership structures exist for shareholders owning bearer shares. These include
the use of registered shares, nominee shareholders, trusts and share warrants.
In addition, some jurisdictions continue to permit the use of bearer shares. Contact
us and discuss with us, we promise to find the best solution for you.
Clarifies New Bearer Shares Regime
press release of 30 October 2003, the BVI Government announced that the special
panel appointed by the Financial Services Commission (FSC) has finalized its report
on the way forward for the bearer share regime.
panel's main recommendation is to propose a seven year transition period before
the new bearer shares legislation takes full effect.
the first four years, existing International Business Companies ("IBC")
would essentially remain the same. For the following three years, those IBC that
wish to retain the power to issue bearer shares would pay a small increase in
their license fee.
At present there has been no indication or clarification from the FSC as to the
amount of the "small increase in their license fee" that an IBC will
have to pay should it wish to maintain the ability to issue bearer shares.
There has been no indication at this stage as to whether or not the effective
four years grace period mentioned will also apply to the issue of filing registers
of directors with the Registered Agent of an IBC incorporated prior to the effective
date, or whether the intended initial period of one year will continue to apply
in respect of this matter.
No indication has been given as to when it is intended the Act will be proclaimed.
Planning for a Family-owned Business
is Succession Planning?
planning is a dynamic, on-going process of systematically identifying, assessing,
and developing leadership talent. Succession planning has also been described
as, "the process of planning the sequencing of management in business and
organization". As a business is set up to continue indefinitely, the current
leaders have a duty to ensure that present business practices can be sustained
and even improved upon when they leave. This can be a very complicated process
that can take many years to develop. But the difficulties are no excuse to delay
the process and risk the future damage to the organization that can arise.
family businesses excel because of the energy, commitment and passion of the founder.
There is no guarantee that the potential heirs will be able to maintain that drive;
in fact, the odds are strongly against it: only 24% of family businesses pass
to the second generation and only 14% pass to the third. Many founders of family-owned
businesses believe that succession is an easy decision to make, although in many
cases they confuse succession and inheritance.
It is sometimes difficult for
the founder/owner to objectively identify the members of the family who actually
have the ability to continue and increase the value of the business. Also, founder/owners
sometimes tolerate or overlook behaviors demonstrated in the family setting, such
as sibling rivalry and in fighting, which can cloud judgment in critical situations
in the business world.
is more difficult for family-owned businesses for several reasons:
have a significant emotional attachment to their business;
to the business often does not leave time to develop outside interests, family
finances and estate planning; and
may view succession planning as indicative of a loss of vitality and control.
As a result, these
decisions are often postponed until the last moment, and that is too late.
in family-owned businesses occurs on three levels: Leadership, ownership and
first level of succession focuses on the next generation leader or leaders. The
current leader should begin by identifying the qualities necessary to take the
business forward and then looking at all potential successors currently within
the organization. Do any have the necessary qualities or can they get them with
the appropriate training? It is generally prudent to look outside of the organization
qualities, of course, depend on the nature of the business and who is making the
assessment. However, there are certain characteristics that all potential successors
should have. The most important of these include sufficient managerial expertise
or potential and sufficient knowledge of the business to lead it forward. These
qualities may seem obvious to many, however, a founder/owner, without proper planning,
may put family members in positions for which they are neither qualified nor suited.
should be made that are impartial and logical for the continued success of the
business. After carefully considering the alternatives, a decision can be made
on the successor. If the chosen candidate is not immediately capable of assuming
the leadership role, then steps should be taken to develop the skills required.
If the founder/owner of a business finds it difficult to make these decisions,
especially where family members are involved, then an independent third party
should be invited to assist in the process.
third party could be a business advisor or trusted family friend with extensive
business experience, preferably experience in dealing with strategic and succession
ownership succession issue focuses on how the business will be owned and operated
once the founder/owner withdraws from the day-to-day management and ongoing ownership
of the business. The following items, in particular, need to be attended to on
the founder's need for cash and security
the founder's estate
the founder's will
how to prepare the executor
estate liquidity/estate tax considerations
should also be given to how the family's interest will be represented in the future.
If the founder/owner wishes to retire and there is no apparent successor within
the family, one option to consider is a sale of the business to a third party.
The family may not wish to become a passive investor in a business operated by
an "outsider". In any case, a family should decide how to dispose the
business as its continuing existence can be of most value to them.
they can be used to some extent as a family employment agency, it may be that
the business is of most value to the family if it is sold, in which case the proceeds
could be used to further the education of its members, and/or invested in other
areas that can often be of lower risk, thereby allowing for diversification.
part of the succession planning, it is often prudent to consult an accountant
or valuation specialist so that a more informed decision can be made. If a sale
is being contemplated, it is usually better to "position" the company
to maximize the selling price, which may include upgrading information systems,
reviewing the management structure, restructuring the business, etc.
last level of succession focuses on the emotional well being of the family and
founder throughout all the phases of the succession process. Issues to be dealt
with for the founder at this level include:
establishing actual and symbolic roles
up the reins", particularly on short notice, can be traumatic for a founder/owner.
A well thought out succession plan, as an integral part of the business' long-term
strategy, can serve to minimize the emotional stress.
planning should be thought of as a process and not an event. If you are a leader
in a family-owned, or any business, make succession part of your strategic planning
process. It is important not to underestimate how complex succession planning
will be, and therefore, consider getting independent help at the outset.
Misconceptions in Estate Duty
the fact that Estate Duty is one of Hong Kong's oldest taxes, there are still
many misunderstandings as to its scope and application.
relation to gifts, while the three-years rule is well known, the fact that a gift
is never effective for Estate Duty purposes if it is not absolute or is made with
a reservation, is frequently overlooked. Many are aware that by careful planning,
it is possible to avoid Estate Duty if the property given is rendered valueless
by the date of death.
the other hand, the fact that a gift of Hong Kong property into a Trust, in which
the settlor reserves a benefit as a discretionary beneficiary, will result in
the settlor becoming permanently locked into potential Estate Duty liability,
has often been overlooked. In this sort of case, there will be no three-years
rule and the gift into trust will not be effective however long ago it took place.
Even if the trustees sell the Hong Kong trust assets and replace them with offshore
assets, the liability to duty on the death of the settlor will continue to be
based on the value at his death of the original Hong Kong assets transferred to
is sometimes said that the Commissioner of Estate Duty never invokes the Section
35 charge. This is not correct, although it is the case that having obtained information
about the transfer of assets to a controlled company, the Commissioner will often
be able to use a different charging provision. It is also widely thought that
the Section 35 charge does not apply to offshore companies. This is entirely incorrect.
hears of people believing that they have solved their Hong Kong Estate Duty problems
by transferring Hong Kong assets to an offshore company like a British Virgin
Islands International Business Company with bearer shares held by the transferor
and his or her relatives which are kept on deposit with a bank in Hong Kong.
arrangement fails on two grounds. First, as a controlled company, the company
will be liable to Estate Duty if the Section 35 charge applies. 'Controlled company'
is if the company's affairs or voting power are under the control of not more
than five persons and their associates, and even though the deceased is not among
the five persons. Secondly, as the bearer shares are physically present in Hong
Kong, these will be Hong Kong property and their value will be based on the underlying
assets of the company. In this sort of arrangement if the company also owns non-Hong
Kong assets, the effect will be to make both the Hong Kong and the non-Hong Kong
assets liable to Estate Duty because their total value will be attributed to the
bearer shares. Despite the fact that this is a disastrous form of Estate Duty
planning, it is an arrangement, which has been used by a large number of Hong
I Invest in Hedged Fund?
funds refer to funds that use one or more alternate investment strategies, including
hedging against market downturns, investing in asset classes such as currencies
or distressed securities, and utilizing return-enhancing tools such as leverage,
derivatives such as puts, calls, options, futures and arbitrage.
a time when world stock markets appear to have reached excessive valuations and
may be due for further correction, hedged funds provide an option to investors
seeking capital appreciation as well as capital preservation in bear markets.
The vast majority of hedged funds make consistency of return, rather than magnitude,
as their primary goal.
of Hedged Funds
hedged fund strategies have the ability to generate positive returns in both rising
and falling equity and bond markets.
of hedged funds in a balanced portfolio reduces overall portfolio risk and volatility
and increases returns.
variety of hedged fund investment styles; many uncorrelated with each other; provides
investors with a wide choice of hedged fund strategies to meet their investment
funds provide an ideal long-term investment solution, eliminating the need to
correctly time entry and exit from markets.
hedged funds to an investment portfolio provides diversification not otherwise
available in traditional investing.
Risks of Hedged Funds Investing
and Lack of Transparency - When
considering alternative investments, especially hedged funds, you should consider
various risks including the fact that some products: often engage in leveraging
and other speculative investment practices that may increase the risk of investment
loss, are not required to provide periodic pricing or valuation information to
investors, are not subject to the same regulatory requirements as unit trusts
or mutual funds, often charge high fees, and in many cases the underlying investments
are not transparent and are known only to the investment manager.
flexibility is not necessarily an advantage or disadvantage: a high degree is
beneficial in the hands of a prudent investor, but potentially lethal in the hands
of a rash speculator. Hedged funds are opaque, and a lack of openness is an invitation
to abuse as industry growth explodes. Has Enron taught investors anything?
Stars - There was
some unfavourable news for hedged funds in recent years. Under the leadership
of legendary trader, John Meriwether, Long-Term Capital Management imploded in
the late 90s. Its collapse nearly sank the global financial system, and, at the
urging of the Federal Reserve, LTCM had to be bailed out by Wall Street. George
Soros retired and Julian Robertson closed shop after several miserable years.
Even the concept of hedged fund holds, we will still expect a number of new and
old funds to close down.
- Unlike stock or
almost all unit trusts or mutual funds, in which investors can withdraw their
money at any time, hedged funds generally have redemption restrictions. Some permit
withdrawals monthly, quarterly - generally with advance notice of 15 to 45 days,
while others may have longer lock-up timing requirements.
Compensation - Earning
a percentage of the profits certainly gives hedged fund managers incentive to
make money for investors, but can also provide dangerous incentives. Since losses
are borne entirely by investors, yet the manager earns a meaningful percentage
of profits, there is still an awful incentive to swing for the fences and take
sum up, not all of the hedged fund products are appropriate for all prospective
investors: various alternative investments are available only to persons who meet
specific financial and residence requirements. You are strongly advised to discuss
with your investment adviser to understand more on the hedged fund strategies
and assess whether it fulfill your risk/return criteria in investing.