Maples and Calder opened its Cayman Islands office 40 years ago and has grown into one the world’s largest offshore law firms, advising on the laws of the Cayman Islands, Ireland and the British Virgin Islands (BVI). Its Hong Kong office, which services the PRC, opened in 1995. Greg Knowles, a partner working out of the Maples and Calder office in Hong Kong, spoke to CHINA ECONOMIC REVIEW about why offshore investment vehicles fit the China market and how transparency laws are affecting offshore jurisdictions.
Q: What factors in to the decision-making when companies are choosing an offshore destination?
A: Companies are concerned with investor-recognition, with not going somewhere untried. After that, they want to know that the jurisdiction has the legal infrastructure to be able to service a significant transaction, and of course they are concerned with price.
Q: Are Chinese firms different from other countries in this regard?
A: Generally, the advantages of Cayman and the BVI are the same around the world. But there is no getting away from the fact that Asia ex-Japan and the PRC in particularare more price-sensitive when it comes to legal work than perhaps some other places in the world.
Q: How has the Cayman regulatory environment changed in the last 10 years?
A: Cayman introduced about seven or eight years ago a systematic anti-money laundering regime that requires registered office providers of Cayman companies to collect information on major shareholders and directors. When we get an instruction from the PRC, we explain to clients that we need to receive materials on shareholders holding more than 10% of shares and on two directors. These materials are kept confidential and only made available to governmental authorities when there is a specific request. They typically include copies of passports, references, proof of address so there is an audit trail. It’s worth pointing out that onshore jurisdictions have now adopted similar anti-money-laundering regimes. For example, law firms in Hong Kong are, with effect from this summer, now obliged to carry out anti-money-laundering verification.
Q: How are Cayman and BVI vehicles typically used by Maples’ clients in accessing the PRC?
A: We’re seeing non-Chinese financial institutions investing into China using Cayman and BVI vehicles, and partnering with Chinese founders. The typical model for this would be where Chinese nationals have developed technology to the point of commercialization and are looking to attract foreign capital. The typical structure would be for the Chinese founders to take one class of share in a Cayman vehicle and the foreign investors would take another class of share. They would then have a shareholders’ agreement in relation to how the business is managed and how the profits are shared between them. The ultimate aim is an IPO in Hong Kong or the US, or a trade sale.
Q: Why does this structure work in the China market?
A: The basic model has been in place for a number of years. I think it works particularly well in China because obviously investors are exposed to all the upsides and downsides of China economically, but in terms of the corporate vehicle, there are no surprises. It’s a Cayman vehicle, and the Cayman principles are derived from a century and a half of English corporate law. For example, it is clear that in all circumstances the directors are supposed to act in the best interests of the company. For a China-based investment vehicle, Chinese corporate law is a bit newer and the principles are possibly more uncertain. So you remove an element of legal uncertainty by using an offshore vehicle.
Q: For a firm looking to list in Hong Kong, how do the Caymans and the BVI compare?
A: Essentially, they offer very similar advantages. Historically, BVI firms were not permitted to list on the Hong Kong Stock Exchange. We understand that that prohibition has been lifted and that BVI companies may now list on the exchange, although at present there are none.
Q: Why was that?
A: I suspect it was simply a desire to keep the number of authorized jurisdictions small and the exchange possibly just wanted to have two or three offshore jurisdictions it would deal with.
Q: What advantages do the Caymans and the BVI have in terms of legal infrastructure?
A: Well, I would divide it into two parts. First, the statutory principles in the Caymans and the BVI are derived from the English Companies Acts and so are familiar – but with some liberalizations to the advantage of investors – for example, the rules on capital maintenance are much more flexible. The statutory provisions are undepinned by common law principles evolved in England and elsewhere which have been honed over time. Second, the lawyers tend to be recruited from major law firms in onshore financial centers. Some younger offshore jurisdictions have replicated Cayman and BVI legal principles, but don’t expect them to have many lawyers who will stay up until midnight for a closing.
Q: How do you expect offshoring to change in the coming years?
A: The advantages of the Caymans and the BVI will be apparent over other offshore jurisdictions. I think we’re relatively cost-effective and we have the legal infrastructure. As the world economy globalizes, the opportunities for offshore vehicles from the Caymans and the BVI will expand. We’re looking at developing other jurisdictions in Asia – Thailand, Vietnam and Indonesia, and, of course, India. We’re looking for contexts in which it would be appropriate and helpful to those jurisdictions for offshore investment vehicles to be used.
