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Legal analysis by Harneys lawyers

Doing Business in Africa: the Benefits of Offshore

Publication Date:
3 May 2016

Harneys has for many years worked together with many of the leading law firms in Africa as well as law firms outside of Africa advising on Africa focused transactions. This relationship is symbiotic, with Harneys advising on the offshore aspects (predominantly BVI and Cayman) of such transactions. Through this involvement in Africa focused transactions, along with our sustained initiative of travelling to a variety of Africa’s business centres to meet with clients and contacts, we have accumulated a wealth of information and experience of where and how offshore structures might be used in the context of Africa. These extend well beyond the use of offshore as a conduit for foreign direct investment (FDI).

Before looking at some practical examples of how we see offshore structures used in Africa, we wish to briefly consider what the main drivers are for this use of offshore structures (the Offshore Advantage). Of the jurisdictions we advise on, we primarily see BVI and Cayman used in Africa focused transactions and so we have focused on these two jurisdictions. In the Africa context, we see the Offshore Advantage as being:

Now that the Offshore Advantage has been established, let us consider how we typically see this applied in Africa. Here are some high level examples.

Vehicles for listing
BVI and Cayman companies are found listed on most of the world’s major stock exchanges. Given the flexibility and familiarity of the corporate regimes, the vehicles are “list” friendly. The reasons for listing are varied and include straight capital raisings (either through debt or equity issuances), a means of exit or a means of attracting institutional investment (ie pension funds restricted to investment in listed investments, notwithstanding that there might be a limited secondary market).

Joint venture vehicles
We come across these frequently across a variety of industries. The joint venture partners could be any combination of foreign investors, domestic African investors or a mix of foreign and domestic African investors. Typically we see a BVI company being used. Of particular interest is where a BVI or Cayman company is used by two domestic African contracting parties because local corporate law does not provide the flexibility for such contracting parties to achieve their commercial objectives ie weighted voting rights or voting and non-voting shares.

Private equity funds
These tend to take the form of limited partnership structures but are also structured through companies. It is generally accepted that Cayman tops the tables for fund domicile. In terms of private equity, it has a sophisticated and user-friendly limited partnership law that has stood the test of time, is used by many of the world’s largest private equity funds and is tailored specifically to meet the needs of both private equity fund managers and their investors. In addition, the Cayman Islands has global recognition as a jurisdiction for the domicile of private equity funds and is familiar to most institutional private equity investors, increasing the chances of a successful fund raising.

Open-ended funds
In terms of domicile of alternative open-ended funds[4], Cayman far outstrips its competitors and as with private equity funds, has global recognition and is familiar to most institutional hedge fund investors, increasing chances of a successful fund raising. Cayman funds have been successfully marketed in the European Union (EU) under the national private placement regimes as provided for by the EU Alternative Investment Fund Managers Directive and the jurisdiction is confident that it will receive the benefit of an extension of the pan-European marketing passport. We also see long-only Africa focused open-ended funds structured through Cayman, plus funds structured for African high-net-worth individuals and family offices looking to manage their assets through a regulated vehicle. In addition to Cayman, BVI is also a leading jurisdiction for the domicile of investment funds and is used by African based investment managers. BVI also provides the cost-effective Incubator Fund and Approved Fund regulatory regimes designed primarily for start-up investment managers.

Permanent Capital Vehicles
These tend to be closed ended investment vehicles and are either listed or unlisted. They differ from traditional private equity funds, in that you would not expect a permanent capital vehicle to have a limited life span and investor returns would tend to be by way of dividend as opposed to a return of capital. We have seen permanent capital vehicles structured either through the BVI or Cayman. They can be useful in the Africa space as a pooling vehicle for specific long term investments ie in infrastructure or where the sponsor wishes to tie-in capital for an extended period and avoid an investment term limit.

Exploration vehicles
We see a number of companies incorporated in the BVI for the purposes of resource exploration in Africa ie minerals, natural gas and oil. A BVI company is the perfect platform for such vehicles given the wide range of options it offers its shareholders ie for merger or consolidation, through a capital raising by listing, through an asset or company sale and in terms of setting the rights of its shareholders.

Loan financing and guarantee arrangements
We frequently see BVI and Cayman holding companies used in loan financing structures involving international lenders. International lenders may gain some comfort from taking security over the shares of a company incorporated in the BVI or Cayman as opposed to taking security over the assets of wholly owned subsidiaries in certain African jurisdictions because of concerns over enforcement.

Bond issuances
Cayman is proving to be a popular jurisdiction for businesses and sovereigns in Africa wanting to raise finance through a bond issuance. Sukuk have also been issued by African-sponsored Cayman vehicles. The typical structure is that a special purpose vehicle (SPV) incorporated in Cayman is used to issue the notes or certificates. The notes or certificates are often guaranteed by the sponsor, as well as being secured by the underlying assets of the business (which could consist of real estate, a project, equipment or shares in the SPV if the SPV is a holding company of an underlying company incorporated in an African jurisdiction where enforcement may be a concern). The notes or certificates may also be listed (which listing can itself be done on the Cayman stock exchange (CSX)).

Asset protection and succession issues
Both the BVI and Cayman are used frequently to establish structures designed to provide asset protection and to deal with succession issues. Both jurisdictions have well-established trust regimes backed by many years of judicial precedent and are used by persons residing in a variety of African jurisdictions. The BVI VISTA trust regime proves to be a popular choice given that it removes the duty of trustees to monitor and intervene in the conduct of the directors and in the running of the BVI company that under the regime is held in trust. A patriarch or settlor may place a BVI holding company over the family business, which BVI company is itself held in trust under the BVI VISTA trust regime. This provides the benefits of asset protection and succession planning whilst allowing the patriarch or settlor to retain a control over the running of the business itself through the board of directors of the BVI company. A similar result can be achieved through the Cayman STAR trust regime.

The CSX is an established and well respected stock exchange being a “recognised stock exchange” by the UK HM Revenue & Customs and being the only offshore stock exchange that is a member of the Intermarket Surveillance Group. In addition, the CSX is an affiliate member of IOSCO and the World Federation of Exchanges and is a full member of the Alternative Investment Management Association. It is possible to list funds, specialist debt securities, Eurobonds, derivative warrants and depositary receipts on the CSX. Harneys is a recognised listing agent of the CSX and is regularly involved in listings on the CSX.

These examples of how we see the Offshore Advantage being applied in Africa is non-exhaustive and are merely to illustrate to readers how using a BVI or Cayman structure might benefit them in achieving their business objectives.

1 Organisation for Economic Cooperation and Development.
2 International Organisation of Securities Commissions.
3 Both the BVI and the Cayman Islands are members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes contrasting many African countries that are yet to become members.
4 Where investors have the option to redeem their interests in the fund.