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structuring Blissful isolation – BVI’s segregated portfolio com Segregated portfolio companies are the latest vehicular addition to the BVI’s <strong>fund</strong> arsenal. But how do they work? How do you set one up? Why consider using one? Phyllis Feinberg, tell us! <strong>The</strong> creation of segregated portfolio companies (SPC) was one of the most important elements of the BVI Business Companies Act of 2004 for <strong>fund</strong>s domiciling in the British Virgin Islands. “With that Act came the capability to incorporate segregated portfolio companies, which is helpful to <strong>fund</strong>s looking to establish an umbrella structure which can now have the benefit of statutory segregation of assets and liabilities,” says Heidi De Vries, partner at lawyers Walkers. Sherri Ortiz, chief operations officer at the BVI International Finance Centre, notes one of the principal aims of the BVI Business Companies Act was “to provide increased choice in the range of corporate vehicles available, thereby adding the advantages of establishing an investment <strong>fund</strong> in the British Virgin Islands. “It has built on the old IBC Act by providing managers with more flexibility, including the ability to utilise segregated portfolio companies and no stated par value shares as standard with no requirements to account for share capital,” she adds. “Other tangible and real improve- ments relate to the solvency tests for distributions and redemptions, which are now more flexible and straightforward under the BVI Business Companies Act,” Ortiz adds. <strong>The</strong> British Virgin Islands is now one of several offshore jurisdictions that provide for a statutory segregated portfolio company, which brings the benefit of statutory segregation of assets and liabilities within a single corporate entity. <strong>The</strong> law applies to companies that are, or will be, recognised as professional or private <strong>fund</strong>s or registered as public <strong>fund</strong>s under the BVI’s Mutual Funds Act of 1996, or companies that are, or will be, licensed as insurers under the Insurance Act of 1994, according to a report from Walkers’ De Vries and her colleague Richard May. <strong>The</strong> BVI Business Companies Act does, however, provide that the SPC structure may be extended to other forms of company of such class as may be prescribed by regulation. At present, no such regulations are prescribed. IN BLISSFUL ISOLATION An SPC is a single corporate legal entity that benefits from the statutory segregation of assets and liabilities between segregated portfolios established within the same company. <strong>The</strong> assets and liabilities of each segregated portfolio within one legal entity are legally separate and there is no joint liability between segregated portfolios. In the context of a mutual <strong>fund</strong>, this means that SPCs can establish segregated portfolios to separate the assets relating to classes of shares with different investment criteria, thus protecting shareholders from the potential of cross-liability arising from the adverse investment performance of other classes of shares. (In the context of licensed insurance companies, this allows one entity to cater for a number of insureds without the risk of cross liability, according to Walkers’ de Vries and May.) IDENTIFICATION <strong>The</strong> assets and liabilities of each segregated portfolio are legally separate from those of the other segregated portfolios and general assets of the company. To achieve that segregation, the segregated portfolio companies must identify the relevant segregated portfolio(s) and make clear that business is being transacted in the name of, or by or for the account of, the particular named segregated portfolio(s). <strong>The</strong> capacity in which the SPC contracts and the name(s) of the relevant segregated portfolios must be set out in writing in the relevant transaction documentation, according to de Vries and May. “<strong>The</strong> SPC is offering good opportunity to <strong>fund</strong>s,” says Peter O’Connell, managing director at Conifer. “It’s attractive to <strong>fund</strong> managers with multi-strategy ambitions.” At the present time Conifer has one client who has formed an SPC. “I expect we will see more,” he says. Funds that used multi-strategy investment programs prior to the new law had to do it through separate companies, he points out. “<strong>The</strong>re is a cost saving for managers through using the segregated portfolio companies,” says O’Connell. <strong>The</strong> benefits of operating segregated portfolios are not restricted by the Act to new companies first incorporated as SPCs, and it is possible for existing British Virgin Islands business companies that are either mutual <strong>fund</strong>s or licensed insurance companies to apply to be re-registered as segregated portfolio companies upon application to the Registrar of Corporate Affairs and the BVI Financial Services Commission. “<strong>The</strong>re is a lot of interest in segregated portfolio companies now, including many <strong>fund</strong>s that are applying to change their <strong>fund</strong>s to SPCs,” says Monique Cova, director of Circle Partners. “Many <strong>fund</strong>s want either to set up as an SPC or change their <strong>fund</strong>s’ structure to a segregated portfolio company.” S12 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com
panies give managers a useful tool to ponder Key features of an SPC include the fact that there is no separate legal personality. <strong>The</strong> SPC is a single legal entity within which may be established various segregated portfolios. Although each segregated portfolio must be separately identified it will not be a separate legal entity from the company, according to de Vries and May. “Segregated portfolio companies are going to be one of the main areas of growth for <strong>hedge</strong> <strong>fund</strong>s,” says Nigel MacPhail of Baker Tilly. “We’re seeing more and more of it.” According to MacPhail many of the firm’s new clients are setting up as SPCs. “With the old share classes they all had cross-liability,” he says, “with the SPC they can’t touch the assets of the individual portfolios. I expect we’ll see more of it.” IDEAL HEDGE FUND VEHICLE Kay Reddy, managing director of Blenheim Fund Services (BVI) Limited, says that SPCs “are the ideal model for <strong>hedge</strong> <strong>fund</strong>s. “With a normal <strong>fund</strong> of <strong>fund</strong>s it invests in different products and different portfolios. Now it’s all one company with the assets and liabilities of each cell distinct from each other.” Reddy points out that “a claim against one cell is not against the whole <strong>fund</strong>.” She thinks it will allow <strong>hedge</strong> <strong>fund</strong>s to have “risky and non-risky classes.” <strong>The</strong>re used to be umbrella companies, through which <strong>fund</strong>s were structured “but the SPC eliminates the need for that,” she says. She adds that “middle-tier investment managers don’t want to set up four or five <strong>fund</strong>s—they’d rather set up four or five cells through a segregated portfolio company.” “We have clients who use them when they are looking to trade different strategies that have different risk profiles,” says Simon Schilder, partner at Ogier. “<strong>The</strong>y may be used because there are a lot of <strong>fund</strong>s that want to trade different things.” He points out that the BVI SPC vehicle has only been around for about 18 months and is now starting to grow faster. Another requirement of the law is that an SPC must include the letters “SPC” or the words “segregated portfolio company” in its name. DIRECTORS’ DUTIES In addition, the directors have a duty to establish and maintain the segregation of each segregated portfolio’s assets from those of other segregated portfolios and also the general asset of the SPC, according to de Vries and May. When dealing with an SPC, a third party is needed to establish clearly which segregated portfolio of the SPC it is dealing with and so which of the relevant segregated assets it has recourse against. <strong>The</strong> advantages of an SPC over traditional methods of creating contractual legal divisions between asset pools (such as setting up subsidiary special purpose vehicles and putting in place contractual limited recourse provisions with third parties) include greater legal certainty, reduced complexity and administrative costs savings. <strong>The</strong> SPC is also now an internationally recognised vehicle for both mutual <strong>fund</strong>s and insurance companies, which can provide greater comfort to shareholders, according to de Vries and May. Another advantage of an SPC is the concept of segregation of assets and liabilities within one legal entity. Under the BVI Business Companies Act the assets and liabilities of each portfolio within a segregated portfolio company are legally separate from those of the other segregated portfolios. Creditors of one segregated portfolio only have recourse to the assets of that specific segregated portfolio and to any general assets of the company (being the assets not comprised in any segregated portfolios) to the extent that the segregated portfolio assets attributable to such segregated portfolio are insufficient. <strong>The</strong> segregated portfolios of the company all reside within the one legal entity. It is important to note, however, that the statutory segregation of assets and liabilities have not yet been tested by the courts of the British Virgin Islands, de Vries and May point out. CHOICE! <strong>The</strong> introduction of the segregated portfolio company structure into British Virgin Islands law has continued to improve the BVI’s position as a jurisdiction of choice for both mutual <strong>fund</strong>s and captive insurance companies and the number of SPC vehicles incorporated in the BVI each quarter is on the rise. <strong>The</strong> British Virgin Islands International Finance Centre’s Ortiz notes in regard to captive insurance business: “the segregated portfolio companies legislation has undoubtedly attracted more captive business to the BVI. “It provides an alternative for organisations with similar businesses and risks to form joint ventures while segregating their respective risks, assets and liabilities. During 2006, a total of 10 SPCs were licensed with 50 segregated portfolios between them.” NO PRECEDENT De Vries says that the SPC has never been tested by the courts and that there is concern an onshore court could try to apply its local laws to the structure — say, if it ended up in a New York court. In a presentation to potential BVI companies, Mark Chapman, partner, Deloitte, said the SPC is appealing to <strong>fund</strong> managers because it is just one legal entity, with as many segregated portfolios as it wishes and with insolvency isolation for each one. He also talked about the directors’ duties with SPCs. He says that SPC directors in other jurisdictions are personally liable for misallocations between portfolios. In addition, BVI SPCs can invest from one portfolio into another, albeit through a special purpose vehicle (SPV), while most other jurisdictions do not allow owning shares in another portfolio, even indirectly. Other rules laid out in the SPC legislation say that if the FSC considers that the name, identification or designation of a segregated portfolio is misleading or undesirable, it may by written notice direct the SPC to change the name of the segregated portfolio on or before the date specified in the notice, which can’t be less than 21 days after the date of notice. STRICT OVERSIGHT <strong>The</strong> law also says that an SPC that fails to comply with a notice issued by the FSC under sub-regulation (1) commits an offense and is liable if convicted to a fine of $5,000. In addition, an SPC shall, by written notice in the approved form, notify the Financial Services Commission of any change in information that it is required to submit to the Financial Services Commission under the regulations, within 14 days of the date that the information changed. <strong>The</strong> legislation also says that at least one director of the company must sign a declaration on behalf of the board that: resolutions of the directors have been passed approving the registration of the company as a segregated portfolio company; that the company is solvent and; that each proposed segregated portfolio will, after the assets of the company have been allocated to the segregated portfolios, be solvent; that the company has given notice to members of its intention to apply for registration as a segregated portfolio company; and that structuring a copy of the offering document for each of the initial segregated portfolios that it is intended will be created. EMMA CHISIT? Application fees for a <strong>fund</strong> that wants to register as an SPC under Section 135 of the Act is $1,000 for the company and $250 for each segregated portfolio. Application fees to create one or more segregated portfolios under regulation 6(1)(a) or regulation 6(1)(b) is $250 for each of the segregated portfolios. For the notification of the creation of one or more segregated portfolios under regulation 7(1) of the Act and for each regulated portfolio included in the notification, the application fee is $250. <strong>The</strong> initial fees that must be paid under the Act include, when the mutual <strong>fund</strong> is incorporated or registered on or before 30 June of any year, an initial fee on incorporation or registration to be $1,000 for the company and $100 for each segregated portfolio approved. <strong>The</strong> initial fee that must be paid when the mutual <strong>fund</strong> is incorporated or registered on or after 1 July in any year is $500 for the company and $50 for each segregated portfolio. <strong>The</strong> initial fee when approval is granted to create one or more segregated portfolios under regulation 6(1)(a) or regulation 6(1)(b) is $100 when the creation of the segregated portfolio is approved on or before 30 June and $50 when the creation of the segregated portfolio is approved on or after 1 July. <strong>The</strong> law states that the total initial fees payable by a mutual <strong>fund</strong> segregated portfolio company in any year shall not exceed $10,000. <strong>The</strong> annual fees for mutual <strong>fund</strong> segregated portfolio companies, which must be paid on or before 31 March of each year following the year of its incorporation or registration is $1,000 for the company and $100 for each segregated portfolio in existence as of 31 December of the previous year. <strong>The</strong> total annual fee paid by a mutual <strong>fund</strong> segregated portfolio company may not exceed $10,000 in any one year. <strong>The</strong> fees must be paid — and there are late fee penalties to be paid if they are not. A mutual <strong>fund</strong> segregated portfolio company that does not pay its annual fee in full, on or before 31 March in any year, must pay a penalty of $250 for each month or part thereof, that the fee or any part remains outstanding. www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | S13
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