New BVI Act To Help Joint Ventures

by Robin Pilgrim, LawAndTax-News.com, London

02 June 2005

Law firm Conyers, Dill & Pearman says that the BVI's new Business Companies Act helps directors deal with conflicts of interest in joint venture situations.

The new Act, described by Chief Minister Orlando Smith as a “modern, sophisticated and innovative” piece of legislation, was passed to ensure compliance with the EU's Savings Tax Directive and the Code of Conduct on Business Taxation, and replaces the current International Business Companies Act, meaning the end of the distinction between offshore and local firms.

The new conflict of interest rules, says the firm, could be particularly attractive to investors seeking maximum flexibility in structuring their joint ventures, and should lead to more joint ventures incorporating in the BVI to take advantage of them.

The problem addressed in section 120 of the new BVI Business Companies Act 2004 relates to conflicts of interest for directors in joint venture situations. It is common for the directors of a JVCo to be representatives nominated by the respective shareholders to, in effect, police their investment and look after their nominating shareholder’s interests. Of course, directors of a BVI company have the usual responsibilities to act in what they in good faith believe to be the best interests of the company, just as is the case in most other common law jurisdictions.

However, there can be occasions where the JVCo’s interests are not on all fours with those of one or more shareholders. A director nominated by a shareholder (who will often be a senior employee in the shareholder’s organisation) can sometimes be faced with a tricky and embarrassing dilemma, where the shareholder’s interest dictates one course of action for JVCo but JVCo’s best interest dictates another. The latter must prevail, according to well-established case law - but this can cause difficulties and divided loyalties for the director.

This, however, is where section 120 attempts to come to the rescue, says the law firm. It offers a valuable element of latitude compared to the previously established, and somewhat restrictive, rules.

The principal requirement is that a director, in exercising his powers or performing his duties, must act honestly and in good faith and in what the director believes to be in the best interests of the company. However, this duty can then be restricted where the company is a subsidiary or carrying out a joint venture between the shareholders. In the case of a subsidiary a director may, if permitted to do so by the memorandum or articles of the subsidiary, act in a manner which he believes is in the best interests of that company’s holding company even though it may not be in the best interests of the subsidiary. If the subsidiary is not wholly-owned then prior agreement of the shareholders, other than its holding company, will also be needed.

Where the company is carrying out a joint venture between the shareholders the director may, when exercising powers or performing duties as a director in connection with the carrying out of the joint venture and if permitted by the memorandum or articles of the company, act in a manner which he believes is in the best interests of a member or members, even though it may not be in the best interests of the company.

The section offers a novel ability for a director to follow his nominating shareholder’s wishes without having to be concerned that these may conflict with JVCo’s interests. The provisions are new and untested, particularly for example section 120(4) for which no definition of a “joint venture” is provided. However, they offer a welcome and laudable attempt to address what can often be a thorny issue for directors. They help to reinforce further the merits of the BVI as a modern, flexible location for doing business.

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