Offshore advantages

As business booms across the Asia-Pacific region, the need for offshore financial centres is on the rise, finds Christopher Horton

Certainly, much of the future demand for offshore-related legal services will continue to come from China but other economies especially in Southeast Asia are increasingly important sources of demand. A growing number of newly regional or global companies are looking for structures that take advantage of British Virgin Islands (BVI) or Cayman Islands structures.

“Much like in China, Indonesian conglomerates often set up BVI companies, primarily as holding companies in their group corporate structures,” says Jonathan Culshaw, Asia managing partner of Harneys. “They are seen as beneficial as they are neutral structuring vehicles, are not subject to any direct tax in the BVI and there are no exchange controls or financial assistance prohibitions which makes them flexible vehicles. As to ‘who’ is interested in offshore counsel, I would say that we are seeing an uptake in instructions directly from Indonesian counsel, rather than directly from the corporates.”

“We see offshore structures used in a broad range of industries such as financial services, commercial property investment, health care, shipping and resource industries,” says Alan Dickson, director and head of the Conyers Dill & Pearman’s Singapore office.

“All are making use of offshore structures to access international pools of capital and to hold cross-border assets,” Dickson says. “We do not see any particular industry as the front-runner in this activity and believe that such a broad based use of offshore structures indicates the main stream acceptance of the advantages of offshore structures among diverse industries.”

“Indonesia has provided transactions and subsequent restructuring work requiring offshore advice, as well as bondholder disputes,” says Mark Western, joint managing partner of Maples and Calder’s Hong Kong office. “The use of BVI entities as holding vehicles by conglomerates is common in Indonesia as is the use of BVI and Cayman trusts for wealth protection and estate planning.”

As the world’s most-populous Muslim nation, Indonesia also offers unique opportunities in the fast-growing Islamic finance sector. One recent example is Ogier’s closing of a $500 million sukuk (an Islamic bond) for Garuda Indonesia.

“The biggest opportunity we see in Indonesia this year is Islamic financing,” says Anthony Oakes, Ogier’s head of finance in Hong Kong. “There is an interest amongst Indonesia corporates in tapping the international Islamic capital markets and Cayman companies are the preferred entity to act as the issuer.”

Similar to structured and asset finance, these Cayman companies are “orphan” special purpose vehicles whose shares are held on charitable or purpose trust. This ensures that these issuers are bankruptcy remote, providing investors with certainty that no other creditors will have claims against them.

PROVIDING VALUE

The recognition of the value of offshore legal counsel in Asia Pacific’s largest economies has grown alongside the push to adopt efficiencies and benefits from advantages of offshore finance.

Hong Kong and Singapore, once gateways to China and Indonesia, are slowly yielding to the massive economies that were once considered hinterlands filled with potential, leading to the continuing rise of Asia Pacific as a growth region for the offshore industry.

On the whole, Asia Pacific is increasingly dynamic, offering a wide range of opportunities for different firms operating in different offshore finance hubs. “The prospects for offshore counsel in Asia Pacific are very good,” says Western. “Our primary function is to support ‘onshore’ counsel and advise specifically on the Cayman Islands or BVI aspects of a transaction.”

“The prospects for offshore counsel in Asia Pacific are very good,” says Western. “Our primary function is to support ‘onshore’ counsel and advise specifically on the Cayman Islands or BVI aspects of a transaction.”

Maples and Calder’s role in transactions is more akin to that of traditional “onshore” counsel, although they often work alongside other major law firms on transactions where their role is to focus on checking the Irish legal aspects of a deal.

“Given our extensive client base and years of practising, we have found that we have become a trusted advisor to many of our clients,” Western says, “particularly in providing on-going company formation and administration or other fiduciary services.” M&A transactions in Asia Pacific are now playing a larger role in the region’s offshore profile.

Trends from the first quarter of 2015 show that M&A transactions were of particular significance, says Christopher Bickley, partner and head of Conyers Dill & Pearman’s Hong Kong office.

“M&A activity was unprecedented throughout Asia during the first quarter 2015,” Bickley says. “Deal activity in this sector has increased significantly across China and the wider Asia-Pacific region.”

“The recent drop in mainland China stock indices and in Hong Kong are likely to have a knock-on effect in capital markets work,” he adds. “The recent suspension of IPOs by authorities for the mainland stock markets is likely to benefit the Hong Kong stock market in the medium term.”

Indeed, Asia Pacific deal volume in the first quarter is greater than that of Europe, the Middle East and Africa (EMEA) by 15.5 percent. During the same period, China’s cross-border activity accrued $28.8 billion, up by 25 percent year on year. The increasing volume of transnational activity creates opportunities for corporations in the region to benefit from the advantages of offshore finance and counsel.

“The popularity of offshore jurisdictions such as BVI and the Cayman Islands are well known and recognized in Asia,” says Kate Hodson, counsel at Ogier’s Hong Kong office. “These two jurisdictions have dominated in Asia for some time and are well-rehearsed at keeping abreast of required regularity changes to meet the demands of sophisticated investors in the region.”

Recent examples of this include the revisions made to the Cayman Islands Exempted Limited Partnership law in the Cayman Islands in 2014 responding to industry feedback in the private equity space. This revised legislation is expected to increase the attractiveness of Cayman Islands exempted limited partnerships to managers, investors and creditors alike. Others jurisdictions have followed suit.

The British Virgin Islands has brought in legislation to introduce two new types of investment funds—incubator and approved funds—designed to provide fast and cost effective open-ended funds. And both jurisdictions have introduced laws to allow for direct enforcement of contractual rights by third parties in contracts to which they are not a party, Hodson says. The prevailing message is that both these jurisdictions continue to appeal to sophisticated investors so the prospects for offshore counsel in Asia are promising.

“Most offshore service providers will operate across a number of jurisdictions, no one wants to put all their eggs in one basket,” Hodson says.

Ogier, for example, offers Cayman Islands, British Virgin Islands, Guernsey, Jersey and Luxembourg advice from Hong Kong.

“Each of these jurisdictions provides sufficient flexibility and advantages to be able to operate across the full breadth of service lines offered by the firm including, M&A, investment funds, private equity, capital markets, finance and private wealth,” Hodson says.

CHINESE POTENTIAL

China is the big prize for offshore firms looking to take advantage of the world’s secondlargest economy and its continued focus on overseas M&A.

“There is an increasing appetite from Chinese managers to launch offshore funds,” says Maples and Calder’s Western. The firm’s China team has worked with “Chinese-sponsored Cayman Islandsdomiciled private equity, real estate and hedge funds over the last 12 months.”

Maples and Calder is continuing to see an increase in litigation work from the PRC, with instructions coming directly from PRC law firms or companies, Western adds.

Most litigation is related to shareholder disputes with respect to BVI and Cayman Islands companies, reflecting the fact that both jurisdictions are widely accepted as having effective court systems.

Trusts is another area that is growing, particularly IPO-related trusts for employees of Chinese businesses and in private wealth planning trusts for founders. Maples and Calder’s corporate team continues to see Cayman vehicles being used by founders of businesses in China for IPOs in Hong Kong, Taiwan and the U.S., he adds.

“Following the strong expansion of the PRC economy and fuelled in part by the relaxation of PRC regulations in relation to cross-border capital flows, the use of Cayman and BVI entities by PRC companies, funds and individuals has increased strongly in recent years,” says Anthony Oakes, head of finance at Ogier’s Hong Kong office.

The most common uses for these offshore markets include:

• Offshore fund structures: Cayman companies are typically used as private open-ended funds like hedge funds and limited partnerships are used as closeended funds, like private equity funds.

• PRC bond deals: BVI companies are typically used as the issuing vehicle for bonds.

• IPOs: Cayman companies have long been a popular entity for companies wishing to list on Asian stock exchanges, particularly Hong Kong.

• PRC holding structures: The so-called “red chip structure” is used by many PRC company groups. A string of Cayman or BVI companies are set up offshore above the PRC operating companies, which produce the group’s income. The offshore structure creates efficiencies in terms of withholding tax, stamp duty and ability to restructure.

• Inbound private equity investment: When private equity investors target PRC companies or joint ventures, they often include BVI and Hong Kong entities as intermediary entities that can provide stamp duty and withholding tax savings.

BEYOND CHINA

Close to both the Chinese and Indonesian markets are the offshore centers of Hong Kong and Singapore, which share similarities but are also markedly different. Hong Kong and Singapore “are similar in that a significant proportion of the demand for offshore legal structures and offshore legal counsel in both markets derives from investment in and from neighbouring countries, rather than being a pure domestic play,” says Dickson of Conyers Dill & Pearman.

In Hong Kong, this principally means China. Singapore casts a wider net with investments from or into member countries of the Association of Southeast Asian Nations (ASEAN), principally Indonesia and Malaysia.

“Demand for offshore structures and legal counsel will in future continue to be driven by levels of business activity in these ‘feeder’ countries,” says Dickson.

The Singapore market for offshore is smaller, but growing, whereas Hong Kong is booming but is undiversified and Chinafocused, notes Harneys’ Culshaw.

“Hong Kong is a more important centre for offshore funds and listcos whereas Singapore’s use of offshore is primarily in financing and joint venture vehicles although offshore products are also used by its private wealth sector,” Culshaw says.

There are significant differences between Hong Kong and Singapore owing to policy, Dickson explained.

For example, Chinese policy has not discouraged the use of offshore structures and Chinese businesses have embraced the neutrality, flexibility, certainty and efficiency that offshore holding company structures offer to them in accessing international capital and in financing and trading transactions. Certain ASEAN countries restrict their citizens and businesses from investing externally.

“To this extent, some ASEAN countries do have institutional impediments to efficient capital flows, and these do represent a significant difference from Chinese economic policy,” he says.

So how do those involved see things playing out for the growth markets of China and Indonesia in the short term?

“Offshore vehicles will continue to be used by Chinese clients both for structuring investments into China and for investments outside of China,” says Bickley at Conyers Dill & Pearman. “Chinese outward bound M&A is likely to continue to increase over the next couple of years and it is expected that offshore vehicles will continue to have a part to play in these transactions.”

“In Indonesia, there is continuing demand for inward investment as this giant economy continues to emerge,” Dickson says from Conyers’ Singapore office. “Considering the efficiencies offshore structures bring to aggregation and deployment of foreign capital, we expect Indonesian demand for foreign capital will drive a similar demand for offshore legal counsel to assist in structuring such efficient investment structures.”

“We see the Indonesia market growing naturally as the size of the Indonesia economy grows and as Indonesia corporates increasingly seek to undertake international capital raisings,” says Ogier’s Oakes. “In China, the continued growth will be reliant not only on the growth of the Chinese economy but also on China continuing to develop its regulations toward internationalisation of the RMB, cross-border capital flow and the fostering of investment. We expect that growth in both jurisdictions will be strong and have put significant resources into servicing both markets, including through our office in Shanghai.”

“Although activity in the Indonesian market has stagnated over the past six months, the deals in Indonesia are becoming more sophisticated and, as such, I think we are likely to see more complex structuring involving the use of offshore vehicles in the next two or three years,” says Harneys’ Culshaw. “The mainland China market is a very interesting market for offshore right now with the local PRC firms transitioning into full service international firms capable of managing more complex cross-border work as lead counsel and linking up with other global firms to extend their reach.”

Offshore work is not immune to slowdowns in the general economy but the steady liberalisation of the PRC’s capital markets, more outbound work and more offshore funds being established bode well for the long term.