Ian S. Winder of Higgs & Johnson looks at the advantages of IBCs - International Business Companies - the challenges in creating one, and how The Bahamas can help.
Succession Planning in The Bahamas: The International Business Company and Shareholders' Agreements
Onshore, The Bahamas is known as a preferred forum for succession planning among high-net-worth individuals. Moreover, as an international financial centre, The Bahamas benefits from industry leading banks and trust companies that tailor their business to meet the demands of their clients.
When paired with a comprehensive shareholders' agreement tailored to meet the financial objectives for future generations the IBC becomes an appealing and discriminating vehicle for successful wealth transfers."
The most common form of succession planning in The Bahamas typically involves the formation of a trust. While the trust structure does benefit many clients, inevitably there are those who, for whatever reason, wish to retain legal ownership in their assets through a company. The Bahamas has a versatile and adaptable regime that can suit a range of clients' desires for their estate strategy.
International Business Companies
In The Bahamas there are two types of companies: those formed under the Companies Act, 1992 (a "domestic company") and those formed under the International Business Companies Act, 2000 (an "IBC"). Domestic companies are generally used by Bahamian citizens; therefore, this article does not focus on these vehicles. Instead, focus is placed on the IBC, a corporate vehicle initially created to facilitate the business of offshore individuals and companies. An IBC has fewer administrative requirements than its domestic company counterpart. Generally, IBCs are easy to incorporate and have a flexible corporate structure.
The following are some requirements for an IBC:
1) It must have at least one director and one shareholder (a director need not be a Bahamian resident or a shareholder of the IBC);
2) There is no maximum or minimum capital requirement and no requirement to conduct audits; and
3) No filing requirements except filing registers of directors and officers (and any amendments thereto within twelve (12) months of the appointment of any director or officer) and filings and reporting obligations that may arise as a result of the Commercial Entities (Substance Requirements) Act, 2018.
IBCs have proven to be an effective and efficient vehicle for managing offshore activities. Usually, the shares in an IBC would be owned by a domestic company, another IBC or by a company in another offshore jurisdiction. Practically, beneficial owners on the advice of their attorneys and financial advisors utilise various ownership structures that suit their individual needs. An IBC's flexibility affords the beneficial owners the option to change the structure of the company when needed.
Memorandum of Association and Articles of Association
The Memorandum of Association (the "Memorandum") is the constitutive document of the IBC that sets out its structure, powers and limitations. The Memorandum identifies, among other things, the authorised share capital, the number of shares and the classes or series of shares with their respective share entitlements.
By contrast, the Articles of Association (the "Articles") operate as a contract that binds the company and its shareholders and the shareholders between themselves. This is particularly beneficial in succession planning as the Articles, when filed with the Companies Registry; also bind each member's heirs, personal representatives and assigns.
The Articles generally offer a certain predictability regarding its administration and the interaction of its members. Both the Memorandum and the Articles can be amended at any time, subject to their respective terms and such amendment being filed with the Companies Registry within twenty-eight (28) days of the passage of the same. Beneficial owners can take comfort in knowing that they can create the preferred mechanisms for amendment that would be applicable to the IBC and govern the relationship of the shareholders. Such amending power can be fortuitous since circumstances often change at short notice.
While the trust structure benefits many clients, there are those who wish to retain legal ownership in their assets through a company. The Bahamas has a versatile and adaptable regime that can suit a range of clients' desires for their estate strategy
The shareholders of an IBC may decide to enter into a supplemental contract among themselves; this is commonly known as a shareholders' agreement. Such shareholders' agreement operates in tandem with the Memorandum and the Articles of the IBC. Frequently, the objective of a shareholders' agreement is to regulate how its shareholders relate to one another. As the Memorandum and Articles are both public documents that are filed with the Companies Registry, the shareholders may elect to include information that they desire to remain confidential because while the International Business Companies Act, 2000 mandates that a notice of a shareholders agreement be filed at the Companies Registry, such shareholders agreement itself does not have to be filed. Moreover, that agreement can be a fertile source for the protection of minority shareholders.
1) Conditions and restrictions on how the shares in the IBC are transferred; and
2) The different classes of shares of the company and their respective rights.
The transfer of shares
In any plan for successive ownership in a company, the transfer of shares is the most salient issue. In drafting appropriate clauses in any shareholders' agreement, the intentions and objectives of the shareholders must be taken into consideration. If the shareholders wish to have a long-term business amongst themselves (and their heirs), they can take a restrictive approach regarding the transfer of any shares. For example, they may decide that any transfer (including one to a current shareholder) shall be subject to vote amongst the shareholders whereby 75% of the vote is required to approve the transfer. While this may be considered repressive, it is effective in managing the succession of shareholders.
Similarly, the shareholders may also desire to include the imposition of pre-emptive rights. This would require that where a shareholder desires to transfer their shares, they must first offer their shares to the other shareholders by notice in writing. The failure to adhere to this provision could render any transfer ineffective thereby controlling the succession of membership in the IBC.
In order to avoid the issue of a difference of opinion in the value of the shares, most comprehensive Articles or shareholders agreements will contain a method of calculating the value of shares prior to the transfer of such shares, which would normally be conducted by an independent third party. This inclusion of a provision of this nature ensures that the estate of a shareholder is paid the appropriate value for the shares of the deceased shareholder.
Classes of shares
The shares of an IBC can be divided into different classes, with different rights attaching to each share class. Typically, there are management shares that carry voting rights in an IBC, and one or two lower classes of shares that do not carry any voting rights.
Should the initial shareholders chose to retain control, while allowing new shareholders voting rights, such initial shareholders could the right to appoint a director to the board of directors. This can be supplemented by provisions limiting the number of directors that can be appointed to the board of the IBC.
Classification of shares can be an ingenious mechanism to preserve control for a particular person or group.
There are many challenges that shareholders can face in creating a company that is intended to be a long-term investment vehicle. The IBC procures for shareholders the framework to implement their succession goals. When paired with a comprehensive shareholders' agreement tailored to meet the financial objectives for future generations the IBC becomes an appealing and discriminating vehicle for successful wealth transfers.
To view this feature in The Bahamas Special Report ezine, click here.
About the author
Ian S. Winder
Ian is an Associate in the Higgs and Johnson's Commercial Transactions and Financial Services, Insurance Law & Regulation Practice Groups. He assists on a variety of corporate and commercial matters, including corporate structuring, M&A transactions, securing governmental and regulatory approvals, financing transactions and securities offerings in The Bahamas.