With 2020 looking shaky, offshore jurisdictions can provide much-needed shelter and support for international deals, listings, incorporations and restructurings. The year 2019 was an eventful one: the Hong Kong protests, Brexit, the trade wars between the U.S. and China, and Japan-South Korea, and Trump’s impeachment were just a few of the events that left their mark on those 12 months And if the start of 2020 is anything to go by, we are in for a wild ride over the new decade as well. The year kicked off with unrest in the Middle East between Iran and the U.S., rising oil prices, U.S.-China trade deal developments, a new respiratory disease virus emerging in China, the Jakarta floods, and the Australian bushfires. And of these happened in just the first month. James Noble, partner and head of litigation, insolvency and restructuring practice of Asia in Carey Olsen’s Singapore ofﬁce, believes many variables could create uncertainty and challenges in the second roaring 20s.
“There is a fairly long list of candidates but in my view, the most important ones are the tensions caused by the U.S.-China trade war, China’s economic slowdown, the civil unrest in Hong Kong and the impending U.S. election. The ﬁrst three of these, in particular, are contributing towards increased levels of distressed debt and the need for companies to take measures to deal with aggressive creditors,” he says. Noble thinks a signiﬁcant proportion of those measures will occur in the Cayman Islands and the British Virgin Islands, given the high levels of inbound and outbound investment that both jurisdictions have with Mainland China and the U.S. Raymond Ng, Hong Kong-based corporate partner at Harneys, sees clients already cautious about what lies ahead. “We have seen some clients taking a more conservative approach at the beginning of 2020 in light of the continuing uncertainties in the world from the U.S.-China trade war to the recent escalating tension between Iran and the U.S.,” says Ng. “Some also fear the political crisis in Hong Kong may continue,” he adds. Given that the Hong Kong protestors have been asking for “ﬁve demands, not one less,” it would seem likely that Ng’s assessment of a political impasse may be correct. Besides Hong Kong, it seems the global situation remains uncertain on multiple fronts as we head into this new decade. The Economist Intelligence Unit (The EIU) recently published its predictions for the year ahead. In the report, the advisory ﬁrm says it believes that the coming year is likely to be more manageable for China but warns that the broader U.S.-China relationship remains on a course of increasing competition. “In 2019, the U.S.-China trade war undoubtedly had an impact on the cross-border M&A deal ﬂow. If the U.S. and China do ﬁnd a workable compromise, we would expect that activity levels will improve,” says Nathan Powell, partner and global head of corporate legal services in Ogier’s Hong Kong ofﬁce. In the business world, the EIU says consumer-facing sectors remain the main bright spots even as growth opportunities are becoming more niche. However, the outlook for China’s technology industry is less optimistic by contrast. The EIU believes the cooling that was shown in the segment last year will extend into 2020. They also named other black swans in the year ahead. This includes unrest in the Middle East; an unsteady oil market; ﬁnancial strains that will continue to plague markets; and the failures of small companies and banks in 2019 possibly resulting in a major entity defaulting in 2020. “Notwithstanding the challenges in 2019, capital markets activity was strong, and we anticipate that trend to continue into 2020. Our dispute resolution and insolvency teams in Hong Kong will continue to expand to meet client demand for complex British Virgin Islands (BVI) and Cayman work,” says Powell. SHELTER FROM THE STORM The volatility of world events has deﬁnite ripple effects in different countries and markets. But through it all, many believe offshore jurisdictions provide a safe harbour for international deals, listings, incorporations, and restructurings against market uncertainty. “The BVI and Cayman Islands provide political stability and neutrality, with independent, transparent and business-minded governments and a legal system derived from English common law. They have secure economies without any exchange or investment repatriation controls,” says Ng. Furthermore, Ng believes these jurisdictions offer light but effective regulation from a business regulatory perspective. “Except for certain businesses such as banking, hedge funds and insurance, the BVI and Cayman Islands do not seek to materially regulate the conduct of business of offshore companies, provided that they are not conducting substantial domestic business within the territories,” says Ng. That’s always a plus for companies looking to seal deals without the burden of unnecessary red tape but in an environment with systemic protection in place. This situation is due to offshore jurisdictions having a keen understanding of what is needed to expedite and ease major trans-national business affairs. “Offshore jurisdictions are seasoned veterans of high-proﬁle, cross-border transactions and restructurings. Part of their appeal as ﬁnancial services hubs is that they have stable economies, political certainty and the availability of laws and products which provide ﬂexibility for achieving the desired commercial objectives,” Noble says. In addition, Noble says there are sophisticated and effective court systems in place for obtaining the necessary relief, when required. “Those courts can be used to resolve disputes at the Topco level of the structure, which minimises the impact on the underlying business being conducted by the subsidiaries. For example, provisional liquidators, receivers or inspectors are frequently appointed over offshore entities to safeguard company assets and to investigate the company’s affairs,” he says. “This can be especially helpful in places like the Cayman Islands where provisional liquidation provides a moratorium on claims against the company and will give it interim protection against disgruntled creditors and shareholders.” Essentially, Powell says the BVI and Cayman are “tried and tested jurisdictions that are familiar to market practitioners in the region, and they provide a robust, ﬂexible and clear legal frame-work to structure transactions.” “Despite the prevailing global uncertainty, we have continued to see growth in our Asia revenue and strong demand across our practice areas,” says Powell. BENEFITS AND CONSIDERATIONS There is demand for a reason. In fact, some might say there are a number of reasons; many lawyers from offshore law ﬁrms can attest to how working in these jurisdictions has beneﬁtted their clients. “Most of the disputes that I am involved with arise out of some form of economic pressure on either the business or on the shareholders that own it. For example, I recently helped a company block actions taken by an unhappy shareholder to try and force a buy-out of their shares,” says Noble of his experiences. “In another case, I successfully challenged an injunction that had been brought to prevent a company from undertaking certain activities, the effect of which would have been crippling to the business.” Other fringe beneﬁts make offshore jurisdictions a worthwhile consideration. For starters, working in offshore jurisdictions can simplify some potentially complicated restructuring. “We have been advising on some significant group reorganisations involving the migration and consolidation of various subsidiary holding companies to streamline the number of offshore jurisdictions used,” says Powell. “For large international groups with complex structures, rationalising the group structure into fewer jurisdictions has reduced compliance costs and management time. We have seen the continued use of offshore structures in these types of reorganisation as they still offer a robust and familiar legal framework.” And, of course, there are the tax beneﬁts offshore locations are known for. “As they are tax neutral jurisdictions, no taxes would be imposed in the BVI or Cayman Islands on transactions involving BVI or Cayman Islands companies,” says Ng. Nonetheless, he recommends that prospective clients seek tax advice on their tax position, as any income received from BVI or Cayman Islands companies in the form of dividends may be subject to tax in the jurisdiction in which the shareholder is a tax resident. GREATER FLEXIBILITY That’s not the only thing that prospective clients need to be aware of regarding operating offshore. “Operating offshore provides clients with a much greater degree of ﬂexibility in how they set up their business. However, clients should also be aware that by using offshore entities in their structures, they need to be prepared to resolve any issues which arise in the offshore courts,” says Carey Olsen’s Noble. The offshore regulations also continue to evolve with the times to better serve and protect those that operate within them. “Both the BVI and Cayman continue to adopt and update legislation to ensure that they adhere to the very best inter-national regulatory practice and standards. Last year saw the introduction of economic substance legislation in the BVI and Cayman and data protection rules in Cayman with legislation to follow this year in the BVI,” says Powell. He claims his team has kept in step with the developments and spent time ensuring that clients are up to speed on these developments and prepared for any changes that are required. been able to adapt quickly and without undue impact on their operations,” says Powell. “Clients need to understand these developments and how to deal with any changes with minimal impact.” Powell believes lawyers need to work closely with clients to help them understand and navigate the impact of the economic substance legislation and the new data protection rules. Of course, offshore law ﬁrms are the main source of advice for companies that have any offshore dealings. “Offshore ﬁrms are well placed to advise companies on better ways to arrange their affairs as well as to address complex and contentious issues which occur in their cross-border operations,” says Noble. “Alternatively, companies may have claims against offshore entities that can’t progress because of a lack of available information about those entities, such as the identity of their directors, shareholders or assets. In those situations, offshore litigators have an array of tools at their disposal for obtaining that information, which can be particularly useful for breach of ﬁduciary duty claims, conspiracy claims, and asset tracing,” he adds. For Ng, there are other reasons why companies should consider the services of offshore law ﬁrms. “Offshore jurisdictions remain popular destinations for those seeking ﬂexibility and certainty when it comes to establishing a company, fund or trust and, as a result, we are continuing to see a surge in demand for offshore legal services,” he says. Offshore law firms are quickly growing alongside their clientele to meet all their needs. “Clients are becoming increasingly sophisticated and offshore ﬁrms have responded by offering a full spectrum of services to meet all of their legal needs, including banking and ﬁnance, corporate, investment funds, litigation, insolvency and restructuring, private wealth, and regulatory affairs and tax,” says Harneys’ Ng, who adds that his ﬁrm prides itself on being able to provide a true “one-stop” service to all of their clients. To contact the editorial team, please email ALBEditor@thomsonreuters.com.