Bermuda is a leading offshore financial centre, with a sterling reputation. There are currently over 660 Bermuda companies listed on major international stock exchanges around the world including the Hong Kong Stock Exchange (“HKSE”), London Stock Exchange, NYSE, NASDAQ, and Singapore Exchange. Bermuda has a long-standing reputation and is one of the two earliest offshore jurisdictions accepted for listing on the HKSE. Hundreds of Bermuda companies have been listed on HKSE since the 1980s resulting in nearly 500 Bermuda companies and constituting 32% of the total number of companies listed on the HKSE today.
From as early as 2002, there have been Hong Kong listed companies changing their domicile to Bermuda in order to take advantage of the commercially expedient regulatory regime in Bermuda on capital reductions. Unlike the Cayman Islands and some common law jurisdictions, a capital reduction does not require court sanction or creditors’ consent under Bermuda law. Provided that the relevant requirements are complied with, namely the Bermuda newspaper notice requirement and the applicable solvency test required to be considered and passed by the board of directors, the capital reduction can be effective as soon as shareholders’ approval resolution is passed. Statutory filings in Bermuda are only required to be done after the effective date of the reduction and do not impact on the timing of the reduction. During the past decade, there have been a steady flow of Hong Kong listed companies changing their domicile to Bermuda, which were all followed by a capital reorganisation involving reduction of issued share capital.
The shareholders’ resolution approving the capital reduction usually provides that the credit amount arising from the reduction be transferred to the contributed surplus account of the Bermuda company, which can then be applied to set off against the accumulated losses of the company. With the accumulated losses eliminated or reduced, the company will then be in a better position to return to net profitability and pay out dividends in the future subject to compliance with the relevant asset and solvency tests.
Some companies also take the opportunity to reduce its share premium account at the same time given that the relevant requirements for capital reduction are the same for share premium reduction. With the various challenges facing today’s global economy, namely, the debt crisis in Europe, the slower than expected recovery pace of the U.S. economy, the cooling of the Chinese economy, and the follow-on effects on the other economies, a capital reduction may be an attractive option for some listed issuers to consider.
A typical reduction of issued share capital would involve the cancellation of the paid up capital of the company by reducing the par value of its issued shares. Another benefit arising from this process is that the par value of shares can be reduced without increasing the total number of issued shares, which would have occurred in the case of a subdivision of shares. A reduced par value can provide greater flexibility on the pricing of its future share offering especially for companies whose share price has been low due to lack of liquidity.
The Bermuda Companies Act allows a foreign corporation to apply to be continued in Bermuda as an exempted company provided the applicant can demonstrate that it has obtained all necessary authorisations required under the laws of the country in which it was incorporated to enable it to effect the migration to Bermuda.
Continuance of a foreign corporation as a Bermuda exempted company means that, amongst other things, the property of the foreign corporation continues to be the property of the company; the company continues to be liable for the obligations of the foreign corporation; and any existing cause of action, claim, or liability to prosecution in respect of the foreign corporation is unaffected. The continuation of a foreign corporation under the Companies Act does not create a new legal entity or prejudice or affect the continuity of a body corporate, which was formerly a foreign corporation and is now a company continued in Bermuda. The result of the continuation into Bermuda is that the foreign corporation becomes a company to which the Companies Act and any other laws of Bermuda apply as if it had been incorporated in Bermuda on the date of its registration.
The procedure and documentation for continuation of a foreign corporation into Bermuda are very similar to that for an incorporation process. Instead of a memorandum of association, the foreign corporation will need to adopt a memorandum of continuance which will have similar content requirements but will contain some basic information on its incorporation in the foreign jurisdiction. The continued company must, as soon as is practicable from the date of continuation in Bermuda, ensure that it has adopted by-laws which conform to the requirements of the Companies Act.