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Firms Ride Asia's Rising Tide of Offshore Registrations
The Asian Lawyer
Almost every major cross-border transaction has an offshore component. More and more of those deals are originating in Asia.
It's not hard to figure out where offshore law firms have been heading.
In the past year, as the print edition of The Asian Lawyer has reported, Ogier and Appleby became the first offshore firms to open representative offices in Shanghai, Collas Crill joined two competitors in Singapore, and Mourant Ozannes made its Asian debut in Hong Kong, where seven other offshore firms already have offices.
These firms and others like Maples and Calder, Conyers Dill & Pearlman, and Walkers hail from locales like Bermuda, the Cayman Islands and the British Virgin Islands in the Caribbean and Jersey and Guernsey in the English Channel -- all of which offer low or zero taxation, reliable U.K.-based legal systems, and flexible regulatory regimes.
Foreign companies eyeing the market in China have long favored offshore entities as investment vehicles, but the offshore firms are now banking on a rising tide of offshore registrations by Asian companies. According to a recent report by the company formation firm of Offshore Incorporations Ltd., they are already starting to dominate. An estimated half of the 800,000 companies incorporated in the British Virgin Islands (BVI) -- the most common offshore destination globally -- are now based in Asia, while Cayman Islands and Bermuda have also been popular with Asian businesses.
"More and more of our clients are from China. It just made sense," says Appleby Hong Kong partner Frances Woo of his firm's new Shanghai outpost, which will initially be used only for business development.
That business is usually developed among other law firms, the "onshore" ones.
"The way it works in almost every case is that offshore firms are retained by onshore counsel," says Greg Knowles, the head of the Hong Kong corporate practice for Maples and Calder. "They will lead on the transaction and we will slot in on the Cayman or BVI advice."
In that regard, offshore firms expanding in Asia have truly been following their "clients" -- the major international firms that have also greatly enlarged their presence in Asia in recent years.
The offshore piece of major deals is usually fairly modest, and fees tend to be in the $10,000-$15,000 range. At such fee levels, price is not usually the major factor in choosing an offshore firm, says Yash Rana, the Hong Kong-based Asia chair for Goodwin Procter. Responsiveness is.
"It is obviously much easier to talk to them if they are in the same time zone," he says.
Cost may be a factor in which offshore jurisdiction gets chosen, though. "The BVI is more popular for startup companies because the corporation, registration and maintenance fees are cheaper than the Cayman Islands," says Knowles. Many larger companies, on the other hand, prefer the more established Caymans.
"There is an element of prestige to being registered in the Caymans," he says.
Like their onshore counterparts, the offshore firms are dealing with the recent slowdown in Asian economies. Listings of Chinese companies in Hong Kong and the United States, deals that make great use of offshore entities, are way down from last year, and there is broad concern that the market isn't coming back anytime soon.
Then there are emerging regulatory concerns. In China, it is still illegal for foreigners to directly own interests in certain industries, including large swathes of the Internet and telecommunications sectors. To get around such restrictions, Chinese companies and their foreign investors have made use of so-called variable interest entities (VIEs). In a VIE, foreign parties own shares in an offshore entity that is then given rights in an onshore business via contract.
Major Chinese corporations such as Internet company Baidu and online marketplace Alibaba have made use of VIEs in order to list in the U.S. or otherwise attract foreign investment, but the Chinese government circulated a memo earlier this year questioning the legality of the VIE structure. No action has been taken, but the foreign investment community has been on tenterhooks for the past several months, as hundreds of billions of dollars have been invested through VIEs.
To make matters worse, the U.S. Securities and Exchange Commission has also begun probing the use of VIEs. Last week, U.S.-listed Chinese company New Oriental Education and Technology Group announced it was the subject of an SEC investigation into whether there was sufficient basis for its China-based operations to be included in the company's financial statements.
Offshore firms say they are watching the situation closely and will deal with whatever either Chinese or U.S. regulators decide. They also think that any decision on VIEs won't detract from the long-term business opportunity in the region.
"Although there may be some pressure on VIEs ahead, I believe that Cayman Islands and British Virgin Islands vehicles will continue to be used in structures for foreign investment in the Chinese market and will continue to remain the investment vehicles of choice," says Andy Randall, a partner in the Hong Kong office of Walkers.
Indeed, the ubiquity of offshore entities in cross-border transactions means a downturn in one area may be balanced by growth in another. Though initial public offerings may be down, Randall notes, so-called "take-private" deals are on the rise, and they also make copious use of offshore vehicles.
Knowles agrees, noting that the use of offshore vehicles has increased consistently through periods of economic crisis. "If there are structural changes, there will still be a role for offshore vehicles," he says.
Additional reporting by Ben Lewis