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Current Issues and Perspectives

As part of our commitment to become better at communicating, both listening and responding, we are looking to use as many information channels to keep you posted on recent changes in legislation, threats, opportunities in the form of information updates and regular briefings for special interest.

All real dialogue must be a two-way conversation. Talk to us and let us know what you think. REGISTER with us today so that we can send you our Current Issues and Perspectives and let us know what you think about what we are doing, and how we are doing it.

Rules tightened on the use of BVI bearer shares

By June 2003, the BVI government will enact a new regime tightening on the use of BVI bearer shares and will also introduce a provision requiring details relating to directors of an  Business Company ("BC") to be maintained at the Registered Office.

Bearer Shares

The main features of the new bearer share regime are:

1.	Companies may continue to issue bearer shares. However, the shares have to be lodged with an Authorised or Recognised Custodian.
2.	Existing companies will have until December 31, 2004 to deposit their bearer shares with a Custodian, exchange the shares for registered shares or otherwise cancel or redeem the shares.
3.	Authorised Custodians are institutions that are licensed under the BVI Banks and Trust Company Act.
4.	Owners of bearer shares must provide to the Custodian:
	The full name of the beneficial owner of the shares.
	The full name of any other person having an interest in that share or a statement to the effect that no other person has an interest in the share.
	Any other information as may be prescribed by the BVI Government.
5.	Bearer shares not deposited with an approved custodian will be deemed "disabled", meaning the share does not entitle the right to vote, receive dividends or obtain a share of the assets of the company on winding up or liquidation.
6.	The BVI Financial Services Commission can apply to court to wind up a company which does not comply with the new bearer shares.
7.	The government incorporation and annual licence fee for a company with the right to issue bearer shares will be US$1,300.
8.	A company that wishes to avoid paying higher fees fro the right to issue bearer shares must include to its M&A a prohibition against the issuance of bearer shares. It is not yet known if existing companies will need to amend their M&A to comply with this requirement.

Director Reporting Requirements

A number of alternative ownership structures exist for shareholders owning bearer shares. These include the use of registered shares, nominee shareholders, trusts and share warrants. In addition, some jurisdictions continue to permit the use of bearer shares. Contact us and discuss with us, we promise to find the best solution for you.

BVI Clarifies New Bearer Shares Regime

On press release of 30 October 2003, the BVI Government announced that the special panel appointed by the Financial Services Commission (FSC) has finalized its report on the way forward for the bearer share regime.

The panel's main recommendation is to propose a seven year transition period before the new bearer shares legislation takes full effect.

For the first four years, existing International Business Companies ("IBC") would essentially remain the same. For the following three years, those IBC that wish to retain the power to issue bearer shares would pay a small increase in their license fee.

Notes to readers:

Succession Planning for a Family-owned Business

What is Succession Planning?

Succession planning is a dynamic, on-going process of systematically identifying, assessing, and developing leadership talent. Succession planning has also been described as, "the process of planning the sequencing of management in business and organization". As a business is set up to continue indefinitely, the current leaders have a duty to ensure that present business practices can be sustained and even improved upon when they leave. This can be a very complicated process that can take many years to develop. But the difficulties are no excuse to delay the process and risk the future damage to the organization that can arise.

Many family businesses excel because of the energy, commitment and passion of the founder. There is no guarantee that the potential heirs will be able to maintain that drive; in fact, the odds are strongly against it: only 24% of family businesses pass to the second generation and only 14% pass to the third. Many founders of family-owned businesses believe that succession is an easy decision to make, although in many cases they confuse succession and inheritance.
It is sometimes difficult for the founder/owner to objectively identify the members of the family who actually have the ability to continue and increase the value of the business. Also, founder/owners sometimes tolerate or overlook behaviors demonstrated in the family setting, such as sibling rivalry and in fighting, which can cloud judgment in critical situations in the business world.

Succession is more difficult for family-owned businesses for several reasons:

	owners have a significant emotional attachment to their business;
	commitment to the business often does not leave time to develop outside interests, family finances and estate planning; and
	founder/owners may view succession planning as indicative of a loss of vitality and control.

As a result, these decisions are often postponed until the last moment, and that is too late.

Succession in family-owned businesses occurs on three levels: Leadership, ownership and emotional.

Leadership Succession

The first level of succession focuses on the next generation leader or leaders. The current leader should begin by identifying the qualities necessary to take the business forward and then looking at all potential successors currently within the organization. Do any have the necessary qualities or can they get them with the appropriate training? It is generally prudent to look outside of the organization as well.

The "necessary" qualities, of course, depend on the nature of the business and who is making the assessment. However, there are certain characteristics that all potential successors should have. The most important of these include sufficient managerial expertise or potential and sufficient knowledge of the business to lead it forward. These qualities may seem obvious to many, however, a founder/owner, without proper planning, may put family members in positions for which they are neither qualified nor suited.

Assessments should be made that are impartial and logical for the continued success of the business. After carefully considering the alternatives, a decision can be made on the successor. If the chosen candidate is not immediately capable of assuming the leadership role, then steps should be taken to develop the skills required. If the founder/owner of a business finds it difficult to make these decisions, especially where family members are involved, then an independent third party should be invited to assist in the process.

The third party could be a business advisor or trusted family friend with extensive business experience, preferably experience in dealing with strategic and succession matters.

Ownership Succession

The ownership succession issue focuses on how the business will be owned and operated once the founder/owner withdraws from the day-to-day management and ongoing ownership of the business. The following items, in particular, need to be attended to on this level:

	the founder's need for cash and security
	the founder's estate plan
	the founder's will
	how to prepare the executor
	estate liquidity/estate tax considerations

Consideration should also be given to how the family's interest will be represented in the future. If the founder/owner wishes to retire and there is no apparent successor within the family, one option to consider is a sale of the business to a third party. The family may not wish to become a passive investor in a business operated by an "outsider". In any case, a family should decide how to dispose the business as its continuing existence can be of most value to them.

While they can be used to some extent as a family employment agency, it may be that the business is of most value to the family if it is sold, in which case the proceeds could be used to further the education of its members, and/or invested in other areas that can often be of lower risk, thereby allowing for diversification.

As part of the succession planning, it is often prudent to consult an accountant or valuation specialist so that a more informed decision can be made. If a sale is being contemplated, it is usually better to "position" the company to maximize the selling price, which may include upgrading information systems, reviewing the management structure, restructuring the business, etc.

Emotional Succession

The last level of succession focuses on the emotional well being of the family and founder throughout all the phases of the succession process. Issues to be dealt with for the founder at this level include:

	exit styles
	exit plans
	establishing open communication
	establishing actual and symbolic roles

"Giving up the reins", particularly on short notice, can be traumatic for a founder/owner. A well thought out succession plan, as an integral part of the business' long-term strategy, can serve to minimize the emotional stress.

Succession planning should be thought of as a process and not an event. If you are a leader in a family-owned, or any business, make succession part of your strategic planning process. It is important not to underestimate how complex succession planning will be, and therefore, consider getting independent help at the outset.

Common Misconceptions in Estate Duty

Despite the fact that Estate Duty is one of Hong Kong's oldest taxes, there are still many misunderstandings as to its scope and application.

In relation to gifts, while the three-years rule is well known, the fact that a gift is never effective for Estate Duty purposes if it is not absolute or is made with a reservation, is frequently overlooked. Many are aware that by careful planning, it is possible to avoid Estate Duty if the property given is rendered valueless by the date of death.

On the other hand, the fact that a gift of Hong Kong property into a Trust, in which the settlor reserves a benefit as a discretionary beneficiary, will result in the settlor becoming permanently locked into potential Estate Duty liability, has often been overlooked. In this sort of case, there will be no three-years rule and the gift into trust will not be effective however long ago it took place. Even if the trustees sell the Hong Kong trust assets and replace them with offshore assets, the liability to duty on the death of the settlor will continue to be based on the value at his death of the original Hong Kong assets transferred to the trustees.

It is sometimes said that the Commissioner of Estate Duty never invokes the Section 35 charge. This is not correct, although it is the case that having obtained information about the transfer of assets to a controlled company, the Commissioner will often be able to use a different charging provision. It is also widely thought that the Section 35 charge does not apply to offshore companies. This is entirely incorrect.

One frequently hears of people believing that they have solved their Hong Kong Estate Duty problems by transferring Hong Kong assets to an offshore company like a British Virgin Islands International Business Company with bearer shares held by the transferor and his or her relatives which are kept on deposit with a bank in Hong Kong.

This arrangement fails on two grounds. First, as a controlled company, the company will be liable to Estate Duty if the Section 35 charge applies. 'Controlled company' is if the company's affairs or voting power are under the control of not more than five persons and their associates, and even though the deceased is not among the five persons. Secondly, as the bearer shares are physically present in Hong Kong, these will be Hong Kong property and their value will be based on the underlying assets of the company. In this sort of arrangement if the company also owns non-Hong Kong assets, the effect will be to make both the Hong Kong and the non-Hong Kong assets liable to Estate Duty because their total value will be attributed to the bearer shares. Despite the fact that this is a disastrous form of Estate Duty planning, it is an arrangement, which has been used by a large number of Hong Kong people.

Should I Invest in Hedged Fund?

Hedged funds refer to funds that use one or more alternate investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives such as puts, calls, options, futures and arbitrage.

At a time when world stock markets appear to have reached excessive valuations and may be due for further correction, hedged funds provide an option to investors seeking capital appreciation as well as capital preservation in bear markets. The vast majority of hedged funds make consistency of return, rather than magnitude, as their primary goal.

Benefits of Hedged Funds

	Many hedged fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.
	Inclusion of hedged funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.
	Huge variety of hedged fund investment styles; many uncorrelated with each other; provides investors with a wide choice of hedged fund strategies to meet their investment objectives.
	Hedged funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets.
	Adding hedged funds to an investment portfolio provides diversification not otherwise available in traditional investing.

The Risks of Hedged Funds Investing

Regulator-Free and Lack of Transparency - When considering alternative investments, especially hedged funds, you should consider various risks including the fact that some products: often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, are not required to provide periodic pricing or valuation information to investors, are not subject to the same regulatory requirements as unit trusts or mutual funds, often charge high fees, and in many cases the underlying investments are not transparent and are known only to the investment manager.

Such flexibility is not necessarily an advantage or disadvantage: a high degree is beneficial in the hands of a prudent investor, but potentially lethal in the hands of a rash speculator. Hedged funds are opaque, and a lack of openness is an invitation to abuse as industry growth explodes. Has Enron taught investors anything?

Fallen Stars - There was some unfavourable news for hedged funds in recent years. Under the leadership of legendary trader, John Meriwether, Long-Term Capital Management imploded in the late 90s. Its collapse nearly sank the global financial system, and, at the urging of the Federal Reserve, LTCM had to be bailed out by Wall Street. George Soros retired and Julian Robertson closed shop after several miserable years. Even the concept of hedged fund holds, we will still expect a number of new and old funds to close down.

Flexibility - Unlike stock or almost all unit trusts or mutual funds, in which investors can withdraw their money at any time, hedged funds generally have redemption restrictions. Some permit withdrawals monthly, quarterly - generally with advance notice of 15 to 45 days, while others may have longer lock-up timing requirements.

Incentive Compensation - Earning a percentage of the profits certainly gives hedged fund managers incentive to make money for investors, but can also provide dangerous incentives. Since losses are borne entirely by investors, yet the manager earns a meaningful percentage of profits, there is still an awful incentive to swing for the fences and take high risks.

To sum up, not all of the hedged fund products are appropriate for all prospective investors: various alternative investments are available only to persons who meet specific financial and residence requirements. You are strongly advised to discuss with your investment adviser to understand more on the hedged fund strategies and assess whether it fulfill your risk/return criteria in investing.