The Belt & Road Initiative (BRI) is truly one of the greatest endeavours in modern history. But to make something so bold and vast a reality, it is and will take international business cooperation on a scale never seen before.
The BRI entails truly vast infrastructural projects by participants from 65 countries. Businesses and governments are coming together to develop ports, roads, bridges and more along the ancient Silk Road trading route. This will take new ways of thinking about the mechanics of international business partnerships. But what is being put in place to ensure these complex international business partnerships can happen, and are successful for all those involved?
Offshore partnerships for international investment
To investment in a new country or region, international and Chinese businesses will often set up a legal entity to manage the project and the movement of funds. Offshore centres have long been the best choice for such ventures – the British Virgin Islands (BVI) in particular was the second largest investor in China from 2006 to 2012, providing US$7.72 billion of inward foreign direct investment in 2012 alone.
One of the primary reasons why Chinese and international businesses create legal structures in a territory almost 8,500 miles away is because it enables their ventures to choose to refer back to the Common Law, which underpins the BVI legal system. The Common Law has fully developed jurisprudence and a universally respected judicial system, and contracts under BVI law are largely straightforward and understandable, in comparison to some of the more arcane elements of US legal drafting, for example. Many Chinese and international businesses know that, under BVI law, international interpretations of contracts and agreements are clearer and less likely to end in contention, especially given the clarity of the statutory framework that underpins the entities and governs their dealings.
Vicky Lord, a partner at Harneys said: “From a disputes point of view, firms are going to get a speedier resolution in a BVI law court, than they would in many countries where there may be differences in approach depending on where a party may be from. This means it’s a more assured decision for all partners involved. Also, if the partnership needs to seek financing it’s easier to go to the markets with a BVI structure as international banks and financiers are familiar with it.”
For groups who wish to co-invest so as to build a fund that can be used to create and fuel BRI initiatives, a Limited Partnership structure is a natural choice. It allows the investors themselves – both in China and globally – to be detached from any liabilities the venture may incur. As Lord noted: “To take part in more innovative ventures, people are looking for more complicated products beyond just having an offshore holding company.”
Evolving legal partnerships
As BRI projects attract more investors from all over the world, the traditional legal structures of business entities are evolving, because what was adequate for businesses in the nineties is no longer fit for purpose. The law is having to move as quickly as the commercial ideas it is serving.
The Limited Partnership model that was being used in the BVI and is still in many other parts of the world is one such law that required an upgrade. It is based on the English Limited Partnerships Act of 1907 and as Michael Killourhy, a partner at Ogier noted: “The framers of the old English law may have been well versed in the professional practice of pre-First World War Britain, but they never contemplated the world of modern private equity and hedge funds. Today, Limited Partnership legislation in many jurisdictions often contains provisions and even whole concepts that are incompatible with the modern investment industry practice.”
While these issues do not fundamentally undermine the utility of Limited Partnerships in fund structures around the world, the tension between commercial requirements and the applicable legal framework has proved tricky for lawyers: “In the past, we were forced to draft rules around the old legislation,” said Killourhy. “This meant many complex agreements had to be drafted, which created uncertainty.”
Quelling fear and uncertainty
Uncertainty is a big driver in dissuading an international business partnership from taking off. That’s why the BVI recently revitalised its law so as to bring the Limited Partnership arrangement into the 21st century – and make it fit for purpose for firms looking to invest in joint ventures from opposite sides of the globe.
For a start, the law is simpler. As Killourhy noted, the market position is now the default position of the law, so there is no need to create a partnership with a lot of additional detail in the margins: “it’s user-friendly and familiar to those who have incorporated offshore before,” he said.
In fact, the new model is broadly based upon the successful incorporation law that has served so many offshore investors well over the years. This means now, for example, partners can choose whether a Limited Partnership is formed with or without legal personality, a key issue if capital is going to be raised using the vehicle. As such, the new law also offers the ability to publicly register a charge against a Limited Partnership with legal personality, and obtain priority under BVI law over subsequent charges as result.
Within the new Limited Partnership law, partners now have the ability to merge or consolidate Limited Partnerships and to migrate existing Limited Partnerships to and from the BVI. There are also more assurances around the reorganization and reconstruction of the structures of the arrangement.
Far-flung partners coming together to profit from the BRI may be entering into such an agreement for the first time. This new law will benefit them in that general partners and limited partner investors will be given much greater flexibility to define their roles, liabilities and limitations in respect of the partnership. So limited partners can engage in a number of activities and remain insulated from being considered managing the Limited Partnership, and thus risking their limited liability.
Smarter laws lure a broader range of investors
The new Limited Partnership laws have been in place for almost a year, and Lord notes that the ability to have a more flexible investment structure is helping drive that interest: “We are seeing an uptick in vehicles being created offshore for investment funds and an increased sophistication from global and Chinese investors,” she said.
Lord added that newer business interest for BRI partnerships are blossoming in the in the emerging markets – notably from the other BRIC countries and beyond: “We’re seeing a clear shift from the US and Europe; for example the relationship between China and Brazil is going from strength to strength, and a lot of investment is coming into Africa from China. As long there is liquidity, investment in BRI enterprises will increase,” she said.
As the BRI evolves and grows, more international and Chinese businesses will seek ways to raise funds and then use them on high growth projects along the new Silk Road. To do so, they will need sophisticated legal structures that are reliable, trustworthy and will lead to beneficial outcomes for all parties. This means going forward, offshore Limited Partnership arrangements will play a major role in the building of the world’s greatest infrastructure project.