Preface
This publication has been prepared for the assistance of those who are considering the establishment of a Bermuda entity to act as an investment (or "mutual") fund. It deals in broad terms with the requirements of Bermuda law with respect to the establishment and operation of such entities. It is not intended to be exhaustive but merely to provide brief details and information which we hope will be of use to our clients. We recommend that our clients seek legal advice in Bermuda on their specific proposals before taking steps to implement them.
Conyers Dill & Pearman
1 INTRODUCTION
The sub-tropical islands of Bermuda are found at the mid-Atlantic crossroads between the Americas and Europe. The United States of America (the "US") is the nearest Continental landfall, 800 miles due west of Bermuda. Despite its remote location and small size, Bermuda is a key player in the global financial world. English is the language spoken in Bermuda, hence the language used for business. Bermuda's infrastructure is modern, well developed and technologically advanced.
Bermuda remains a British Overseas Territory, but is responsible for its own internal self-government and law courts. Bermuda has an independent legal and judicial system, with a right of final appeal to the Privy Council in London.
The laws of Bermuda are based substantially upon English common law. Bermuda's legislation derives for the most part from a number of principal statutes from the United Kingdom ("UK"), but also includes original local statutes. Bermuda's business laws and legal system have evolved in keeping with being a leading international offshore financial centre in the 21st century.
Over the years, Bermuda has strived through legislation and codification of practices to meet the highest international standards in order to ensure that its name would be synonymous with ethics and quality. By being diligent in "knowing its customers", it has often declined lucrative business when provenance was in doubt.
Bermuda is a major centre in the international offshore investment fund industry. As of December 2022, there were over 800 funds registered, authorised or designated by the BMA (as defined below), with such registered and authorised funds having collective assets of over US$292 billion.
Bermuda remains committed to attracting quality funds by offering demonstrable political and demographic stability, excellent fund administration services, and welcome regulation of the investment industry to provide more transparency and disclosure.
2 BERMUDA MONETARY AUTHORITY
The Bermuda Monetary Authority (the "BMA") was established in 1969 under The Bermuda Monetary Authority Act 1969 (the "BMA Act"). The BMA is the competent authority responsible for supervising, regulating and inspecting financial institutions operating in or from Bermuda and is responsible for exchange control. It also issues and redeems Bermuda's currency notes and coins. The BMA is the principal body responsible for the regulation of investment funds, including those listed on the Bermuda Stock Exchange (the "BSX"). The BMA is a full voting member of the International Organisation of Securities Commissions ("IOSCO").
The BMA insists that persons proposing to establish funds in Bermuda are persons of sound business integrity and good financial standing in addition to having high industry credentials. By maintaining such an approach, Bermuda has become the jurisdiction of choice for discerning fund managers.
Bermuda investment funds are regulated under the Investment Funds Act 2006 and the rules and regulations relating thereto (collectively, as amended, the "IFA"). The IFA establishes and maintains standards and criteria applicable to the establishment and operation of investment funds in Bermuda with a view to protecting the interests of investors.
The IFA deals with regulatory disclosure, the content of offering documents and the responsibilities of various service providers to Bermuda investment funds. Operators of Bermuda investment funds must comply with the IFA.
3 INVESTMENT FUNDS
3.1 General
Under the IFA, an investment fund is defined as any arrangement with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangement to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. The arrangements must be such that the persons who are to participate do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions. To constitute an investment fund, the arrangements must also have one or both of the following characteristics:
- the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; and
- the property is managed as a whole by or on behalf of the operator of the investment fund.
Notwithstanding the above definition, certain types of arrangements are expressly excluded from the definition of investment fund by virtue of the Investment Funds (Definition) Order 2019, as amended. Excluded arrangements include, inter alia, arrangements operated by a person otherwise than by way of business, joint ventures, holding entities for the purposes of the Economic Substance Regulations 2018, pension funds and sovereign wealth funds. Such arrangements are not considered "investment funds" for the purposes of the IFA and are therefore outside the scope of the requirement to register or become authorised with the BMA and are not regulated under the IFA.
References herein to "fund" or "investment fund" should be interpreted in accordance with the above.
3.2 Open-Ended vs Closed-Ended Funds
An investment fund may be 'open-ended' in that it may issue and redeem its participating shares on a continuous basis at their net asset value. An investor in an open-ended investment fund generally has the right to require such investment fund to redeem his or her investment at current net asset value on an ongoing basis.
Funds are 'closed-ended' where investors do not have such a right to require redemption.
4 FUND STRUCTURES
4.1 General
Bermuda investment funds may be structured and organised in several ways including as:
- a company under the Companies Act 1981 (the "Companies Act");
- a limited liability company ("LLC");
- a limited partnership; or
- a unit trust.
In addition, in circumstances where special corporate objects or powers are required, a company may be incorporated by petition to the Bermuda legislature for a private act of Parliament (a "Private Act"). A Private Act is customised legislation which would provide for a specifically required corporate structure.
4.2 Companies
Historically, most funds regulated under the IFA were structured as "mutual fund" companies, meaning an open-ended fund company that states in its memorandum of association that it is a mutual fund and has the power to purchase for cancellation or redeem its shares without reducing its authorised share capital. A mutual fund is exempted from certain requirements under the Companies Act which would otherwise require it to have a share premium account or prevent it from freely redeeming or purchasing its shares or making payments of dividends or distributions. A mutual fund also benefits from an exemption from the requirement to have its share register open to the public or other shareholders, thereby providing a higher degree of privacy to investors. The IFA also applies to non-mutual fund companies that fall within the IFA's definition of investment fund.
An investment fund may create and offer one or more classes or series of shares. Typically, an investment fund structured as a company would be incorporated with two or more classes or series of shares that would include the manager's shares (usually with voting rights but without participation rights) comprising one class of shares that are issued to and held by the manager. The remaining shares would typically be participating shares issued to investors, who may be entitled to request the redemption thereof at the current net asset value.
An investment fund which is a company under the Companies Act will be subject to certain Companies Act provisions applying to all companies. Such provisions include, among other things, the requirement:
- to maintain at its registered office in Bermuda, its register of members, its register of directors and officers (including the resident representative, if any) and signed minutes of meetings of all directors and shareholders;
- to hold an annual general meeting of its members in each calendar year, unless such requirement is waived by resolution of the members;
- to make financial statements available to the members;
- to pay the prescribed annual government fee by 31 January of each year (see "Government Fees" below).
4.3 Segregated Accounts
Companies wishing to operate segregated accounts may either petition the Bermuda Legislature for private legislation or it may register under either The Segregated Accounts Companies Act 2000 (the "SAC Act") or the Incorporated Segregated Accounts Companies Act 2019 (the "ISAC Act"). The SAC Act sets out rules for governing the operation of segregated accounts and the ISAC Act sets out the rules governing the formation and operation of incorporated segregated accounts.
Pursuant to the SAC Act, a segregated accounts company ("SAC") is permitted to create and operate segregated accounts. Any asset which is linked by the SAC to a segregated account shall be held by the SAC as a separate fund which is not part of the company's general account and shall be held exclusively for the benefit of the segregated account owners and any counterparty to a transaction linked to that segregated account. The assets linked to a segregated account are available only to meet liabilities to the account owners and creditors of that segregated account and are not available, and may not be used, to meet liabilities to, and shall be protected from, the general shareholders and from the creditors of the company who are not creditors with claims linked to that segregated account.
Pursuant to the ISAC Act, Bermuda law also provides for the creation of segregated accounts with separate legal personality. Incorporated segregated accounts companies ("ISACs") differ from SACs in that each incorporated segregated account ("ISA") is incorporated as a separate legal entity in its own right. As such, each ISA will have all of the attributes of a company, including the ability to hold assets, sue and be sued in its own name, be subject to winding up proceedings with no impact on other ISAs or the ISAC and merge or amalgamate with other ISAs of the ISAC. Additionally, each ISA within an ISAC could be a separate investment fund for the purposes of the IFA (as opposed to segregated accounts within the same investment fund).
Except for those provisions which are specifically amended pursuant to the SAC Act or ISAC Act (as applicable), a SAC fund or ISAC fund is otherwise subject to all the provisions of the Companies Act and the Act. Please refer to your contact at Conyers should you require more information regarding SAC and ISAC funds.
4.4 Limited Partnerships
The partnership is a popular vehicle for international ventures primarily because it is generally regarded as a fiscally transparent and flexible structure.
The principal statutes governing the formation and operation of Bermuda partnerships are:
- the Partnership Act 1902, as amended;
- the Limited Partnership Act 1883, as amended; and
- the Exempted Partnership Act 1992, as amended
(collectively, the "Partnership Acts").
In Bermuda, a partnership may elect to have a separate legal personality. If such election is not made, the partnership is not a legal entity with any degree of legal personality, but merely a relationship between the partners.
There are two types of partnership under Bermuda law: a general partnership (where all the partners have unlimited liability for the debts and obligations of the partnership) and a limited partnership (where one or more "general partners" have unlimited liability for the debts and obligations of the partnership and the liability of the other "limited partners" is, subject to satisfaction of certain requirements, limited to the amount of capital contributed or agreed to be contributed by such limited partners).
The Partnership Acts do not attempt to regulate the affairs of a partnership to the same extent as the Companies Act does in relation to companies. For the most part, the operation of the partnership is left to agreement between the partners. It is generally only where the partnership agreement is silent that the provisions of the Partnership Acts apply. There are however, certain required provisions, including that the governing law of an exempted partnership must be Bermuda law, the general nature of the partnership business must be stated in the partnership agreement, the exempted partnership must maintain a registered office in Bermuda, a register of limited partners must be maintained at the registered office and a resident representative in Bermuda must be appointed and maintained.
The partnership agreement is private except for information in the Certificates of Exempted and Limited Partnership, which are registered with the Registrar of Companies.
Bermuda exempted partnerships may be resident in Bermuda and can only carry on business from Bermuda in connection with transactions and activities which are external to Bermuda. In practice, the activities carried out by partnership funds managed and marketed outside of Bermuda have no difficulty in meeting this requirement.
Limited partnerships, which are formed under the Limited Partnership Act, are commonly used for venture capital investments and closely held investments. The position of a limited partner in a limited partnership is analogous to that of a shareholder in a company. The IFA applies to investment funds structured as limited partnerships, and to any offering documents issued thereby. Common law principles relating to true, accurate and full disclosure made in any such offering documents will also apply.
A limited partnership must have at least one general partner. In general, only the general partner or partners of a limited partnership may engage in the management or transact the business of the limited partnership. The general partner will usually be a special purpose vehicle which appoints an investment manager. All suits in respect of the business of a limited partnership can generally only be brought against the general partner(s). If a limited partner engages in the management of the partnership such limited partner will lose the benefit of limited liability although this is subject to certain exceptions; for example, limited partners may make decisions in respect of any investments made by the limited partnership without losing their limited liability.
Please ask your contact at Conyers for more information regarding Bermuda partnerships and the requirements of the Partnership Acts.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
