Why British Virgin Islands and Cayman Islands Trusts are Spearheading the Pre–IPO Trust Structures in Asia

Despite the challenges of the global pandemic and market conditions over the last couple of years, the popularity of offshore pre-IPO trusts has continued to increase dramatically, particular in Asia.   A pre-IPO trust is a trust arrangement, established prior to an IPO, for holding the shares of the company that will be listed.

By Nicola Roberts, Partner and Head of Litigation, Insolvency and Restructuring Group, Singapore, and Henno Boshoff, Senior Associate, Private Wealth and Trust Practice, Singapore, Harneys

Many company founders prior to the IPO will often use the opportunity to undertake a review of their company structure and re-evaluate their personal succession plans with their key trusted advisers, seeking advice on asset protection and tax.   Often this will lead to the founders (as well as some key executives) choosing to establish a trust to hold their shares prior to the company being listed.  Successful IPOs can mean a sudden influx of liquidity, which needs to be planned for in a sufficient and secure way.

Both the British Virgin Islands (BVI) and Cayman Islands (Cayman) have common structuring options that are at the forefront in helping founders and their senior executives achieve their goals and planning prior to a pre-IPO company being listed

1. BVI & Cayman succession structures that allow families to be more involved in succession planning.

Both BVI and Cayman have, in comparison to other jurisdictions, comprehensive and sophisticated trust legislation that is frequently being used in pre-IPO structuring. Some of the structures and how they may be of benefit are:

Discretionary Trust

The most common form of discretionary trust structure used for pre-IPO structuring, subject to tax advice, is the reserved powers trust. The popularity of reserved powers trusts is due to the fact that they allow a settlor to reserve certain powers for him or herself (or to confer such powers on others) under the terms of a trust instrument, and the BVI and Cayman has enacted comprehensive legislation confirming that the reservation of such powers will not invalidate the trust. Some of these powers include: the power to add and remove trustees, make alterations to the class of beneficiaries and change the proper law and forum of administration of the trust. It is also possible to reserve powers to direct the trustees in relation to the investment of the trust fund and distributions of income generated by the trust fund, both of which are appealing to individuals who wish to implement a comprehensive succession plan, but retain a level of control.

Employee Share Option Plan Trust and Employee Benefit Trust

There has been an increase in trend for companies prior to IPO to establish an Employee Share Option Plan Trust (ESOP) or Employee Benefit Trust (EBT) to implement their share award schemes for their employees. The most common structure, subject to tax advice, would be for a pre-IPO company to hold or grant shares in the company via such a trust. The Trustee may be a licensed trust company or a private trust company in the BVI or Cayman. The beneficiaries will be the employees who participate in the proposed trust; these are usually key employees or may in some cases be a wider group or all employees once they reach a certain period of employment. In most cases an advisory committee will be appointed to manage the shares or assets.

It is very important when setting up an ESOP or EBT trust that the pre-IPO company works with local and international counsel (including offshore counsel), tax advisors and trustees, to make sure that the proposed structure achieves all its goals and provides the optimum benefit to the pre-IPO company and relevant stakeholders.

Charitable Trust

Charitable trusts are increasing popular in pre- IPO situations as more and more families wish to implement a philanthropic programme to be pursued after the IPO (in certain situations, there may also be tax incentives!). Both BVI and Cayman have very clear and recognised charitable trust legislation. 

Essentially a charitable trust follows the principles of English Law. Charitable purposes include the relief of poverty; the advancement of education; the advancement of religion; other purposes beneficial to the community at large, where there is an element of public benefit.  The purposes of such trusts must be exclusively charitable and must come within the legal definition of benefit to the public. Such trusts are not subject to the rule against perpetuities and may last indefinitely.

2. Conclusion

There is clear importance for any founder, senior executive, shareholder in understanding the variety of trust structures available as part of prudent pre-IPO planning.  BVI and Cayman will continue to play a key role as jurisdictions of choice in this area due to their sophisticated trust laws in which different forms of reserved power discretionary trusts, ESOPs, EBTs and charitable trusts may be established.

3.  About Harneys

Harneys is a global offshore law firm. We provide advice on British Virgin Islands, Cayman Islands, Luxembourg, Cyprus, Bermuda* and Anguilla law. Our office network is the largest of any offshore law firm with 186 lawyers and 12 locations around the world. We are the largest offshore law firm in Asia. We are a full service law firm spanning all major transactional, contentious and private client disciplines.

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.

*Bermuda legal services are provided through an exclusive association with Zuill & Co, an independently owned and controlled Bermudian law firm.