Bermuda's Private Equity Sector: Getting The Deal Through

FORMATION AND TERMS OPERATION

1 Forms of vehicle

What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?

Form of vehicle

Private equity vehicles in Bermuda are typically formed as exempted limited partnerships (a designation under the Companies Act, 1981 and Exempted Partnership Act, 1992 for entities that are predominantly owned by non-Bermudians), limited liability companies or unit trusts with the vast majority of private equity vehicles being formed in Bermuda as exempted limited partnerships. Bermuda limited partnership legislation has its roots in English partnership legislation, but it is also directly comparable with its Delaware counterpart and, as such, is particularly popular with private equity fund sponsors in the United States targeting global investors.

Limited liability companies and unit trusts are seen to a lesser extent than limited partnerships. Unit trusts are occasionally used, mostly by Asia-based sponsors where participation in a unit trust is more desirable than shares in a company owing to favourable tax transparency treatment.

Private equity funds are typically formed in Bermuda as standalone funds, although they can also be structured as fund-of-funds, master-feeder funds or umbrella funds. Bermuda segregated accounts companies (SACs) registered under the Segregated Accounts Companies Act, 2000 (SAC Act) may also be employed to pursue multi-pronged investment strategies where assets and liabilities of one account are ring-fenced from those of other segregated accounts of the same company.

Separate legal personality, consequences for investors and fund manager

Limited partnership

A Bermuda exempted limited partnership is comprised of at least one general partner and at least one limited partner.

As a matter of common law, a partnership is essentially a contractual relationship among the partners. However, one particularly notable feature of a Bermuda law partnership is that it can elect to have a separate legal personality. The primary benefit to taking on legal personality is to ensure continuity of the partnership notwithstanding any change in the composition of the partners (English common law generally regards any change in the composition of a partnership as resulting in the creation of a new partnership). While the partners may agree among themselves that the partnership business may continue where there is a change of partners (for example, the transfer of a partnership interest or addition of a new partner), this does not necessarily bind third parties.

This is particularly relevant in respect of a partnership's entry into loan agreements, giving security or charges, and participating in master derivative contracts such as the International Swap Derivatives Association (ISDA) or International Capital Market Association/International Securities Lending Association global master repurchasing or securities lending agreements where there are special requirements concerning counterparty mutuality in set-off and netting of trades and transactions. There are also advantages in the holding of certain property in the partnership's own name.

Typically only the general partners of a limited partnership may engage in the management or transact the business of the partnership. If a limited partner engages in the management of the partnership, that partner may become liable for the debts of the partnership on the same basis as the general partner(s).

Company

It is a fundamental feature of Bermuda company law that a limited company has a legal personality separate and independent from its shareholders. As a consequence of this:

assets belonging to the company are the assets of that company alone and do not belong to the shareholders; liabilities incurred by the company are the liabilities of that company alone and are not borne by any other entities within the group; in respect of a cause of action against the company, only the company can be sued in respect of that cause of action and in carrying on its business, the company does not act as agent of its shareholders even where the company is wholly owned by a holding company. Accordingly, any liability incurred by the company in carrying on of its business is the liability of the company and not the liability of its shareholders. Unit trust

A unit trust does not have separate legal personality. Rather, it is a relationship where property is held by a trustee for the benefit of investors who hold units in accordance with the terms of the trust.

2 Forming a private equity fund vehicle

What is the process for forming a private equity fund vehicle in your jurisdiction?

Bermuda has streamlined its partnership formation and company incorporation process and, as a result, both partnerships and companies are typically formed or incorporated within one to two business days, all within the standard government incorporation fee.

Limited partnership

The proposed name of an exempted limited partnership must be approved and, if available, reserved with the Bermuda Registrar of Companies (RoC). An application is then made to the Bermuda Monetary Authority (BMA) for consent to the formation of an exempted partnership. The application must include the identities of the general partner(s) and a personal declaration from each individual who owns, directly or indirectly, 10 per cent or more than the general partner. No beneficial ownership information is required to be supplied in respect of the limited partners. The BMA's consent normally takes around one to two business days.

Another feature of Bermuda limited partnerships which has proven attractive to private equity promoters is that there is no requirement that the general partner be an entity formed in Bermuda or, for a non-Bermuda entity, that it be registered in Bermuda.

Once the BMA's consent has been obtained, signed copies of the certificates of Exempted and Limited Partnership are delivered to the RoC who will then register the partnership as an exempted limited partnership.

The partnership agreement is governed by Bermuda law and is not required to be filed with the BMA or the RoC. There are no statutory minimum capital requirements for limited partnerships.

Company

The BMA is also responsible for the approval of the incorporation of all Bermuda exempted companies following its satisfactory vetting of beneficial ownership information. Once know your client (KYC)/anti-money laundering (AML) information has been processed, incorporation can usually be achieved in one to two business days.

The memorandum of association and the by-laws together form the constitution of a Bermuda-exempted company. Only the memorandum of association is on file with the RoC. It is a matter of public record and available for inspection by the public at the offices of the RoC. The by-laws are not subject to scrutiny by the BMA, the RoC or the Ministry of Finance.

The memorandum of association may provide that the objects of the company are unrestricted, or it may set out the specific objects of the company. The objects clause may be restricted to permit only certain kinds of transactions or to permit only a single transaction which can be especially important for special purpose vehicles. A Bermuda company has the capacity, rights, powers and privileges of a natural person, subject to any specific provisions in its memorandum of association.

The memorandum of association must set out the authorised share capital of the company. There is no statutory minimum capital (save for insurance companies). The authorised share capital may subsequently be increased by resolution of the company in the general meeting.

Unit trust

BMA consent is only required for the issuance of units granting voting rights to investors, which is rare for private equity funds. Otherwise, no regulatory or governmental approval is required for the formation of a closed-ended private equity unit trust.

3 Requirements

Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?

Custodian and administrator

Closed-ended private equity funds are outside the scope of the Investment Funds Act, 2006 (the IFA 2006) of Bermuda and, as such, are not required to maintain (locally or overseas) a custodian or administrator.

Limited partnership

Every exempted limited partnership is required to have a registered office (which cannot be a post office box address) situated in Bermuda and must appoint a 'resident representative' in Bermuda. The resident representative is required to inform the BMA if the partnership is not complying with certain basic provisions of the law. The resident representative may be a locally based corporate administrator.

The Certificates of Exempted and Limited Partnership are public documents which are available for inspection. The partnership agreement, itself, remains confidential and is not publicly available.

Company

A Bermuda company must have a registered office in Bermuda, the address of which is registered with the RoC. In general, the share register and records of the company must be kept at the registered office. Duplicate records may be kept at any other office outside Bermuda.

Each Bermuda exempted company is required to have at least one director and a secretary. A director of a Bermuda exempted company may be an individual or any type of legal person (including any company or association or body of persons...