60:40 to become 40:60 – an impetus for investment?
About Teressa Macbeth
Teressa Macbeth is a Senior Associate in the corporate practice group at MJM Limited. Her practice includes acting for multinational financial institutions, public and privately owned companies, high net worth individuals and asset managers and alternate lenders on complex, multidisciplinary financings.
On the 21 February 2020 at the presentation of the 2020/2021 budget statement the Minister of Finance confirmed the Government’s intention to introduce a bill that will reduce the required ownership of a local Bermudian company from 60% Bermudian to 40% Bermudian, while maintaining the requirement for the Board of Directors to be not less than 60% Bermudian.
This new bill will be the culmination of a policy proposal first espoused by the Premier in January 2018, when he indicated that a relaxation of the existing 60:40 rule was being considered as a means of stimulating growth in the ailing Bermudian economy by encouraging investment by non-Bermudians.
The 60:40 rule has general application and is primarily found in section 114(1)(a) of the Companies Act 1981 and Part 1 of the Third Schedule to that Act. There is a distinction drawn there between local companies incorporated in and controlled by Bermudians, which may carry on business in Bermuda, and other companies, which, unless they are deemed exempted, must obtain a section 114B licence from the Minister of Finance to carry on such business.
The prohibition under the 60:40 rule of non-Bermudians holding a controlling influence in a local company operates to prevent any commercial agreements or arrangements that may have conferred voting control or imposed constraints on the effectiveness of majority votes from the Bermudian board of directors or the shareholders in general meetings.
The proposed relaxation of the existing 60:40 rule will provide the ability for majority non-Bermudian ownership of a local company, without the need to seek an exemption from the 60:40 rule by obtaining a section 114B licence (although a non-Bermudian wishing to hold more than 60% of the shares of a local company will still be able to go down this route). The previous requirement for Bermudian control of the shares in local companies will now be eliminated.
The total voting rights in a local company at board level to be held by Bermudian directors remains unchanged at 60%. Provided that the Bermudian directors in a local company remain at not less than 60% and they are (i) free to vote in the best interests of the company and (b) not subject to the direction of the non-Bermudian shareholders, the new bill grants de-facto control to the non-Bermudians at shareholder level. The business of the company will remain managed by Bermudian directors at board level, who are empowered to take decisions for, and exercise all the powers (not otherwise reserved for shareholders) of, the local company. One wonders if this will affect the influx of foreign investment this policy is designed to usher in, as one would suspect that a majority shareholder may also wish to have majority board control.
It is understood, at the time of writing, that the new bill will be introduced in the 2020/2021 budget session.
As the current 60:40 rule was primarily one of the means by which Bermuda could promote and preserve local control over the Bermudian economy, the details of the new bill will be very interesting to analyse, and we will provide a further update on this subject once it is released. It is safe to assume that the new bill will contain protection for certain business sectors and require the satisfaction of specific conditions in order to allow for the 60% non-Bermudian ownership in local companies. Also of interest will be whether this change proves to be the desired stimulus for the local economy and, in particular, how, and to what extent, Bermuda and Bermudians benefit from this extra foreign investment.