Offshore law firm Walkers had to go all the way through the appeals process to the UK Privy Council to establish that its office in Bermuda, established in 2015, is locally controlled and should therefore be able to legally operate in the territory.
In June 2016, Bermuda’s Bar Council refused to grant Walkers Bermuda a certificate recognising the firm as a professional company under local law. The Bar Council argued that Walkers Bermuda did not meet the requirement that local companies must be controlled by Bermudians.
Similar to rules in the Cayman Islands, Bermuda law distinguishes between local companies controlled by Bermudians with at least 60% of the shares, voting rights and board directors and other companies that, unless exempted, must be licensed by the minister of finance to carry on business locally.
While Cayman-headquartered Walkers Global did not have any legal control or interest in the shares of Walkers Bermuda, which were Bermudian-owned, the relationship between the two entities was going to be governed by a loan agreement, as well as a licensing and services agreement.
Walkers Global intended to fund the Bermuda office’s start-up and operational costs with a US$5 million loan, license the Walkers brand to the entity for a fee and provide it with certain services, including operational management, compliance, finance support, human resources, marketing, information technology, training and project management.
When Walkers appealed the decision by the Bar Council, the then-Chief Justice Ian Kawaley, now a Grand Court judge in the Cayman Islands, ruled that these commercial arrangements did not infringe the local control laws and that the Bar Council had erred in its decision to refuse the granting of a professional certificate.
The Court of Appeal, however, disagreed. It interpreted the provisions wider, finding that even a company that is owned and directed by Bermudians could be controlled by non-Bermudians through commercial arrangements, like the ones contemplated by Walkers.
In a judgment given on 10 June, the Privy Council said the Court of Appeal erred in overturning the initial ruling by the chief justice.
The Privy Council found that the relevant sections of the law that aim to preserve local control over Bermuda companies are concerned with the exercise of shareholder rights and the decisions of the directors, “rather than an amorphous control by another entity solely by means of its commercial bargaining power”.
In the court’s view, “commercial arrangements which would give non-Bermudians influence over the decisions which shareholders would take in their own interests on matters relating to the local company or directors would take in the interests of that company would not fall within the phrase or amount to control of a local company”.
The interpretation by the Court of Appeal that the law intended to outlaw commercial control of local companies by non-Bermudians was unlikely, given that it could be easily circumvented under existing rules, the Privy Council noted. A trading subsidiary that is wholly owned by a Bermudian-controlled parent company could, for example, enter into commercial arrangements with third parties and cede control over its affairs to them.
The wider interpretation applied by the Court of Appeal would also put local companies at risk of “intolerable uncertainty” over whether they are potentially committing an offence.
A Bermuda-based business that enters into an exclusive supply agreement with an overseas buyer, for example, could become dependent on the buyer, who would be able to exert considerable influence over the supplier’s commercial decisions.
“If such control by itself sufficed, the legality of the supplier’s business would depend on the way in which the overseas buyer chose to exercise its commercial influence,” the judgment said.
A local company that borrows considerable sums from an overseas lender and subsequently gets into financial difficulty could equally find itself in a position where it has to comply with the directions of the lender.
“There would be great uncertainty as to what actions of, or advice by, the lender would amount to control thereby causing the local company to commit an offence,” the Privy Council said.
At the same time, the judgement sympathised with “the predicament” of the Bar Council that the proposal effectively amounted to a “franchise arrangement by which [Walkers Global] seeks to extend the provision of legal services under its brand into Bermuda”.
It also saw no reason to disagree with the Appeals Court’s conclusion that it was possible that almost everything other than local legal work would be carried out by Walkers Global offshore and that the financial obligations on Walkers Bermuda under the loan and service agreements would likely give Walkers Global substantial power over the conduct of Walkers Bermuda.
But these proposed arrangements for the operation of Walker’s Bermuda office did not contravene the local control sections of the law, and the Bar Council should not have refused to grant a certificate of recognition on these grounds.