Pioneering legislation

Friday, 01 June 2012
The Bahamas financial services industry recently welcomed the Bahamas Executive Entity. Here the author reports on its practical uses.

The wait was over for eager local and international practitioners when the Bahamas Executive Entity (BEE) launched on 1 February. The unique planning vehicle came into being through the Executive Entities Act 2011 (the Act). It was created to act in a specific and focused capacity, and can only hold assets that will enable it to carry out its functions. While people have their own definition of the BEE, it’s the Act that clarifies its characteristics and what it can do.

The BEE is a legal entity

Defining the BEE’s status is critical, and s3 of the Act notes that:

3(1) An Executive Entity is a legal person established by Charter to perform only executive functions and registered in accordance with this Act.

3(2) An Executive Entity which satisfies the requirements of subsection (1) shall be resident and domiciled in the Bahamas and able to sue and be sued in its own name.’

By establishing that the BEE is a legal entity, it can own and transact in its name. Any legal entity is registered, so certain information is publicly available, and this is certainly the case with the BEE. However, the amount of public information is limited, so confidentiality can be maintained.

Performing executive functions

A key phrase in s3 (and my definition) is the reference to ‘executive functions’ and the restriction that these are all the BEE can perform. As to why there is a restriction, the Act explains what executive functions means.

Section 2 of the Act, the interpretation section, defines an executive function as:

(a) any powers and duties of an executive, administrative, supervisory, fiduciary and office holding nature… and

(b) the ownership, management and holding of (i) executive entity assets, and (ii) trust assets.’

The Act provides examples of positions that qualify as executive functions.

What can the BEE do and hold?

The purpose of the BEE, and its assets, are dealt with in sections 5(1) and 4 respectively. The Act states that it ‘shall be limited to the carrying out of such of the executive functions as are set out in its Charter’. Going a step further, s4 notes that the BEE can only hold assets allowing it to carry out its executive functions and meet all expenses and statutory/regulatory obligations – nothing more, nothing less. This highlights that this is an entity established for a specific purpose.

To fully appreciate what the BEE is for, you must look at its other key characteristics. In doing so, the definition and practical applications start to become clear. The BEE has:

  • limited liability
  • no share capital (so no shareholders)
  • no beneficiaries
  • no minimum level of assets required (it only requires assets allowing it to carry out its functions)
  • continuity – it can be established for a definite or indefinite period
  • confidentiality (the names of the founder and Executive Entity Council remain confidential and are not public information)
  • no annual filing requirements
  • the ‘registered office’, provided by the Executive Entity Agent, which is the only Bahamian requirement;
  • no requirement that the Executive Entity Council, officers or other supervisory body be provided by residents of the Bahamas.

For purists, the two characteristics that stand out are that there is no share capital requirement and no beneficiaries. This being the case, the obvious question is: where are the checks and balances and how can we ensure the purpose is being fulfilled? Of course, the checks and balances are built into the BEE governance documentation – e.g. the ability to add and remove officers and council members – but the Act provides recourse for enforcement of the purpose.

However, this is the reason for limiting the assets the BEE can hold to only those that will allow the BEE to carry out its purpose. By limiting the assets, the risk of loss is mitigated to a great extent, and this is further shown by the functions envisaged by the Act.

‘The BEE has no share capital requirement and no beneficiaries’

Key positions and documents

As with any entity/vehicle, it is important to understand the key positions that should be filled. For the BEE these are the founder (who signs the charter), the Executive Entity Agent (the registered office and only Bahamian requirement), the officer, the council (the governing body) and the secretary.

The Act notes that the BEE need not have both officers and council members. However, if no officers are appointed the BEE must have a council, and that council will also assume the duties of the officers. The same is true if only officers are appointed.

Turning to the BEE documentation, the main governing document is the BEE charter. This contains the basic governance parameters, but importantly is not a registered document (thus maintaining a good degree of confidentiality). The other, and optional, document is the BEE articles, which can be used to provide additional governance information and, again, are not public information.

Given the flexibility of the BEE, it can act as a standalone entity or form part of an overall structure. To illustrate this, the following are some of the roles the BEE can play.

Executive functions:

  • director of a company
  • protector/enforcer of a trust
  • authorised applicant of a purpose trust
  • foundation council;
  • foundation officer.

Advisory functions:

  • investment advisor;
  • family council.

Holding functions:

  • shareholder of a private trust company
  • shareholder of a family business;
  • holder of voting shares of a company.

The simplified administration of the BEE, along with the key characteristics already noted (legal entity, limited liability, confidentiality, etc), will make the BEE worth considering in the above circumstances. Indeed, where you have unlimited liability acting as a personal protector or investment advisor, why not limit your liability through the use of a BEE? It seems like a simple decision.

Putting the above together, it’s clear that the BEE has been designed as an administratively efficient vehicle aimed at performing a specific purpose. It is another step in the evolution of the estate-planning world and certainly a welcome addition to the Bahamas toolkit.

Innovative and timely

The Bahamas Executive Entity (BEE), the first of its kind, has already attracted interest from families and their advisors looking to strengthen, but at the same time simplify, their structures.

The legislation creates a perpetual entity designed specifically and solely to carry out executive functions, which are any powers and duties of an executive, administrative, supervisory, fiduciary and office-holding nature. The BEE is suited to act as shareholder of a private trustee company (PTC), or as a protector, enforcer, advisory board, corporate director or reserved powers holder, or even to carry out family-office-style administrative functions. Previously, no individual or vehicle was best suited to this purpose.

The BEE has no shareholders, beneficiaries or enforcers, and it is not a wealth-holding vehicle. Its officers can comprise the founder’s chosen family members and trusted advisors, who benefit from limited liability as if they were directors of an international business company. Formerly, these people may have been reluctant to take on a fiduciary role in their personal capacity because of the risk.

The hallmark of the BEE is its ability to control and protect decision-making at the top level of a structure within a confidential, straightforward and best practice framework.

International law firm Lawrence Graham (LG) proposed the concept to the Bahamas Financial Services Board as a solution to its clients’ concerns about who should occupy key ownership, management, supervisory and investment advisory positions in their wealth-preservation structures.

LG Partner Rose Chamberlayne TEP (pictured) was involved in developing the BEE. She said: ‘This legislation is targeted at protecting the confidentiality of wealth-preservation structures while at the same time giving the founder greater certainty and security that the right decisions will be made by the right people at the right time and for the right reasons.

‘It also has the benefits of removing unnecessary layers of ownership and administration within these structures, as well as facilitating the application of best practice family and corporate governance principles to protect against internal and external conflict. Its existence showcases the Bahamas’ visionary approach to meeting private client needs.’

Author block
Right
Timothy J Colclough

Timothy J Colclough TEP is Assistant Vice President and Head of Business Development and Custody, Butterfield Bank (Bahamas) Limited.

Topic
Trusts
Section
STEP Journal
Country
Bahamas

The content displayed here is subject to our disclaimer. Read more