Matter note: shareholders' agreement terms for the BVI joint venture

A shareholders' agreement for a British Virgin Islands (BVI) joint venture vehicle looks straightforward until day two of the relationship. The entity is incorporated offshore for sound structural reasons – capital neutrality, familiarity to international co-investors, ease of share transfer. But the agreement that governs how the parties actually deal with each other is a different instrument entirely, and the choice of governing law and forum inside it will determine whether the arrangement holds under pressure. In our cross-border practice, the documents that cause the most difficulty are not the ones drafted carelessly. They are the ones drafted for an ideal relationship, not a stressed one.

Shareholders' agreement terms for a BVI joint venture require careful alignment of the governing-law and forum clause with the BVI Business Companies Act, the seat of any dispute mechanism, and the practical enforcement route – typically through Hong Kong as the regional enforcement hub and commercial forum. The interaction between BVI corporate law and the governing law of the agreement itself is the source of most day-two disputes in structures of this kind.

This matter note sets out an anonymised instruction of the kind our corporate counsel desk handles in this area. It describes the situation, the constraint, the route taken, and the lesson that transfers to other cross-border structures using a BVI joint venture vehicle.

What was the situation?

Two groups – one operating from the Mainland China corridor, one from a European hub – entered a joint venture to develop an Asian distribution business. The joint venture vehicle was a BVI company. Both parties had prior experience with BVI entities in M&A transactions; the vehicle type was not the issue. The issue was the shareholders' agreement governing how they would actually run the entity together.

The two sides had negotiated commercial terms at length. Deadlock provisions, distribution policy, approval thresholds, anti-dilution – these had all been discussed. What had not been resolved with precision was the governing-law and forum clause. A draft circulated by one party's existing counsel selected English law as the governing law and referred disputes to English-seated arbitration. The other party had concerns it could not fully articulate. Its general counsel sensed a mismatch but could not identify the structural problem clearly enough to push back effectively.

Our desk was brought in at a late stage of the negotiation, after the commercial heads of terms had been agreed. The instruction was narrow: review the governing-law and forum selection clause and advise on whether it served the structure. In practice, that review opened a wider set of questions about how the agreement would operate over the life of the joint venture – and what would happen if the relationship became adversarial.

What was the cross-border problem?

The mismatch the general counsel had sensed was real. It ran in two directions.

First, BVI company law governs the internal mechanics of a BVI company. The BVI Business Companies Act (the statute governing BVI-incorporated entities) sets the rules on share issuance, director authority, member rights, and the constitutional relationship between the memorandum, the articles, and any shareholders' agreement. A shareholders' agreement under English law does not override those statutory rules. Where the agreement and the BVI statute conflict – on a point such as the authority of directors to allot shares, or the procedure for a compulsory transfer – the BVI position governs the corporate act. The English-law agreement governs the contractual obligations between the parties. These are not the same thing. A party who wins an English-law contractual argument may still face a BVI corporate act that is perfectly valid under BVI law, and which the other side will assert to its advantage.

Second, the forum clause proposed English-seated arbitration without any analysis of where the parties' assets and enforcement targets actually sat. One party's substantive assets were held through a Hong Kong operating structure. The other's were more diverse, but included a Hong Kong interest. An English-seated award is a valid award, and it is enforceable in many jurisdictions. But for parties whose real enforcement target is a Hong Kong asset or a Mainland interest, the enforcement route matters. The interaction between an English-seated award and the enforcement mechanisms available through Hong Kong – including the mechanisms for Mainland assets – is not identical to the route that would flow from a Hong Kong-seated award.

Neither problem was fatal to the structure. But both required a deliberate decision, not a default. The draft as circulated had made the default choice without any analysis of which jurisdictions' courts and enforcement routes the parties would actually need.

The sequence above describes the standard position. Your matter turns on the documents, the jurisdictions actually engaged, and the order of steps – which is where the route is won or lost.

To discuss how these cross-border mechanics apply to your joint venture position, contact info@lockhartyip.com.

What route was chosen and why?

Our analysis proceeded in two stages.

The first was to map the enforcement target. Where, in a stressed scenario, would each party seek to act? One party's BVI shares were the most accessible enforcement asset for the other. Share transfers under BVI law require compliance with the BVI Business Companies Act and the company's articles – not just a court order from an arbitral seat. The party seeking to enforce a default remedy, or to acquire shares compulsorily, would need a mechanism recognised and actionable at the BVI level. That pointed toward designing the dispute and enforcement provisions around the BVI and Hong Kong axis, not the London axis, for this specific structure.

The second was to address the gap between contractual and corporate. We recommended an amendment to the shareholders' agreement that did several things. It selected Hong Kong-seated arbitration (proceedings under the HKIAC Administered Arbitration Rules, the administered rules of the Hong Kong International Arbitration Centre) as the forum for disputes arising under the agreement. It preserved express carve-outs for urgent court relief – specifically, the ability of either party to apply to the Hong Kong Court of First Instance or a BVI court for interim relief pending constitution of the tribunal. It also included a clause acknowledging the BVI law basis of the company's constitutional documents, so that the parties were expressly on notice that the agreement's governing law applied to contractual obligations between them, and that BVI law applied separately to the corporate acts of the company itself.

The choice of Hong Kong as the arbitral seat was not incidental. Hong Kong is a signatory jurisdiction under the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards), giving an award made in Hong Kong access to over 170 contracting states for enforcement purposes. More directly for this structure, since 1 October 2019, parties in Hong Kong-seated arbitrations have been able to apply to Mainland courts for interim measures under the Arrangement Concerning Mutual Assistance in Court-ordered Interim Measures in Aid of Arbitral Proceedings by the Courts of the Mainland and of the Hong Kong Special Administrative Region – a tool not available to arbitrations seated outside Hong Kong. For a joint venture where one party had Mainland exposure, that tool had material value.

The governing law of the agreement was also changed. English law remained one of the candidates, but the parties ultimately selected Hong Kong law, for two reasons. First, Hong Kong courts and arbitrators are readily available to interpret and apply Hong Kong law in the context of disputes arising from the agreement. Second, and more practically, both parties already had Hong Kong legal capacity in their operating structures. Applying Hong Kong law to the agreement reduced the number of legal systems at play and created a coherent line from the agreement to the enforcement forum to the relevant courts.

What was the turning point?

The turning point in the instruction was not the governing-law change itself. It was the deadlock provision.

The original draft contained a deadlock mechanism – a process for resolving situations where the board or members could not agree on a reserved matter. The mechanism was written in contractual terms. It described obligations of the parties. What it did not address was how a deadlock resolution would translate into a valid corporate act under BVI law: specifically, whether a direction issued under the deadlock process would constitute a valid director instruction under the BVI Business Companies Act, or whether it would require a separate shareholders' resolution passed in accordance with the company's articles.

This is the kind of gap that does not appear in a normal commercial review. It appears when you read the agreement alongside the BVI corporate documents and trace what would actually happen in a real deadlock. In this matter, the analysis showed that the original deadlock mechanism required one additional procedural step – a confirmatory shareholder resolution – that the original draft had not contemplated. Without that step, a direction under the deadlock clause would be contractually binding but not automatically effective as a corporate act. A party wishing to resist compliance had a technical argument under BVI law that the opposing party had not anticipated.

Correcting this required a redraft of the deadlock provision and a corresponding amendment to the company's articles of association. The articles amendment was a BVI corporate act, governed by the BVI Business Companies Act, and required execution in a form consistent with that statute. Our coordination with counsel admitted to practice in the BVI – locally licensed firms in the relevant jurisdiction – ensured the amendment was correctly implemented at the BVI level.

If an earlier draft, structure or enforcement attempt produced an adverse or stalled result, a second review can identify the strategic gap and the steps still available.

For a structured assessment of your shareholders' agreement across the Hong Kong and BVI interface, write to info@lockhartyip.com.

What was the outcome, and what transfers to other matters?

The agreement was executed with the revised governing-law clause, the HKIAC arbitration provision, the express carve-out for interim court relief, and the corrected deadlock mechanism. The articles were amended consistently. Both parties had clarity on what governed each aspect of the relationship: Hong Kong law and HKIAC arbitration for contractual disputes between them; BVI law and the company's constitution for corporate acts of the entity itself.

The joint venture has since proceeded. We cannot and do not describe its commercial performance. What we can say is that the structural ambiguity that would have created a serious dispute risk in a stressed scenario was removed before it could operate. The turning-point correction – the deadlock-to-corporate-act alignment – is the kind of issue that generates substantial arbitration costs and injunctive proceedings when it is not caught at the drafting stage.

The transferable lessons are three.

First, governing-law and forum selection in a BVI shareholders' agreement is a substantive decision, not a drafting formality. The choice determines which courts can grant urgent relief, which enforcement route is available, and how easily an award or order can be acted upon in the jurisdictions where the parties and their assets actually sit. Defaulting to the incumbent counsel's standard clause is a structural risk.

Second, the interface between the shareholders' agreement and the company's BVI constitutional documents must be read together, not separately. A provision that works contractually may not work as a corporate act. The two instruments need to be consistent – and where they are not, the BVI statute governs the corporate position. This is an area where international counsel working alongside BVI-admitted firms adds measurable value, because it requires reading across legal systems simultaneously.

Third, the enforcement axis matters from the start. If the realistic enforcement target in a dispute is a Hong Kong asset or a Mainland interest, the forum clause should be designed for that target. A Hong Kong-seated arbitration gives access to both the Hong Kong Court of First Instance for interim relief and – for Mainland-connected matters – the interim-measures arrangement that has been in effect since October 2019. That combination is not replicated by an award from a seat without a direct Mainland connection.

Across our corporate counsel practice, we see this pattern consistently: the documents that fail are not the ones that were poorly drafted commercially. They are the ones where the cross-border interface between the governing law, the corporate statute, and the enforcement route was not traced at the outset. A shareholders' agreement for a BVI joint venture is a short document with a long operational life. The investment in getting the structure right at the front end is almost always less than the cost of the dispute that follows when it is not.

For related analysis on BVI corporate structures involving Hong Kong, see our matter note on corporate restructuring across Hong Kong and the BVI, and the corporate counsel practice overview. For ongoing corporate counsel support for foreign groups operating through Hong Kong, see our ongoing corporate counsel service.

Related practices

• Holding Structures – structuring and maintaining cross-border holding arrangements through Hong Kong and offshore centres
• Disputes & Arbitration – international arbitration, enforcement and interim-measures strategy across Greater China and offshore

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Related

• Corporate Counsel
• Corporate Restructuring Across Hong Kong Bvi Bvi Matter
• Ongoing Corporate Counsel Foreign Group Hong Kong

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.