Published in the Jersey Evening Post Funds Review - March 2007 

A key part of recent efforts to develop Jersey's funds industry was the introduction of cell companies in the form of the protected cell company (the "PCC") and the incorporated cell company (the "ICC") in February last year.

The concept of protected cell companies is not new in the offshore investment funds market. Jersey has quite deliberately drawn from the lessons learnt in other jurisdictions with protected cell/segregated portfolio type structures; for instance in Guernsey, Bermuda and Cayman and developed a better product. In addition, the Jersey ICC was an entirely novel creation, although now similarly available in Guernsey. The ICC was intended as a robust alternative to the PCC and was expected to be considered attractive in those jurisdictions less familiar with the concept of protected cells.

By way of background, a PCC is a single legal entity within which there may be established numerous protected cells. Although each protected cell must be separately identified and have a separate memorandum and articles of association with its own shareholders and directors, it will not be a separate legal entity from the protected cell company itself. A cell of an ICC is, however, a company which can hold assets and sue and be sued in its own name. A cell company is able to ring-fence part of its assets so that the creditors of a cell have recourse only to the assets of that cell; they have no claim against non-cellular assets of the company or the assets of any other cell.

Trends

As expected, the use of cell companies in Jersey has followed the trends set in other offshore centres, so we have seen PCCs and ICCs established for multi-series securitisation programmes, umbrella investment funds and captive insurance structures.

From our experience, the most popular use of cell type structures in Jersey to date has been with investment funds. Investment managers in particular may wish to establish segregated portfolios to divide the assets relating to classes of shares with different investment criteria thereby protecting shareholders from the potential of cross class liability arising from adverse investment performance of other classes of shares. Before the arrival of cell structures managers would look to set up separate companies for each new product. However, as the portfolios became more diverse and the products and subsequent vehicles more numerous, it becomes more complex and cumbersome for the investment manager to manage; all of which ultimately results in greater administration costs for the fund. So the concept of having a single corporate legal entity established albeit with numerous underlying cells was always going to prove an attractive proposition to fund managers.

As a firm, we were fortunate to be actively involved in the formation of some of the first PCCs and ICCs used for collective investment funds and to have worked on some innovative captive insurance products utilising both the PCC and the ICC. There have also been a number of well known investment banks that have recently looked to the Jersey ICC as the most effective structure in asset financing transactions.

From details obtained from the Jersey Financial Services Commission, approximately 40 PCCs and ICCs have been formed in Jersey to date with a large number of underlying cells. In the early days, the PCC appears to have been the more popular vehicle, due in part to greater familiarity. However, from the experiences of our funds group alone, it would seem that the ICC will prove equally as popular (if not more so) in future years as the professional community becomes more familiar with the structure.

Developments

Further amendments are expected to be made to the Companies Law later this year some of which directly affect cell companies.

At present whilst each cell has its own board of directors, the board must comprise the same persons as those on the board of the cell company itself. Shareholders in a cell have no control over the composition of its board notwithstanding that they may be the majority shareholder(s) in the cell. Changes are now proposed to remove the requirement for common directors. If introduced, such a change should prove beneficial to those structures where investors in particular cells require board representation in those cells alone, without the need to be a director of the company and every other cell.

The proposed amendments to the Companies Law should also clarify that a reorganisation of an ordinary company into a cell company is effected through the Companies Law provisions dealing with schemes of arrangements, requiring court approval. The Court procedure was recently tested to full effect by Ashburton to convert two umbrella funds into PCCs and then merge the two entities.

The first year has also exposed some interesting practical difficulties. Public companies in Jersey must file accounts which are open to inspection by the general public at the Registry. However, the Companies Law provides that financial information relating to a cell is only available to shareholders of that cell. Consequently, a shareholder of Cell A should not have access to financial information of Cell B. Difficulties therefore can arise where cells are created with the feature of a public company.

Summary

The major issue facing protected cell structures in any offshore centre is whether or not other jurisdictions will recognise and enforce protected cell provisions or whether such provisions may be viewed as procedural rules only, which a foreign court may be less likely to uphold as a matter of international law. Whilst there has been little case law anywhere involving protected cell companies which would support these concerns, the ICC is designed to allay such fears which may exist in certain quarters in connection with the PCC.

The introduction of cell companies to Jersey was an important step forward in ensuring that the Island was properly equipped to service the broadest range of fund structures. The signs today are that not only have the new cell structures been embraced with open arms by the fund community particularly due to their ease of administration and cost savings, their use in multi-fund structures is becoming the standard model for many firms and as things stand today, their future seems assured.