Change of Control Obligations under the Financial Services (Jersey) Law 199819 May 2015
This briefing is of interest to entities carrying on financial service business for the purposes of the Financial Services (Jersey) Law 1998, as amended (the "FSJL") and highlights a common pitfall among registered persons (including licensed investment advisers, general partners, managers, trustees and administrators) planning a change of control.
The Jersey Financial Services Commission (the "JFSC") regulates all registered persons. It considers that the ownership structure of a registered person is an essential element of an entity's ability to satisfy the JFSC that it is a fit and proper person to hold a license under the FSJL. Accordingly, the JFSC applies the fit and proper test to all "shareholder controllers" of entities making an application to become registered persons under the FSJL. The definition of shareholder controller is not without complexity, and can involve a review of the ownership and control structure of both the registered person and, on a 'look through' basis, of entities and persons sitting above the registered person as part of an owning or controlling group.
There are certain notification and pre-approval requirements under the FSJL which must be complied with, allowing the JFSC to vet and monitor shareholder controllers, which registered persons (and their owners and controllers) which are planning a direct or indirect change of control need to be aware of and follow.
It is noteworthy that the JFSC can require the removal of a shareholder controller (or other principal person or key person) in the event that it concludes that their presence in the structure is not compatible with the registered person being considered fit and proper. Stiff penalties can apply where the notification or pre-approval obligations are not complied with.
Notification and pre-approval requirements
In relation to change of control events, the relevant requirements set out in the FSJL are as follows:
"14(1) No person shall become a [shareholder controller], in relation to a registered person unless –
(a) he or she has notified the JFSC in writing of his or her intention to become a [shareholder controller], in relation to the registered person; and
(b) the JFSC has notified him or her in writing that there is no objection to him or her so becoming such a person in relation to the registered person."
"14(2) No person who is a shareholder controller shall increase, reduce or dispose of his or her holding in the company concerned so that the proportion of the share capital or voting rights held by the person in the company reaches, exceeds or falls below 20%, 33% or 50%, or so that the company becomes the subsidiary of such person or ceases to be such subsidiary, as the case may be, unless the person has notified the JFSC in writing of his or her intention to increase, reduce or dispose of such holding, as the case may be, and the JFSC has notified the person in writing that there is no objection to the person’s so doing."
Accordingly, a shareholder controller cannot dispose of any part of his direct or indirect shareholding in the registered person without first ensuring that he complies with Article 14(2) of the FSJL. Similarly, no person may become a shareholder controller of a registered person (so this will be relevant to any proposed purchasers of a registered person) without first complying with Article 14(1) of the FSJL.
An application by a person under Article 14(1) for approval as a shareholder controller involves the submission of an online personal questionnaire to the JFSC. In addition to requiring the submission of personal information relating to the applicant, the questionnaire includes a number of declarations. Unless the person has already been vetted by the JFSC, it can take at least 6 weeks for the approval to be granted (assuming that, ultimately, the JFSC determines that the applicant is a fit and proper person). The JFSC may ask for further information prior to issuing a notice of "no objection" to the applicant. No regulatory fee attaches to the issue of a "no objection" notice.
A shareholder controller who intends to increase, reduce or dispose of his shareholding in a registered person must notify the JFSC of his intention to do so. In the case of a disposal or reduction of shares, this notification under Article 14(2) will typically include some basic details of the individual or individuals to whom the shareholder controller intends to dispose of his shares. The JFSC will then await receipt of the purchaser's personal questionnaire.
The registered person itself is also subject to certain obligations. In particular, where the thresholds set out in Article 14(2) are triggered, the registered person must notify the JFSC in writing within a month from the day on which it becomes aware that any person has increased, reduced or disposed of his or her shareholding or is about to do so.
Consequences of a breach
The change of control rules are taken very seriously by the JFSC and any such changes must not be effected until the requisite consent has been received from the JFSC.
Any person failing to comply with Articles 14(1) or 14(2) will be guilty of an offence under the FSJL. The penalty for any person who contravenes these articles is a 2-year term of imprisonment and an unlimited fine. In addition, if a registered person fails to notify the JFSC of a change of control of which it is aware, it will be guilty of an offence and liable to a 6-month term of imprisonment and an unlimited fine.
The JFSC has a wide range of additional powers, in respect of shares and generally, at its disposal under the FSJL for dealing with a breach of the change of control rules, including the power to give such directions as it may consider appropriate in the circumstances, including that:
- a transfer of the shares in a registered person or an agreement to transfer those shares is void;
- no voting rights shall be exercisable in respect of those shares;
- no further shares shall be issued in pursuance of any offer made to their holder;
- on an application to Court, to order the sale of any shares;
- a shareholder controller be removed or replaced;
- a registered person cease operations or wind up its affairs.
The FSJL contains similar obligations to notify and obtain the prior approval of the JFSC in connection with changes of principal persons and key persons (as these terms are defined in the FSJL), including company directors, partners in a partnership, compliance and money laundering officers of registered persons.