Jersey companies law amendments28 Jan 2009
The Companies (Amendment No.2) (Jersey) Regulations 2008 (the "Regulations") and the Companies (Amendment No. 9) (Jersey) Law 2008 (the "Law") were approved by the States of Jersey on 15 and 16 January 2008, respectively. The Regulations came into force on 22 January 2008. The Law (save for Articles 17 to 22) came into force on 27 June 2008. Articles 17 to 22 (which contain "Accounts and Audit" provisions) came into force on 1 August 2008.
The thrust of the amendments is aimed at increasing the flexibility of the capital maintenance regime applicable to Jersey companies. There is also a raft of more general provisions, some of which simply "tidy" the Companies (Jersey) Law 1991 (the "Companies Law").
The principal amendments introduced by the Regulations are as follows:
- the introduction of "treasury shares";
- the abolition of rules concerning financial assistance in connection with the acquisition of shares;
- amendments to the form of the solvency statement required in connection with a repurchase or redemption of shares;
- the introduction of corporate directors;
- clarification concerning "squeeze-out" rights; and
- new provisions concerning cell companies.
The principal amendments introduced by the Law are as follows:
- changes to the capital maintenance rules;
- certain amendments in respect of public companies;
- alterations to the notice periods for certain shareholder meetings;
- amendments to the basis upon which accounts are prepared and signed off (when Articles 17 to 22 are in force); and
- provisions relating to liquidations and winding up.
Introduction of treasury shares pursuant to Articles 57(7) and 58A and 58B of the Companies Law
These provisions have been introduced to enable a Jersey company, following a repurchase or redemption of shares and if so authorised by a special resolution of its shareholders in connection with such repurchase or redemption, to hold those shares as "treasury shares". It is of note that purchased or redeemed shares must be cancelled unless held as treasury shares.
Treasury shares may be cancelled, sold or transferred to an employee share scheme or simply held without cancellation, sale or transfer. Treasury shares do not carry the right to vote and there is no entitlement to dividends in respect of treasury shares. If treasury shares are held by the company, the company is not treated as a member of itself.
Subject to the above, it is of note that treasury shares may be included in takeover offers.
Subject to it not being prohibited by the company's memorandum and articles of association and to there being an authorising special resolution, a company may hold as many treasury shares as it wishes. The only proviso is that there is at least one non-redeemable share of the company in issue held by a third party. Should this cease to be
the case, the company has a 12 month period in which to rectify the situation by issuing at least one non-redeemable share. In this respect, the Jersey legislation is markedly different from the UK companies legislation.
The register of members should include an entry relating to the number of shares held by a company as treasury shares, and the number of treasury shares should be included in the annual return of the company.
Treasury shares are likely to be attractive to investment funds, particularly those which are closed-end listed funds, since they enable the company to have increased liquidity. The amount of distributable profits available will not be reduced on a cancellation or repurchase of shares by a need to create a capital redemption reserve fund. As no dividends are payable on treasury shares, all the distributable profits will be available for distribution amongst "non-treasury" shareholders.
In a private company context, these provisions may be a useful tool for managing shareholder disputes since the provisions could be used to fund the exit of a minority shareholder. Any repurchased shares could be "warehoused" with no immediate requirement to find a replacement shareholder.
Abolition of rules that a company may not give financial assistance in connection with the purchase of its shares
Article 58 of the Companies Law is amended so as to abolish the rule that a Jersey company may not give financial assistance, directly or indirectly, for the purpose of any acquisition of shares in the company.
Furthermore, all criminal sanctions arising from the giving of "unapproved" financial assistance have been abolished.
This means that financial assistance may be given without any requirement for a special resolution of shareholders, previously known as "the whitewash procedure". This will simplify and streamline acquisition finance transactions.
Amendments to the form of solvency statement required to be signed by the directors
The two key changes are that it is only those directors who participate in the resolution authorising a repurchase or redemption of shares who have to sign the solvency statement. Secondly, the requirement that the directors may only make such a statement after having made a "full enquiry into the affairs and prospects of the company" has been removed.
At a practical level, this will mean that it is not necessary to seek signatures from all board members when preparing or filing a solvency statement but, equally, it is only those board members who approve the repurchase or redemption who will be liable to creditors in the event that the solvency statement is not correct.
It should also be noted that a solvency statement is now required in respect of the declaration of a dividend, once again, to be signed by the directors who are approving payment of the dividend. The new form solvency statements require directors to be aware of, and consider the solvency of the company, for a 12 month period going forward. This is a change to the Companies Law which potentially impacts on day to day practice for many.
Introduction of corporate directors
The Regulations amend Article 73 of the Companies Law so as to permit corporate directors of Jersey companies in circumstances where the body corporate, which is acting as a director, is permitted under the terms of its registration under the Financial Services (Jersey) Law 1998 to act as a corporate director, i.e. in the regulated fiduciary services industry. Thus, as in the case of corporate trustees, it will be possible to use licensed trust companies and corporate service providers as corporate directors in respect of Jersey companies, but it will still not be possible to use "unlicensed" corporate directors. The licensed trust company or corporate service provider may decide to incorporate a new company specifically to act as a corporate director, in which case the new company would be treated as being a participating member of the affiliation leader.
It should be noted that no director of a body corporate director can be a body corporate. The board of the corporate director must be comprised of individuals. The fiduciary duties of a corporate director are identical to those of an individual director. Two key practical advantages of using a corporate director are flexibility for operational management (for example, a wider pool of persons to act in terms of the activities of the client entity) and administrative convenience (for example, only one set of internal procedures). A corporate director also has the perceived advantage of limited liability, albeit on the basis that a corporate director must be regulated with appropriate professional indemnity insurance cover. It is arguable whether, as a matter of practice, there is any real dilution of responsibility here. There may also be regulatory consequences, damage to reputation and possible shadow director concerns, if a regulated entity sought to shelter behind the limited liability of a corporate director, in the event of a breach of fiduciary duty by the corporate director. The use of corporate directors may not be appropriate for bespoke situations, for example, where the capability or experience of an individual is key to the relationship (such as in bespoke private equity or private wealth management scenarios).
Clarification concerning "squeeze out rights"
The "squeeze-out" provisions which apply under Articles 117 and 119 of the Companies Law where an offer exists to buy out a minority shareholder (i.e. one who owns 10% or less of the relevant shares) are clarified. The provisions now clearly apply to offers where the offeror has 90% of the shares to which the offer relates by reference to the nominal value of the shares and not the quoted value of those shares.
Amendments to the provisions relating to protected cell companies and incorporated cell companies under Part 18D of the Companies Law
There have been a number of additions and enhancements to the provisions of the Companies Law concerning both protected cell companies and incorporated cell companies. The principal amendments are as follows:
- clarification that there is no need for any "subscribers" to sign the memorandum and articles of association of a cell of a cell company when it is established;
- clarification that the directors of a protected cell or incorporated cell are no longer required to be the same directors appointed in respect of the protected cell company or the incorporated cell company itself. Therefore, each cell can have a separate board of directors. However, the cell of an incorporated cell company is required to notify the incorporated cell company of a change of director, but, as previously, each cell of a cell company must have the same company secretary and registered office;
- the provisions for transfer of a cell of one cell company to another cell company have been amended and clarified;
- provisions have been introduced to enable a company (not being a cell company) to become a cell of a cell company;
- clarification in relation to the provisions concerning alteration of the memorandum and articles of association of a company, so as to enable an existing company to convert into being either a protected cell company or an incorporated cell company, or for an incorporated cell company to convert to a protected cell company (or vice versa); and
- the parent cell company remains responsible for the cell company's register of directors and secretaries and for the annual return but is no longer responsible for its accounting records or register of members.
All of these provisions introduce additional flexibility into the concept of protected cell companies and incorporated cell companies.
Changes to the capital maintenance rules
A series of further changes bring increased flexibility to the capital maintenance regime. These changes include the removal of the requirement to make distributions only out of defined distributable reserves thus enabling companies to make distributions as they wish, subject only to the proviso that they remain solvent and do not deplete either the nominal capital or the capital redemption reserve. To this end, the directors will be required to make a solvency statement in the new form.
The Law also introduces provisions enabling a company to redeem or buy back a number of its own shares from any capital source, provided that those shares are fully paid up, and provided that the directors sign a solvency statement authorising the redemption or repurchase. There is no longer a requirement to make an equal amount transfer to the capital redemption reserve. These changes make greater funding choices available to companies undertaking share buy-backs.
Public company amendments
Following introduction of the Law and, save in the case of cell companies, a public company can now end its name "Public Limited Company" or use the abbreviations "PLC", "plc" or "Plc", as it prefers.
Certain changes are also introduced to clarify the position of the filing of accounts by companies which convert from public to private companies within an accounting period.
All companies, whether public or private, are now able to dispense with holding annual general meetings by agreement in writing of all the shareholders.
Notice periods for general meetings
The statutory minimum notice period for annual general meetings has been reduced from 21 days to 14 days. Similarly, the minimum notice period for a meeting at which a special resolution is to be proposed has been reduced from 21 to 14 days. This amendment is, of course, subject to any provisions in the company's articles to the contrary.
Preparation of accounts
The form of wording which can be used in connection with the accounts of a Jersey company to be signed off by the directors is amended (subject to Articles 17 to 22 of the Law being in force). The accounts must still be prepared in accordance with generally accepted accounting principles. However, the requirements to show a true and fair view of the profit and loss of the company for the period and of the state of the company's affairs at the end of the period have been removed and replaced with a requirement that the accounts must state which generally accepted accounting principles have been adopted in the preparation of the accounts and that they show a true and fair view or are presented fairly in all material respects. The requirement to comply with any other provisions of the Companies Law remains the same.
Provision relating to liquidation and winding up
A new provision is introduced which is of general application to liquidators and/or directors conducting a creditors' winding up of a Jersey company. This allows a liquidator (or a director, if no liquidator has been appointed) to distribute part of the property of the company to its members before settling the costs of the winding up and all creditors' claims and expenses, if he is satisfied that the remaining assets will be sufficient to enable all creditors' claims to be met after the distribution has taken place.
In addition to the specific changes summarised above, there are a number of general "housekeeping" amendments which tidy the presentation of the Companies Law. For example, references to "par value" are changed to "nominal value" and the meaning of "holding company" is clarified. Further, the Law contains provisions enabling the States to make future amendments by Regulations.
These changes go a long way to modernising and simplifying the law applicable to Jersey companies, thus making it more attractive to investors. This should result in an increased use of Jersey companies bringing benefits to the Island and its reputation as an offshore finance centre.