As well as being home to many private equity and other funds, Jersey continues to provide a popular domicile for the acquisition structures used in private equity-backed buyouts of target businesses in the UK and elsewhere. In this briefing, we explore some common features and advantages of a buyout structure involving Jersey companies.
Private equity acquisition structures in Jersey often mirror those used in the United Kingdom, typically consisting of a newly incorporated 'stack' of companies including:
- Topco: the top company in the structure in which the private equity investor, any co-investors and the target's management team (some of whom may hold via a nominee company or employment benefit trust ("EBT")) receive shares.
- Midco: a wholly-owned subsidiary of Topco which may issue shareholder or other subordinated debt (there may be more than one Midco).
- Bidco: a wholly-owned subsidiary of Midco which acquires the target company and, where the deal is leveraged, borrows the senior acquisition debt. By lending to Bidco, senior lenders ensure structural subordination of any junior debt issued by Midco. Senior lenders will take security over the underlying target group.
The exact structure used depends primarily on financing and tax objectives in each case. Topco, Midco and Bidco will often be Jersey companies but may be UK tax resident. Structures can involve more intermediate companies, but will typically follow the basic stack form.
Management or employee shareholdings can be held in Topco directly or indirectly, for example via a nominee company or an EBT, a trust of which employees are the beneficiaries. An EBT or nominee arrangement is often structured using a Jersey trust or corporate vehicle to maximise flexibility and tax efficiency, and can facilitate equity ownership and incentivisation for a potentially large and shifting base of management and/or other employees.
Once the structure has been set up and funded (using Bidco's senior debt plus shareholder equity and debt injected via Topco and/or Midco), Bidco acquires the target, normally by way of a share acquisition.
International lenders and investors tend to be very comfortable investing and lending via Jersey structures given the jurisdiction's history of political and judicial stability, a well-established finance industry and the familiarity and flexibility of Jersey's corporate and finance law and market practice.
More information about Jersey companies and their formation is available in our separate briefing: An overview of Jersey company law.
Whether or not Jersey companies are used, an element of the shareholder debt which is used to fund the acquisition structure will often be listed on The International Stock Exchange ("TISE"), a Channel Islands based exchange, allowing the debt to be qualified as 'Quoted Eurobonds' on which interest payments can be made without deduction of UK withholding tax.
Bedell Channel Islands Limited, a Bedell Cristin group company, is a member of TISE and an authorised listing agent. Our team has considerable experience acting as sponsor and/or adviser for TISE debt listings on private equity buyout structures, and can help to arrange a listing quickly and efficiently as part of the structuring process.
Topco will be subject to an investment or shareholder agreement (which may be subject to English or other governing law) and will have articles of association which together set out the economic and governance rights applicable to the equity holders. Jersey law allows for bespoke shareholder rights and documents, and the terminology and form of these generally follow the English equivalents so will be familiar to onshore clients and advisers.
The acquisition structure usually remains in place for the life of the private equity fund's investment in the target business, but during this time may be subject to changing equity holdings (for example, if there are new or departing management shareholders requiring share transfer or redemption), fresh injections of equity or debt finance and potentially 'bolt-on' investments made by Bidco or the underlying target group in other, complementary businesses. Jersey's versatile company law regime is generally useful in facilitating any such adjustments to the structure and financing arrangements as become necessary during the holding period, enabling change without complexity.
On an exit from the target business by way of a share sale or an Initial Public Offering (an "IPO"), a Jersey structure provides considerable flexibility. Importantly, no stamp duty or other transfer tax is charged on the sale of shares in a Jersey company, and Jersey charges no capital gains or (for holding structures) corporate taxes. A Jersey structure can also enable any management shareholders who are UK resident but non-UK domiciled to use remittance based taxation, allowing them to defer UK tax liabilities on exit. If an IPO is chosen, the shares of Jersey companies may be listed on most of the major foreign stock exchanges, including the LSE Main Market, AIM, NYSE and NASDAQ.
Once the exit has taken place, Jersey company law allows for a variety of familiar options for returning proceeds to equity investors in the form of cash or share consideration, including distribution, redemption and buy-back. Jersey has a simplified maintenance of capital regime which allows solvent companies to return capital to investors from almost any source, with no requirement for the company involved to have sufficient distributable profits.
When they are no longer needed, Jersey companies can be quickly and efficiently wound up by shareholder resolution. Liquidators can be appointed if required, but this is not necessary on a solvent wind-up. Alternatively, two or more Jersey companies may be merged via a statutory process; this can be very helpful where a structure needs to be simplified following a secondary buyout involving a new stack, for example.
Bedell Cristin for private equity
Bedell Cristin is a leading offshore legal adviser for private equity funds, investments and portfolio management. Our cross border, full service legal practice supports private equity houses, management teams, limited partners and lenders across all aspects of the private equity lifecycle. In addition to our funds and finance expertise, we have extensive experience in downstream private equity activity covering acquisitions, reorganisations, disposals and listings, and also provide advisory services on a range of matters including corporate governance and employee incentive structures.
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