25 February 2008
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Building on the amendments to Jersey's companies legislation in 2006 - a major feature of which was to introduce provisions concerning protected and incorporated cell companies - further substantive changes and refinements in this area were introduced by the States of Jersey in 2008, reflecting international trends.
The changes have been made to the principal companies legislation for the island - the Companies (Jersey) Law 1991 - and are contained in two parts.
The initial amendments were effected by the Companies (Amendment No 2) (Jersey) Regulations 2008. The second piece of amending legislation was the Companies (Amendment No 9) (Jersey) Law 2008.
As regulations are able to be adopted by the States of Jersey more quickly than the direct amendments to the companies law itself, the regulations came into force on 22 January 2008. The amendment law, although approved by the States of Jersey, requires Privy Council consent and thus may take slightly longer to bring into force - it is anticipated that this will take place later this year.
The principal amendments introduced by the regulations include the introduction of treasury shares and corporate directors, the abolition of the proscription of financial assistance - ie assistance relating to the acquisition of a company's shares - together with certain amendments to the provisions concerning cell companies and solvency statements.
As with English and Guernsey incorporated companies, a Jersey company will now be permitted to hold its shares as treasury shares. Essentially, the amendment enables a Jersey company that purchases its own shares to hold them for a limited duration, rather than having to cancel them. A company may then sell the shares, cancel them or transfer the same to an employee benefit scheme.
During the period that shares are held as treasury shares, the company is unable to exercise any rights of voting in respect of them, nor can it receive distributions relating to them.
The concept of treasury shares is likely to be attractive to, for example, Jersey-based corporate investment funds, as it will enable the fund company to increase distributable profits reduced in buying or redeeming treasury shares, rather than being forced to adopt a procedure of cancellation then reissue of shares. Normally, distributable profits would be transferred to a capital redemption reserve, as was previously required by the companies law.
Subject to certain requirements being met, a Jersey company is now permitted to have corporate directors on its board. The conditions are that the corporate director entities are registered under the Financial Services (Jersey) Law 1998, as amended, to act as, or to fulfil, the requirements of a director. In addition, a corporate director company cannot have corporate directors appointed to its own board.
This will be of obvious benefit to the 200 registered trust company businesses in Jersey - in practice many directors are provided by such businesses and it makes sense that those businesses, rather than its employees, act as directors.
Allowing financial assistance
Again, tracking recent developments in English companies legislation, the prohibition against a Jersey company providing financial assistance in respect of the acquisition of its own shares (apart from some exceptions) has been abolished.
The changes do not distinguish between private and public companies incorporated in Jersey. Indeed, this amendment has gone somewhat further than similar changes in England, adding provisions that seek to remove any doubt that the concept of financial assistance might continue by virtue of common or customary law principles.
This change will be welcomed by legal practitioners in Jersey, particularly those who focus on banking and corporate transactions, who were faced with adopting the 'whitewash' procedure - albeit less cumbersome than equivalent English provisions - or the draconian consequences of a breach rendering a relevant transaction void.
As with changes to many aspects of modern companies legislation, the focus of the law has shifted away from anachronistic 'maintenance of capital' requirements to ensuring that the company simply remains solvent after the provision of any financial assistance by it. On the basis that it continues to be solvent, the actions of a company are its internal affairs.
While financial assistance will no longer be unlawful, provisions such as shareholders' approval and a director's statement of solvency will remain (to ensure that such financial assistance would not constitute a distribution by the company) until the amendment law comes into force.
Protected and incorporated cell companies
The introduction of provisions enabling the incorporation of protected cell companies, together with the more innovative concept of incorporated cell companies, was an important development of the companies law in 2006.
There have been further refinements to this area in 2008. One important change means that a cell of a cell company will no longer be forced to adopt the same directors on its board as the board of directors of the cell company itself.
Again, this will be particularly attractive to the funds industry, where it is now common to encounter umbrella funds structured as protected or incorporated cell companies and each cell established with different types of investors and underlying assets.
There is a number of miscellaneous changes to Jersey cell companies, including provisions for the conversion of a company to become a protected cell, a protected cell company or an incorporated cell company, and clarifying that a cell company no longer has responsibility for maintaining the register of members or preparing the accounts in respect of its underlying cells.
The regulations also remove an onerous burden on directors to confirm that they have made "full enquiry into the affairs and prospects of the company" in the statutory solvency statements required for redemption and purchases of shares. This was interpreted as necessitating the production of updated accounts to ensure compliance with the statutory provisions. In practice, this was found to be both difficult and cumbersome, especially if financial statements were several months old.
The amendment law
The amendment law will greatly simplify the capital maintenance rules for distributions, reductions of share capital, redemptions/ purchases of shares and financial assistance. Distributions to a company's shareholders and redemptions/repurchases of par value shares will be permitted to be effected from any source, provided that the directors make the requisite statement of solvency.
This reflects the general trend of focusing on the ongoing solvency of a company, rather than imposing particular statutory requirements on a company's activities. Previously, a company wishing to make distributions (or redemptions/repurchases of par value shares) could do so only from sources prescribed in the companies law.
As a consequence of the changes to the companies law relating to distributions, the provisions regarding financial assistance will be amended further - removing the provisions concerning shareholder resolutions and solvency statements mentioned above.
The requirement for the Royal Court of Jersey to confirm reductions of capital comprising the return of assets to shareholders from a capital account will be removed. It is important to note that a return of capital in this instance will constitute a 'distribution' for the purpose of the companies law, and thus have to comply with the revised provisions in that regard. However, the simplification of the procedure, removing the expense of making a court application, will be welcomed.
Other miscellaneous amendments include the reduction of the notice period for AGMs or extraordinary general meetings to 14 days from 21 days, increased flexibility regarding preparation of accounts and permitting a Jersey public company to be designated a plc.
In summary, these changes introduce useful and practical enhancements to the companies law, and amendments necessary to ensure it remains included at the forefront of modern companies legislation. The amendments will be welcomed by industry and practitioners alike, and should also serve to retain Jersey's attractiveness as a jurisdiction of choice for the incorporation of vehicles for fund companies and general corporate and banking transactions.
In particular, the increased flexibility of Jersey companies will make Jersey attractive for cross-border transactions.
Mark Chambers and Marcus Stone are partners at Ozannes