29 January 2007
Jersey's programme of company law reforms is continuing to enhance the island's international competitiveness. The reforms began in earnest in 2002: major changes then included the introduction of new corporate vehicles, such as no-par value companies (having no specified nominal value per share) and procedures for redomiciliation of companies both in and out of Jersey. These have proved extremely useful and versatile in international finance transactions.
Last year saw the introduction of protected cell companies and incorporated cell companies, which are now being used for investment funds, insurance structures and in other areas where the legal segregation of assets is vital. Jersey's enhanced ring-fencing of assets and liabilities in these vehicles has since been followed in some competing offshore jurisdictions.
Other important company and insolvency law changes were made last year, some of which have not proved as popular with legal advisers. In particular, adding an additional requirement for solvency statements to be made by directors when 'whitewashing' (the giving of financial assistance by companies for the purchase of their own shares) has not been welcomed.
Thankfully, the States of Jersey is moving swiftly to rectify this. As part of the package of further enhancements to Jersey's company law expected this spring, the general prohibition on financial assistance for the acquisition of companies' own shares will be abolished. It is currently proposed that this would allow both public and private companies to provide financial assistance without undertaking any whitewash procedure.
Another issue has arisen out of last year's amendments due to the imposition of a new solvency test, which must be satisfied before a company makes certain redemptions or repurchases of shares or other distributions of assets to members. The new test requires the directors to make a prior statement of their opinion as to the company's solvent status, both immediately following the relevant redemption, repurchase or distribution and for the following year.
The new test was meant to avoid the necessity of having accounts or auditor reports prepared prior to the directors deciding to make a redemption, repurchase or distribution. However, as the new test specified that the directors making the statement did so "having made full enquiry into the affairs and prospects of the company", most directors have been advised to prepare accounts in order to satisfy that requirement due to uncertainties surrounding the notion of 'full enquiry'.
It is now proposed to delete the requirement to 'make full enquiry' and also modify the related offence so that the directors authorising the transaction and making the solvency statement without having reasonable grounds to do so will be guilty of an offence. While accounts may be reasonable or necessary in many cases, simple asset holding companies, for instance, may enjoy the flexibility of making distribution without accounts or auditor statements as a result of this proposed change.
Lawyers outside Jersey are sometimes surprised that corporate directors are not currently permitted by the island's legislation. However, as part of this year's package of reforms these will now be allowed, provided that the relevant corporate directors are regulated to carry out trust company business under the Financial Services (Jersey) Law 1998. This change will be warmly welcomed by local trust companies due to the additional practical flexibility afforded by allowing corporate directors.
The UK's Takeover Panel has to date supervised takeovers of listed Jersey companies. However, the Takeover Panel currently has no statutory authority in Jersey. Rather than reinventing the wheel in Jersey it seems sensible that the Takeover Panel continues to supervise the takeovers of listed Jersey companies. Therefore, it is proposed that Jersey's company law be amended to give Jersey's minister for economic development the power to appoint a body to supervise takeovers of listed Jersey companies and to make related orders and rules. The minister can then by order appoint the UK's Takeover Panel to fulfil that function, utilising its rules.
The proposed amendments will also allow companies to hold treasury shares following redemptions or repurchases of their own shares provided that they are not prohibited by their constitutional documents and are authorised by general resolution. Treasury shares offer greater flexibility to companies on redemptions and repurchases, as companies will have more options to either cancel the shares, sell them, transfer them in relation to employee share schemes or simply hold them. Treasury shares should prove very popular with Jersey investment funds as well as employee share schemes and employee benefit trusts.
There will be restrictions and limitations placed on the rights attached to treasury shares and the number of treasury shares that can be held at any one time (10 per cent of the issued share capital is currently proposed). Treasury shares will, however, attract bonus shares issued subsequently.
Other modifications are also to be made, including some to the existing provisions for cell companies in order to simplify and clarify several points that have arisen in practice over the past year. The company law amendments are likely to be brought into force, partially by regulation early this year.
Later this year Jersey's limited partnership law is to be amended, again to enhance Jersey's legal infrastructure to maintain its offshore competitive position.
Currently, Jersey limited partnerships do not have legal personality but are transparent for the purposes of Jersey taxation. This allows non-Jersey resident investors acting as limited partners to be exempt from Jersey income tax on their shares of partnership profits. Last year it was proposed by the States of Jersey that flexibility on the question of legal personality would be introduced, possibly as an option on registration of a limited partnership under the existing law. That would allow the limited partners, in effect, to opt for a different tax treatment compared with traditional limited partnerships. But following a consultation process, an alternate and separate limited partnership with legal personality is likely to be introduced under its own legislation by the end of this year.
Other proposed amendments to the existing limited partnership law are likely to go ahead later this year. These include changes to the position of the general partner, who will no longer automatically be a trustee of the limited partnership's assets. The general partner's fiduciary position will be determined in accordance with the partnership agreement. Also, further flexibility will be introduced by allowing limited partnerships to be deregistered, but not dissolved, thus allowing them to remain as general partnerships or to be reregistered as limited partnerships in other jurisdictions.
These changes will increase the flexibility of limited partnerships as vehicles for sophisticated or institutional investors wishing to invest with the benefit of limited liability, but without taking managerial responsibilities. Their popularity as part of international tax-planning arrangements and as vehicles for private equity, venture capital, assets protection and investment funds will no doubt continue.
-Wendy Benjamin is a partner at Appleby Hunter Bailhache