The Companies (Demerger) (Jersey) Regulations 2018 (the Regulations) come into force on 1 September 2018. The Regulations provide for certain Jersey companies to benefit from a new demerger regime, which will provide further versatility and flexibility to the restructuring and M&A landscape in Jersey.
Practical application of the Regulations have an obvious use in the restructuring and insolvency of Jersey corporate structures, but the demerger regime introduced by the Regulations could also be a very useful tool for investment groups and family offices seeking to segregate assets and spin off investments into other vehicles. Subject to the applicable tax regime, the completion of a demerger under the Regulations may also avoid triggering a tax event that could otherwise arise on conclusion of an alternative transaction.
With Brexit on the horizon and corporate and investment groups structuring to accommodate this, the introduction of this new demerger regime could also be very timely and we anticipate seeing utilisation of the Regulations in the run up to and post March 2019.
Application and Process
The Regulations will allow for a Jersey company to demerge into two or more Jersey companies, which may or may not include the demerging company. The demerger regime will have a number of uses, including:
- executing a pre-sale restructuring or corporate simplification exercise;
- introducing new holding structures to facilitate a reorganisation of different classes of assets or asset portfolios; or
- allowing for existing businesses and risks to be identified and separated between entities within a group.
To achieve a demerger, a statutory process must be followed and the application to the Registrar of Companies in Jersey must include a demerger instrument. The instrument need not be detailed but must include specific information, as set out in the Regulations, such as whether the original company will be a survivor company or a new company and details of the directors of the original company and the demerged company (if a new company) or any board changes (if a survivor company). Notice must be given to various stakeholders and as you would expect, certain parties have the right to object.
One of the main attractions with the demerger regime is that there is no requirement to go to court for approval. This sets the demerger tool apart from a scheme of arrangement and means that those seeking to utilise the demerger regime could see considerable time and cost savings in comparison. It is worth noting, however, that if the original company is insolvent, the Royal Court of Jersey must approve the demerger.
Protection of Stakeholders
Where shareholders are asked to approve a demerger, either at a meeting or if a written resolution has been circulated to them for approval, this will have been preceded by resolutions of the directors that the demerger is in the best interests of the demerging company. Creditors of the demerging company can take comfort from the fact that the Regulations require that solvency statements in respect of the demerging company are made by each director that voted for the demerger. In addition, any creditors known to have a claim over £5,000 are entitled to at least 21 days' notice of the demerger. As mentioned above, shareholders and creditors are also entitled to object to the demerger. This is in addition to employees, whose rights are expressly dealt with in the Regulations.
There has already been a significant amount of interest in the new demerger regime. Whilst the demerger regime currently only provides for a Jersey company to demerge into two or more Jersey companies, it is hoped that this will be extended in due course to permit demergers into non-Jersey corporate entities, which will add further flexibility and make utilisation of the Regulations more widely available.
Of course, a demerger via a scheme of arrangement under the Companies (Jersey) Law 1991 remains available and in some circumstances, for example where the compromise of creditor claims could be particularly useful, will still be a more attractive or appropriate tool. The introduction of the demerger regime, however, means that those seeking to divide an undertaking among two or more Jersey companies now have a new offering.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.