The current conditions in the financial markets have made financing mergers and acquisitions with debt more difficult, but they have also had the effect that assets are available at good prices for those who can raise the necessary finance. For corporates wanting to raise cash for an acquisition without depleting their cash reserves or drawing on borrowing facilities, the equity markets can be attractive but a number of conflicting concerns have to be reconciled.
Cash placings are an efficient way of raising small amounts of new equity but do have drawbacks for more significant amounts. A UK listed company ("UK PLC") that wishes to raise cash by the issue of shares is restricted by the pre-emption rights regime under UK law as to the amount it can raise through a straightforward issue of securities for cash unless the new shares are offered pro-rata to existing shareholders.
Cash placings may exceed the limits prescribed by law but only with approval from the shareholders of the UK PLC, as the issuing company. Obtaining shareholder approval will entail not only the expense and delay of convening a meeting, but also the need to announce and describe the proposed transaction for the purposes of the shareholder meeting. Often, the proposed use of the required cash is highly confidential, with the effect that it will not be feasible to call a shareholders' meeting as the proposed transaction cannot be described in public. In addition, guidelines have been published by the Pre-emption Group (a committee of representatives from the Association of British Insurers, the National Association of Pension Funds and certain other institutions and companies), setting out maximum limits on the disapplication of statutory preemption rights.
The restrictions mentioned above apply to shares issued by UK PLC for cash. Shares issued for a non-cash consideration are not subject to the same restrictions.
This is one of the ways in which "cash box" structures are useful (see also "Uses of Cashbox structures"). They allow the UK PLC to raise cash, above the usual limits, from the equity markets without the need for a shareholder meeting, by enabling it to issue shares for a non-cash consideration, and to do so within a short time-scale. Provided that the new shares of UK PLC represent less than 10% of its issued share capital, under the UKLA listing rules, it is not required to produce listing particulars.
This briefing describes how cash box structures work, some of the reasons for using them and why Jersey companies are particularly well suited to cash box structures.
What is a cash box structure?
(a) Incorporation of a subsidiary UK PLC incorporates a new subsidiary which acts as the "cash box" ("Cashbox"). Cashbox is usually incorporated in Jersey (see "Advantages of using Jersey companies"), but in order to avoid the need for HM Treasury consent, it must be managed and controlled in the UK for the purposes of UK tax. If merger relief is to be sought, it is usual for a proportion of the equity share capital of Cashbox to be held by the institutions acting as dealers or managers (the "Dealers") for the issue of shares by UK PLC. Cashbox will also have a class of redeemable preference shares for issue to the Dealers.
(b) Subscription of shares in the Cashbox UK PLC, the Dealers and Cashbox enter into a series of agreements under which:
- UK PLC and the Dealers agree to subscribe for and pay up their respective ordinary shares;
- the Dealers agree to subscribe for the redeemable preference shares in Cashbox to be issued fully paid for an amount equal to the net proceeds of the placing and to transfer all of the shares in Cashbox held by them to UK PLC in return for the issue by UK PLC of shares to placees determined by the Dealers; and
- UK PLC agrees to issue new shares to placees selected by the Dealers in exchange for the transfer to UK PLC by the Dealers of the shares that the Dealers hold in Cashbox.
The agreements also contain option arrangements to enable the structure to be unwound if the placing of UK PLC's shares does not proceed.
(c) Placing and admission The Dealers place the shares to be issued by UK PLC with investors and, upon listing of those shares:
- the Dealers pay the subscription monies for the redeemable preference shares to Cashbox and Cashbox issues the redeemable preference shares to the Dealers;
- the Dealers transfer all of their holdings of shares in Cashbox to UK PLC; and
- in return for the transfer of the shares in Cashbox, UK PLC issues its shares directly to the investors selected by the Dealers.
(d) Payment of cash to the UK PLC As a result of the transfers of Cashbox shares, Cashbox becomes a wholly-owned subsidiary of UK PLC, holding funds equivalent to the net proceeds of the placing by the Dealers. These may be lent by Cashbox or paid to UK PLC by way of redemption of the redeemable preference shares or distributed to UK PLC in a winding up of Cashbox.
(e) Some variations Cashbox structures used in connection with placings usually require only a single issue of shares by Cashbox. Where Cashbox structures are used in connection with rights issues, however, it is quite common for there to be more than one tranche of shares issued by Cashbox, with a gap between them in order to allow for the adjustments required if any cheques for the rights issue shares are unpaid.
Under the usual Cashbox structure, subscription monies are paid by the investors in UK PLC's shares to the Dealers and the Dealers use the funds to satisfy their undertaking to subscribe for the redeemable preference shares in Cashbox. With a view to mitigating credit risk, however, for some Cashbox structures, a trust mechanism is used so that the funds are held on trust for the different persons interested in the funds through the various stages of the process.
Uses of Cashbox structures
Cashbox structures are commonly used as part of the financing structure for acquisitions, but may also be used in convertible bond issues and for rights issues to create distributable reserves.
In relation to rights issues, the requirement to account for share premium is relieved if the requirements for merger relief to be available on the issue of the new ordinary shares issued pursuant to the rights issue are met. The redemption of the shares in Cashbox can then allow for the creation of distributable reserves in the hands of the parent. Even in a rights issue it may also be useful to have an element of flexibility in relation to preemption rights. This is particularly useful if there are overseas shareholders.
Advantages of using Jersey companies
Jersey companies are suited for use in Cashbox structures for a number of corporate and tax reasons:
- Jersey companies can be incorporated within a short timescale: using the urgent process, same day incorporation can be achieved for an additional filing fee of only £200.
- Jersey companies are typically incorporated on a bespoke basis and are not shelf companies; incorporating a bespoke company makes it easier to demonstrate that Cashbox is a subsidiary of UK PLC with UK management and control from incorporation.
- Jersey companies can be managed and controlled in the UK whilst retaining their registers and registered offices in Jersey: there is no requirement for board or shareholder meetings to be held in Jersey or for there to be Jersey resident directors.
- A Jersey company can redeem shares from any source of funds, including share capital, making Jersey companies more flexible in this regard than UK companies.
- Jersey companies' law enables Jersey companies to issue no par value shares. These are shares that do not have a specified par value but are issued for an agreed price recorded in a stated capital account. The whole of the stated capital account may be used for the purposes of redeeming the shares.
- Winding up solvent Jersey companies is also a simple and quick procedure. It is not necessary to appoint a liquidator and the process can be completed within a day.
- Jersey companies can be tax neutral and assist with the UK tax analysis:
- liable to 0% tax on income;
- no capital gains tax;
- no withholding tax;
- no duty payable on the issue or transfer of shares;
- Jersey companies are not resident for tax purposes in Jersey if the business is centrally managed and controlled outside Jersey in a country or territory where the highest rate at which any company may be charged to tax on any part of its income is at least 20%; and
- transfers of shares are carried out on the register which is required to be maintained in Jersey and all transfers and share certificates can be executed and retained in Jersey, outside the UK.
- Jersey has an experienced professional infrastructure accustomed to managing the regulatory, technical and practical demands of the Cashbox structures.
Mourant has acted on Cashbox structures used in a wide range of high profile transactions, providing legal and administrative services in Jersey and also administrative support within the UK. The close working relationships between our teams giving legal advice, and those carrying out corporate administration and secretarial support and their experience of these transactions, means that we are able to provide efficient, smooth and seamless support for all aspects relating to the Jersey company. Mourant's services include:
- Jersey legal and regulatory advice,
- company formations,
- registered office services, and
- company secretarial and other corporate administration services.
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.