Ogier has recently helped realise the first listing of a Russian business on the Stock Exchange of Hong Kong Limited (the "HKSE"), using a Jersey holding company. Ogier client and Jersey incorporated United Company RUSAL Plc ("UC RUSAL"), the global leader in the aluminium industry, listed on the HKSE at the end of January 2010 with a market capitalisation at the time of the listing of approximately US$21 billion which makes it the largest Jersey company by market capitalisation to list on a stock exchange. UC RUSAL also completed a secondary listing of global depositary receipts on Euronext Paris at the same time as part of the international offering of its shares.
In addition to the London markets, HKSE is another gateway to access the significant and growing Asian capital markets and using a Jersey company as the listed vehicle to achieve this uses a respected and recognised (both by the markets and investors) and tax neutral corporate structure. This briefing looks in further detail, amongst other things, at why Jersey companies have proved so popular with businesses and their investors, and why it is likely that, as the Asian, and in particular Chinese, economies continue to surge forward and the global economy continues to recover, we will see the number of initial public offerings ("IPOs") increase and in particular why we expect to see more Russian, CIS (and other) businesses choosing a Jersey holding company as their preferred vehicle for listing on the HKSE and in London.
Who and Where?
Prior to October 2009, Jersey companies were already listed around the world on various markets including New York (NASDAQ), London (Main Market, AIM and PLUS), Amsterdam (Euronext), Toronto (TSX and TSXU) and Stockholm (Stockholmborsen). In October 2009 and upon the application of UC RUSAL, Ogier was instrumental in Jersey being approved as an Acceptable Overseas Jurisdiction by the HKSE, thus paving the way for other Russian, CIS (and other) businesses to use Jersey holding companies to float on the HKSE.
Jersey listed companies come from a wide variety of sectors, including metals, oil and gas, mining, pharmaceuticals, media, real estate, support services, construction and materials, finance and investment. Their businesses are typically international, and their names are often well known such as Randgold Resources Limited and Shire Plc (listed in London and in New York), Experian Plc, Petrofac Limited, WPP Plc and Regus Plc (all listed in London) and now UC RUSAL Plc (listed in Hong Kong and Paris).
Why list in Hong Kong?
Asia is a vast, and growing, market with the Chinese economy being the biggest. China has effectively become the second largest economy in the world after that of the US and is expected to overtake them within the next ten years. In other words, there is a significant amount of capital being generated in Asia, and in particular China, which is ripe for investment.
The HKSE is one of the largest stock markets in the world, within the top ten based on market capitalisation and also one of the most successful exchanges recently. In 2009, Hong Kong raised 22 percent of worldwide IPO capital, making it the largest centre of initial public offerings in the world, and it is projected that 2010 is likely to be a record year with businesses raising up to a staggering US$48bn in IPOs1.
Russian and CIS businesses have hardly tapped the Asian markets in terms of capital raisings. The new ability to access capital in China through the HKSE presents an attractive proposition to any Russian or CIS business especially if they have an obvious link with China which would undoubtedly help market their securities to Chinese investors (for example, an existing or potential demand for the company's output or product in China, or perhaps existing assets or manufacturing in China). Listing on HKSE presents significant investor reach which may be greater than some of the other exchanges around the world, where the economies where they are located are still suffering the effects of the global economic downturn and where recoveries are forecast to be slower.
As a major stock exchange, a primary listing on the HKSE can easily be accompanied by a secondary or dual listing on another exchange (demonstrated by the dual listing of UC RUSAL where they listed global depositary shares on Euronext Paris at the same time as listing their shares on the HKSE) giving a business even greater opportunity to raise capital by accessing other markets at the same time.
Why list in London?
London has for a long time been the principal European market, and in the absence of the links into an Asian investor base which Hong Kong may offer, it is going to be the most likely choice for a Russian or CIS business. Alternatively, even if an Asian listing is chosen, a dual listing in London may extend the investor reach further. With a track record of existing Russian and CIS businesses who have already come to that market, there is a familiarity amongst the professional advisors able to take the business through the process, as well as investors, which should hopefully achieve a successful IPO.
For the larger companies listing on the London Main Market, subject to meeting the criteria, Jersey companies are eligible to form part of the coveted FTSE 100 classification, as they are treated for those purposes as UK companies.
Why Choose a Jersey Company?
The principal reason to use a Jersey company is to gain a benefit or benefits which will ultimately make the IPO most attractive to as many investors as possible and generally put the company and its business in the best long term position to grow and develop. Here are some of the specific reasons which make a Jersey incorporated company attractive to both investors and the company itself.
Jersey has long enjoyed an outstanding international reputation offering investors the comfort of recognised reliability, substance and appropriate regulation.
The Island has for many years been subject to the OECD convention and therefore an OECD territory issuer. In April 2009, Jersey was designated from the outset by the OECD as a "white listed" jurisdiction meeting agreed international tax standards for information exchange and co-operation.
In addition, Jersey received one of the most favourable reports of all jurisdictions when the IMF published its report in September 2009 on the Island's anti-money laundering and countering of financial terrorism regime. The IMF report showed that Jersey complies with all of the core principles for effective banking supervision and complies with 44 of the 49 general FATF recommendations (the highest ever recorded by the IMF and compared with, for example, 36 for the UK and 33 for Switzerland).
Couple this standard of excellence with years of stability from an economic, political and financial point of view, and the presence of highly experienced professionals in the Island within a finance industry representing some fourteen percent of Jersey's population, and it is easy to see why Jersey has earned and retained its global reputation as a first class international finance centre with a proven track record for attracting investment from around the world.
Many Russian, CIS and other businesses with an international reach can derive a real advantage from their holding company being incorporated, managed and controlled in a tax neutral jurisdiction such as Jersey. As a consequence, investors in such Jersey holding companies will gain a similar advantage. In Jersey:
- there is no corporation tax, capital gains tax or capital transfer tax;
- there is no requirement for a Jersey company to make any withholding or deduction on account of Jersey tax in respect of dividend or interest payments; and
- no stamp duty or similar taxes are payable on the issue or transfer of a Jersey company's shares (although note that another jurisdiction may apply their own stamp duty when trading listed shares - for instance Hong Kong stamp duty may be payable on a transfer of shares in a Jersey company if the shares are registered on an overseas branch register kept in Hong Kong).
In terms of income tax, the general rate of Jersey corporate income tax payable by companies that are tax resident in the Island is zero per cent. Moreover, a Jersey company may elect not to be resident for tax purposes in Jersey - and so exclusively tax resident elsewhere - if:
- its business is managed and controlled in a jurisdiction other than Jersey;
- it is tax resident in that jurisdiction; and
- the highest rate of corporate income tax in that jurisdiction is 20% or higher. Consequently, companies formed as listing vehicles can expect to pay no income tax in Jersey, irrespective of whether or not they are tax resident in the Island.
As well as offering a potentially extremely favourable tax environment, Jersey's corporate laws also appeal to businesses and investors alike. This is principally because:
- they are familiar: Jersey's principal corporate statute, the Companies (Jersey) Law 1991 (as amended) ("the "Companies Law"), is to a large extent modelled on, and uses many of the same concepts as, previous English Companies Acts which were the basis for the Hong Kong Companies Ordinance. A Jersey company's constitution is therefore very similar to that of a Hong Kong or English company and the overall form and content of its memorandum and articles of association will therefore be familiar to investors in Hong Kong or London and will typically provide equivalent rights and protections; and
- they are flexible: the Companies Law, whilst robust, offers a degree of flexibility not afforded by Hong Kong or English law in certain key aspects. The flexibility of the Companies Law allows any necessary changes to be made to the constitutional documents of a Jersey company to accommodate investor expectations and/or to satisfy the listing rules of a particular stock exchange.
Some examples of this familiarity and flexibility are considered below:
- Pre-emption Rights: HKSE investors would be familiar with the lack of statutory pre-emption rights under Jersey law for existing shareholders to be offered shares before new investors as the position is the same under Hong Kong law. For a London listing preemption rights on the issue of shares are often included in the articles of a Jersey listing vehicle in order to enhance investor protection;
- Disclosure of interests in shares: there are no statutory disclosure and transparency provisions under Jersey law requiring shareholders to disclose interests in shares but under Hong Kong's Securities and Futures Ordinance, substantial shareholders are required to disclose interests in shares of Hong Kong listed companies. For listings in London, it is commonplace to build provisions into the Jersey company's articles to reflect the disclosure requirements of the relevant stock exchange;
- Takeover Codes: Hong Kong's Codes on Takeovers and Mergers and Share Repurchases applies to takeovers, mergers and share repurchases affecting public companies in Hong Kong and companies with a primary listing of their equity securities in Hong Kong (and therefore would apply to a Russian, CIS or any other business with a primary listing on the HKSE). Hong Kong's Takeover Code is generally modelled on the UK City Code on Takeovers and Mergers which applies to Jersey companies that are listed on London's Main Market and to other Jersey public companies that are centrally managed and controlled in Jersey. For those Russian, CIS and other businesses using a Jersey holding company to list in London and to which the Takeover Code (or a similar code) does not apply to that holding company, it is usual (and arguably best practice in order to provide investors with comfort) to include provisions in the articles prohibiting or restricting the acquisition of shares in the circumstances envisaged by the UK Code and giving the directors wide powers (commensurate to the extent possible with those vested in the Takeover Panel) to deal with a breach of any such prohibition or restriction.
- Repurchase of Shares: A business using a Jersey holding company may repurchase its shares from any source provided that a cash-flow solvency test is met. For a London listing, this gives Jersey listed companies an edge over their English counterparts in circumstances where the procedure allowing a company to purchase its own shares out of capital is only be available to private companies. However, for Hong Kong listings, the HKSE presently requires Hong Kong listed companies to be subject to the section of the Hong Kong Companies Ordinance where purchases may only be made out of distributable profits, proceeds from fresh issues of shares etc and therefore it is recommended that the articles of the listing company include appropriate wording to that effect.
- Distributions: A business using a Jersey holding company can make a distribution from that Jersey holding company out of any source other than the nominal capital account or capital redemption reserve, provided that the company is able to carry on its business and discharge its liabilities as they fall due for 12 months after the distribution. The ability for Jersey companies to distribute from a wide range of sources in this way may be an advantage over other companies seeking to maintain a consistent dividend policy, including Hong Kong and English public companies which need to have qualifying profits and satisfy additional capital maintenance requirements in order to make a distribution.
How is the Jersey Holding Company Introduced?
A Jersey holding company can be introduced into a group structure in a number of different ways. These include the following.
We are often approached by entrepreneurs who are setting up a business that they intend to float in the months or years to come. In these cases, we are able to incorporate a Jersey company from the word go and, working with the client's tax advisers, put in place the most effective structure from the outset to meet the client's needs.
We are just as frequently asked to work with existing businesses that wish to introduce a Jersey holding company into their current group structure. In these cases, we incorporate the new Jersey company and then reorganise the existing group companies so that the Jersey company is placed at the top of the structure. This can be done in a number of ways, although a simple share for share exchange or a court approved scheme of arrangement are probably the most common, depending on the circumstances.
Migration or Merger
If the laws of the existing country of incorporation permit, an existing foreign holding company may migrate to Jersey. In doing so, it ceases to be incorporated in its original country of incorporation and instead continues in existence as a registered Jersey company.
Similarly, new provisions to be introduced into Jersey company law during 2010 are expected to allow a foreign holding company to merge with, and continue as, a Jersey company.
The migration and merger routes may be used when using a Jersey holding company will provide the added benefits which have already been identified above to both the company and investors alike.
By doing this it may be possible to achieve results which may not be possible, or may be less attractive, using the existing holding company or the introduction of a new holding company into the group structure.
Establishing and Marketing the New Jersey Holding Company
Forming and maintaining the holding company
Incorporating a new Jersey holding company is straightforward and can be done on a same day basis. Once incorporated, the company must maintain its registered office and register of members in Jersey but is not required to have Jersey-resident directors. Ogier frequently handles the incorporation process for its clients and also provides registered office and company secretarial services on an ongoing basis.
In addition, electronic registrar services can be provided locally in Jersey to support the volume of trading in shares of a listed company. Jersey law specifically permits securities to be uncertificated and a Jersey company's shares are capable of being held in dematerialised form. In London, traded shares are cleared in the CREST system. For a Hong Kong listing, a branch register is established in Hong Kong and to provide greater ease in trading, shares listed on the HKSE are typically issued in the name of HKSCC Nominees Limited, a wholly-owned subsidiary of HKSCC (the Hong Kong Securities Clearing Company Limited) which operates CCASS (the Central Clearing and Settlement System) in Hong Kong. Brokers are provided with stock accounts through which they can trade shares.
Marketing the company's shares
In terms of marketing, the shares in a Jersey holding company will generally be capable of being marketed freely from a Jersey law perspective. One point to note is that the offer/admission document that is sent to prospective investors may amount to a prospectus for Jersey law purposes, and certain basic steps need to be taken as a result. However, these are not considered onerous particularly when Jersey approvals will generally be given concurrently with and on the same basis as other formal approvals which may also be required in certain markets where the shares may be sold:
There are other marketing considerations which may have an impact on how one structures a listed holding company. For example, some investors, particularly those in Europe and North America, require shares or securities to be issued by an issuer which is appropriately recognised or regulated (e.g. an OECD territory issuer). Some require any investment to be held as shares rather than depositary receipts - Jersey companies can do both. Thus, with its high standards and wide recognition, Jersey as a jurisdiction can normally provide that crucial advantage to a successful offering.
1 www.bloomberg.com , 21 December 2009
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.