Until now, barely a week could go by for finance lawyers and trust company directors in Jersey without someone entering into a long-standing debate about whether an "upstream" guarantee could be a distribution for the purposes of Jersey Law. However, that has changed. This article considers the benefits and practical implications of the Companies (Amendment No. 11) Jersey Law 2014 (the Amendment) in respect of deemed distributions, curing previously unlawful distributions, and ratification of directors' other breaches of duty.
THE UPSTREAM DEBATE
Prior to the entry into force of the Amendment, it was necessary to consider whether an upstream guarantee or other similar arrangement could be a distribution. If, for example, a guarantee were given to guarantee the obligations of the sole shareholder of the guarantor, and the guarantee were to be called upon the next day, there would be little in the Law (pre-Amendment) to rule out the possibility that a distribution had been made (although the debate would inevitably rumble as to whether that were true where the guarantee was not expected to be called upon, as would normally be the case). Some directors were advised that it was not a distribution, entering into upstream guarantees on the basis of board minutes only; while other directors were advised (or required by lenders' counsel) to be more cautious, and follow the solvency statement procedure set out in Article 115 of the Law.
The Amendment adds much-needed clarity to Article 115, making it clear that the restriction on distributions does not apply to a distribution which does not reduce the net assets of the guarantor. In normal situations, an upstream guarantee would not reduce the net assets of such a guarantor, and so we now know for certain that an upstream guarantee does not trigger the requirement for directors to give the statutory solvency statement.
THE CURE
While helpful in this regard, the Amendment only changed the Law going forward; it did not settle the debate that existed under the old law in respect of transactions entered into before the Amendment came into force. Therefore, where an upstream guarantee was given or other deemed distribution made under the old law without an Article 115 solvency statement, it should be noted that the potential breach would not be cured by the Amendment. However, the Amendment does introduce a court application procedure whereby a previously unlawful distribution can be ratified. Whilst the ratification does involve a court application, which can be time consuming and costly, it does have the advantage of allowing the distribution to be treated as lawful at the time it was made.
RESOLUTIONS AND RATIFICATIONS
The Amendment has also altered the law on ratification of directors' breach of duty. Under the law prior to the Amendment, a unanimous authorisation of the shareholders under Article 74(2) was required in order to sanction or ratify a breach. A new Article 74(3) has been added allowing the same procedure to be carried out by ordinary resolution (or special resolution if the articles of association require). Furthermore, previous difficulties associated with the meaning of "unanimous" in the context of non-voting and other limited right shares have been removed. On a related note, changes have been made to the regime for passing written resolutions, allowing for non-unanimity, and setting out the procedure for doing so. The articles of association of the relevant company can set different thresholds for different resolutions, adding a welcome degree of flexibility to companies, while still allowing for a welcome degree of protection for minority shareholders.
These changes, along with other simplifications such as the introduction of a solvency statement route for a reduction of capital; improvements to the rules on mergers and demergers; improvements to the rules on prospectuses; and private companies no longer being required to hold an AGM unless they opt-in by special resolution all serve to update and simplify the Law and improve its usefulness to the international cross-border finance transactions it supports.
Article first published in Connect, September 2014
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.
