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.
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
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.
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