Jersey: Demerger

Demerger provisions were anticipated in the Companies (Jersey) Law 1991 (as amended) and now the Companies (Demerger)

(Jersey) Regulations 2018 (the "Regulations") are coming into force on 1 September 2018.

What is a Demerger

The principle of a demerger regime is to enable a company to divide its assets and liabilities between two or more companies and for the transfer of such assets and liabilities to be by operation of law.

A split up demerger means that the original entity may cease to exist and there would be two or more new entities continuing the business. A spin off demerger means that the original entity continues with one or more new entities set up. Both options are available in Jersey.

Terminology in the Regulations

The terminology in the Regulations includes the following:

  1. Demerging company means the company that is demerging;
  1. Demerged companies means the resulting companies;
  1. Survivor company means the original company if it continues to exist; and
  1. New company means any company resulting from the demerger that is not a survivor company.

Application

The demerger regime is applicable to Jersey companies demerging into Jersey companies and the Regulations specifically set out a list of companies not eligible to demerge, which are summarised under "Who is Eligible to Demerge". Currently the regime will be applicable only to Jersey companies that are not liable to pay tax (either at the company or shareholder level), although there are plans to extend the regime once appropriate amendments have been made to the underlying tax legislation.

Banking and insurance businesses are excluded from the regime on the basis that procedures are already in place in relation to transfers of such businesses.

To note that for most international clients with Jersey companies that are non-Jersey resident owned, it is likely that the demerger regime will be available.

A Flexible Option for Jersey Companies

Whilst a Jersey company may also wish to consider a scheme of arrangement, sale of assets or liquidation, it has been widely recognized commercially that another flexible option, such as demerger, would be helpful.

A demerger allows more flexibility for a Jersey company and is cost efficient, whilst at the same time provides the necessary protections for shareholders and creditors.

From a commercial perspective, a demerger may be used in the following circumstances (noting that this list is not exhaustive):

  1. for succession planning for a family or other business where assets could be split between two or more companies;
  2. for splitting out assets or risks which aren't compatible with the rest of the business;
  1. for splitting out different strands of businesses which would allow management to focus on each strand separately;
  1. to split out and "warehouse" illiquid assets for a fund;
  1. to prepare a company for a sale and to split out assets or risks that may not be of interest to a potential buyer; or
  1. to enable easier analysis of a particular part of a business for investors.

The process to demerger is set out under "Process - the Steps to Demerger".

Protection of Shareholders, Creditors and Employees

Solvency

The demerger regime is also designed to ensure third parties are suitably protected. As a general policy direction by the Jersey law-makers, this protection is ensured by focusing on solvency.

Each of the directors of the demerging company who vote for the demerger have to sign a certificate including either a Solvency Statement or a statement that the directors are satisfied on reasonable grounds that there is a reasonable prospect of obtaining the permission of the Court to the demerger.

A "Solvency Statement" is a statement that, having made full enquiry into the affairs of the demerging company, the person making the statement believes that the demerging company is, and will remain until the demerger is completed, able to discharge its liabilities as they fall due.

Each of the proposed directors of the demerged companies also have to sign a similar certificate in relation to the expected solvency of the demerged companies for the twelve month period immediately following the demerger. If the proposed directors are all new directors then one of the existing directors who signed the Solvency Statement of the demerging company will also need to sign the post demerger certificate.

It is an offence to sign any of these certificates without having reasonable grounds to do so and to give any false or misleading or deceptive information. The offence is punishable by imprisonment up to two years and a fine.

Where solvency is an issue, the Court will only sanction a demerger if it is satisfied that the demerger would not be unfairly prejudicial to the interests of any creditors or shareholders of the demerging company.

Shareholders

A demerger must be approved by special resolution of the shareholders at an EGM (so at least two-thirds majority) and can be vetoed. The shareholders must have the relevant information provided to them in order that they may make an informed decision. If a shareholder objects to the demerger, they can let the demerging company know and then make an application to Court. If the shareholder would be unfairly prejudiced by the demerger then the Court can make any order that it thinks fit for giving relief.

Creditors

Where a Solvency Statement has been made, any creditor with a claim of over £5,000 (a "Creditor") has to be sent notice of the demerger and a notice should also be published in a local newspaper or published in another approved manner. A Creditor can also review the demerger instrument (see "Demerger Instrument" for further details of the demerger instrument), which may have commercially sensitive information redacted. A Creditor can object to the demerger, serve a notice on the demerging company of such objection and, if its claim is not paid, it may apply to the Court for an order either restraining the demerger or modifying it, on the basis that the Creditor (or any other creditor) is being unfairly prejudiced.

If Court approval is being sought to the demerger then a Creditor has a right to be heard by the Court.

Employees

Unless specifically mentioned, the contracts of employment between the demerging company and its employees will automatically transfer to one of the demerged companies with no changes to the terms and conditions.

All employees have to be sent notice of the demerger and they can review the demerger instrument, which may have sensitive information redacted.

An employee can object to the transfer of his/her contract of employment. If the objection is still in place at the time of the demerger, the employee would be treated as having resigned from the demerging company with effect from the date of the demerger.

Effects of Demerger

Where do the assets and liabilities of the demerging company end up following a demerger?

Subject to certain limitations, the demerger instrument will specify where each of the demerging company's assets and liabilities go.

The demerger instrument is a critical document in the demerger process and must be executed by the demerging company. There are certain requirements in the Regulations around what needs to be included in the instrument and in general terms it sets out the terms and means of affecting the demerger. The requirements are set out under "Demerger Instrument" below.

What if the demerger instrument doesn't refer to specific assets ("Omitted Assets") or liabilities ("Omitted Liabilities")?

Ideally the demerger instrument should include sweep up language to cover Omitted Assets and Omitted Liabilities (even if certain assets and liabilities are not specified) however if it doesn't, the default position is as follows:

  1. Omitted Assets will be held jointly in common in equal parts between the demerged companies in equal shares; and
  1. Omitted Liabilities of a civil nature will be equally held jointly and severally by the demerged companies.

Ideally all assets and liabilities will be included in the demerger instrument.

Who is eligible to Demerge

The explanatory note of the Regulations states:

"A company that is registered under the Banking Business (Jersey) Law 1991 or that is a permit holder under the Insurance Business (Jersey) Law 1996 would not be eligible to demerge or to become a demerged company. A company specified in Regulation 2(3) would not be eligible to demerge or to become a demerged company, including a company that is a financial services company within the meaning given in Article 3(1) of the Income Tax (Jersey) Law 1961 that is subject to tax under Article 123D of that Law and a utility company within the meaning given in Article 123(3) of the Income Tax (Jersey) Law 1961. A company which is under investigation in relation to an offence or has been charged with an offence and against which there is a criminal prosecution pending would not be eligible to demerge or to become a demerged company until the conclusion of the criminal prosecution."

To note that a financial services company within the meaning given in Article 3(1) of the Income Tax (Jersey) Law 1961 includes banks, fund administrators and custodians. A utility company within the meaning of Article 123C(3) includes The Jersey New Waterworks Company Limited, the Jersey Gas Company Limited, the Jersey Electricity Company Limited and any company holding a telecommunications licence, postal services licence or ports operations licence.

Process - the Steps to Demerger

The Chief Minister's Department Consultation Paper in relation to the Regulations neatly summarises the path the demerger as follows:

"The path to demerger

Full detail is included in the Regulations but the process in summary is as follows:

Assuming directors can sign statement of solvency at Step 3

Step 1 Prepare demerger instrument Step 2 Directors pass resolution

Step 3 Directors and/or proposed directors of demerged companies sign certificates Step 4 Notice of EGM given with specified information/documents

Step 5 Approval of Demerger by Special Resolution of members at EGM

Step 6 Written notice to each creditor with claim over £5,000 and notice to employees. Self-certification to Taxes office.

Step 7 and Articles of Association and Memorandum available for inspection and notice of demerger published in Jersey paper (or other approved method of publication)

Step 8 Apply to Registrar of Companies to complete demerger providing specified documents Step 9 Demerger registered by Registrar upon which registration the demerger is complete

If the directors cannot sign statement of solvency at Step 3, court permission is required

Step 5A Company applies to court for permission on the ground that the demerger is not unfairly prejudicial to the interests of any creditor or member (with copies of application to specified parties).

Step 5B Court order

If a Member objects

Step 6A Objecting member notifies company of objection and applies to court for order that demerger would unfairly prejudice the interests of the member

Step 6B Court order and filing with Registrar

If a Creditor objects

Step 7A Objecting creditors notify company of objection and apply to court for order restraining or modifying demerger

Step 7B Court Order"

Demerger Instrument

A demerger instrument must state the terms and means of effecting the demerger and in particular:

 

  1. the details of the demerging company;
  1. whether it is to be a survivor company or not;
  1. the names and addresses of the directors of the demerging company;
  1. details of any arrangements necessary to complete the demerger;
  2. details of payments to be made to a member or director of the demerging company;
  1. details of any securities of the demerging company that are to be converted into securities of a demerged company;
  1. the demerged company is to be a new company, the proposed memorandum and articles of association, the name and address of any directors and any other document that would be required under Part 2 of the Companies Law;
  1. if the demerging company is to be a survivor company, any amendments to the memorandum and articles of association and names and addresses of any director changes;
  1. identify which part of the undertaking, property, rights and liabilities of the demerging company and is to become the undertaking, property, rights and liabilities of each demerged company , except that a liability attached to any property of a demerging company must not be separated from that property.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Carey Olsen
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Carey Olsen
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions