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.