UK: Cash Boxes: The Use Of Jersey Companies In Rights Issues

Last Updated: 30 March 2009
Article by Jonathan Walker

Structuring a rights issue for a UK PLC using a Jersey cash box vehicle can both make it easier to implement and add to the benefits from it. The advantages that a cash box structure offers are flexibility in relation to making the offer and, in relation to the proceeds of the issue of the shares, the availability of merger relief under the UK Companies Act.

Background

The turmoil in the financial markets has reduced the availability of debt financing and has simultaneously created a need for banks and other companies to recapitalise their balance sheets. There are various methods of raising equity capital but, for large equity fund raisings, rights issues are probably the preferred mechanism: they are perceived as fairer to the wider body of shareholders than the other methods; the right to subscribe for the shares is tradable; and, a particular advantage in the current market conditions, there is no maximum discount at which the shares can be offered, unlike in the case of placings and open offers.

Rights issues can, however, be slow or cumbersome to implement. Until the beginning of this year, rights issues for UK PLCs required a minimum of 23 days (or 39 where a general meeting is required) and may take considerably longer. This has a number of undesirable consequences. These have been recognised by the FSA in its recent policy statement reducing the minimum rights issue subscription period in the Listing Rules to 10 business days.

The Association of British Insurers has also revised the guidance it issues about the expectations of institutional investors in relation to authorising the allotment of new shares and disapplying statutory pre-emption rights in respect of allotments. ABI Members will now regard as routine requests for authorisation to allot new shares in an amount of up to one third of the existing shared capital and, subject to satisfying certain criteria, will also regard as routine requests to authorise the allotment of a further one third. The effect is that rights issues have become a quicker and easier way of raising equity capital.

Where a cash box structure is used, it allows flexibility in making the offer because the shares are issued for a noncash consideration and, consequently, the offer is not subject to the pre-emption restrictions that apply where shares are issued in return for cash. The benefit of this flexibility is clear in relation to placings but it is also valuable in relation to rights issues, particularly where there are shareholders resident outside the UK and for the purposes of placing shares which are not taken up under the rights issue.

Cash box structures also enable the rights issue to be structured so that the requirements for merger relief may be met for the shares issued in the rights issue. This has the advantage that the requirement to account for share premium is relieved and distributable reserves can be created.

This Briefing describes how cash box structures work and some of the reasons why Jersey companies are particularly well suited to cash box structures.

What is a cash box structure?

Incorporation of a subsidiary

A UK listed company ("UK PLC") that wishes to make a rights issue incorporates a new subsidiary which acts as the "cash box" ("Cashbox"). Cashbox is usually incorporated in Jersey (see below Advantages of using Jersey Companies), but in order to avoid the need for HM Treasury consent under the UK Income and Corporation Taxes Act, Cashbox must be managed and controlled in the UK for the purposes of UK tax. If merger relief is to be sought, a proportion of the equity share capital of Cashbox needs to be held by the institutions acting as underwriters of the rights issue (the "Underwriters") by UK PLC. Cashbox will also have a class of redeemable preference shares for issue to the Underwriters.

Subscription for and transfer of shares in Cashbox

UK PLC, the Underwriters and Cashbox enter into a series of agreements under which:

  • UK PLC and the Underwriters agree to subscribe for and pay up their respective ordinary shares in Cashbox;
  • the Underwriters agree to subscribe for the redeemable preference shares in Cashbox, to be issued fully paid for an amount equal to the net proceeds of the rights issue and to transfer to UK PLC all of the shares in Cashbox held by them in return for the issue by UK PLC of shares to investors exercising their rights; and
  • UK PLC agrees to issue new shares to investors taking up the rights in exchange for the transfer to UK PLC by the Underwriters of the shares that the Underwriters hold in Cashbox.

The agreements also contain option arrangements to enable the structure to be unwound if the issue of UK PLC's shares does not proceed.

Where a cash box structure is used in connection with a rights issue, the agreements will usually provide for Cashbox to issue more than one tranche of shares. A first tranche of ordinary and redeemable preference shares are issued to the Underwriters in conjunction with the initial take up of rights of UK PLC and are transferred by the Underwriters to UK PLC in consideration for the issue by UK PLC of its ordinary shares under the rights issue. Further tranches of redeemable preference shares and ordinary shares may also need to be issued to the Underwriters in respect of shares that are not taken up in the initial rights issue.

If it is necessary for there to be further issues by Cashbox of redeemable preference shares, it will also need to issue further ordinary shares in conjunction with the issue of redeemable preference shares so that the requirements for merger relief are satisfied in relation to each issue of shares by UK PLC and each transfer by the Underwriters of shares in Cashbox to UK PLC in consideration for the issue of those shares.

Payment of cash to UK PLC

As a result of the transfers of the Cashbox shares, Cashbox becomes a wholly owned subsidiary of UK PLC holding funds equivalent to the net proceeds of the rights issue. These may be lent by Cashbox or paid to UK PLC by way of redemption of the redeemable preference shares or distributed to UK PLC in a winding up of Cashbox.

Advantages of using Jersey Companies

Jersey companies are suited for use in cashbox structures for a number of corporate and tax reasons:

  • Jersey companies can be incorporated within a short timescale: using the urgent process, same day incorporation can be achieved for an additional filing fee of only £200.
  • Jersey companies are typically incorporated on a bespoke basis and are not shelf companies; incorporating a bespoke company makes it easier to demonstrate that Cashbox is a subsidiary of UK PLC with UK management and control from incorporation.
  • Jersey companies can be managed and controlled in the UK: there is no requirement for board or shareholder meetings to be held in Jersey or for there to be Jersey resident directors.
  • Jersey companies must retain their share registers and registered office in Jersey so that shares are transferred outside the UK
  • A Jersey company can redeem shares from any source of funds, including share capital, making Jersey companies more flexible in this regard than UK companies.
  • Jersey companies' law enables Jersey companies to issue no par value shares. These are shares that do not have a specified par value but are issued for an agreed price recorded in a stated capital account. The whole of the stated capital account may be used for the purposes of redeeming the shares.
  • Winding up solvent Jersey companies (for example at the end of the life of Cashbox) is a simple and quick procedure. It is not necessary to appoint a liquidator and the process can be completed within a day.
  • Jersey companies can be tax neutral and assist with the UK tax analysis. The Jersey tax position of Cashbox can be summarised as follows:
    • liable to 0% Jersey tax on income;
    • no Jersey capital gains tax;
    • no Jersey withholding tax;
    • no Jersey duty payable on the issue or transfer of shares;
    • Jersey companies are not resident for tax purposes in Jersey if the business is centrally managed and controlled outside Jersey in a country or territory where the highest rate at which any company may be charged to tax on any part of its income is at least 20%; and
    • transfers of shares are carried out on the register which is required to be maintained in Jersey and all transfers and share certificates can be executed and retained in Jersey, outside the UK.
  • Jersey has an experienced professional infrastructure accustomed to managing the regulatory, technical and practical demands of cashbox structures.

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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