Amendments to the LLC Law
The States of Jersey made various amendments to the Limited Liability Companies (Jersey) Law 2018 in May, with some significant changes to fiduciary duties which should be noted before LLCs become available for registration later this year.
Although the LLC Law came into force in early 2019, the corresponding fanfare may have been slightly premature since LLCs can't be registered until enabling legislation is passed, and the Companies Registry creates forms and systems for accepting their registration. It is now expected that LLCs will be ready for registration from 1 December 2020 - the same day that the new Registry Law1 comes into force.
LLCs are mainly aimed at the US market, particularly for alternative investment and hedge funds, and their introduction by Government is part of a deliberate US-focussed strategy which, combined with the opening of Jersey Finance's New York office last year, is intended to position Jersey as a suitable entrepôt for American investment into European assets, building on the nearly £200 billion of US assets already administered in Jersey. For this reason, they are also present in several other offshore jurisdictions such as Bermuda, the Cayman Islands and the Isle of Man. This US-focussed context is important when trying to understand the reasons behind some of the nuances in the LLC Law.
From our perspective, the most notable change made by the amendment is the substantial scaling-back of fiduciary duties owed by managers2 of an LLC. Whilst the original LLC Law copied the fiduciary duties of directors under Article 74 of the Companies (Jersey) Law 1991, the amendment provides that a manager does not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than a duty to act in good faith3 . This change seems to be designed to bring LLCs in line with other jurisdictions such as the US.
On the other hand, it should be noted that the amendment adds that where an offence is committed by an LLC, and that offence is committed with the consent or connivance of a manager, or is attributable to the negligence of a manager, then the offence is also committed by that manager. Thus, the risk for managers in the criminal sphere is potentially more onerous than the corresponding risk for directors of Jersey companies. In a world where Jersey's authorities are flexing their financial crime-related prosecution muscles in preparation for Jersey's next Moneyval assessment, that risk should not be taken lightly.
Legal form of LLCs
LLCs are stated in the LLC Law as having legal personality without being a body corporate. Whilst this distinction may be initially confusing, it should be understood as giving LLCs a combination of the limited liability protection of a company with the constitutional flexibility and privacy of a partnership. Going back to the US market focus of LLCs, this can be understood as both reflecting the position in US law and being more helpful from a foreign tax reporting point-of-view by affording the opportunity for the LLC to elect to be either transparent or opaque for US tax purposes.
At present, the LLC Law doesn't require the LLC agreement, being the key constitutional document of the LLC, to be filed with the Registry. There is a question in my mind as to whether this can remain the case indefinitely, since the Financial Action Task Force's Recommendation 2434 requires that the constitutional documents of companies be publicly available on the company register. The avoidance of criticism on this point in Jersey's next Moneyval report may hinge on persuading the assessors that LLCs are legal arrangements not legal persons, that is, more like a partnership than a company in legal form.
A note on the Registry Law
The LLC Law is just a piece in a wider jigsaw of changes for the Companies Registry which, alongside the Registry Law, include updated and slicker digital infrastructure. The Registry Law effectively imports Recommendation 245 and enables the Government of Jersey to create further regulations regarding publicly-available information. Back-end infrastructure changes are intended to both improve the user experience (the ultimate ambition being that TCSPs will be able to automatically update Registry entries pulled from company secretarial software using APIs) and the Registry's own information management. In time, that improved information management, and regulations made under the Registry Law, will form the foundation on which Jersey's public register of beneficial ownership will be created and ported with European registers under AMLD5. They will also provide opportunities for the Registry, the JFSC generally, and the States of Jersey Police Joint Financial Crimes Unit, to implement more sophisticated financial crime monitoring systems, putting Jersey in a stronger position for its next Moneyval assessment (whenever that may be - possibly around 2022).
These changes are all advantageous to Jersey's international reputation and political standing, the value of which should never be lost on the Island's finance industry in the long term. In the medium term, however, the heightened relevance of compliance and the risk of enforcement will continue as key themes for business risk registers, both in Jersey and its sister Bailiwick.
Of more immediate relevance to the industry, the Registry Law will require registers of directors to be filed with the Registry for the first time. Whilst we expect there to be a transitional period on registers of directors, it will in all likelihood become mandatory at some point in 2021. What will this look like in practice and how will it work for professional directors in the Island? Watch this space.
Other minor changes under the Amendment Law include:
- The removal of references to Jersey customary law, with the external target market in mind;
- Clarification that if a member or manager of an LLC becomes aware that information contained in the registration declaration was false or inaccurate, then the LLC must deliver an amendment statement to the registrar to correct the information;
- Increased flexibility for the Registrar to change the forms used for the registration of an LLC;
- A requirement to keep a list of names and addresses of the secretary and each deputy secretary in addition to the managers and members, and clarification that a notice of trust must not be entered on the register, and that details of an assignee of an LLC interest are not required to be entered.
1. The Financial Services (Disclosure of Information) (Jersey) Law 2020
2. For present purposes, managers can be equated to the directors of a company, although the managers of an LLC can also be the members at the same time (as distinct from the duality of shareholder-directors of companies)
3. This is stated as being subject to the LLC agreement. Presumably, therefore, the subject of whether a given LLC agreement should contain fiduciary-like duties will occupy the chargeable time of us Jersey lawyers for some time to come.
4. Relating to Transparency and Beneficial Ownership of Legal Persons and Arrangements.
5. Which has hitherto been awkwardly shoe-horned into COBO.
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