As the extension of various forbearance measures and fiscal support packages continues in response to the global pandemic, Appleby has seen an increase in structuring and restructuring activity. Corporates and corporate groups are using this time to "right size", restructure existing debt and deploy other processes to secure sustainability and the long term future of businesses.
Interestingly, although not surprisingly, we have seen an increase in the use of Jersey entities in such restructuring exercises.
Jersey entities are seeing a rise in popularity in group reorganisations, which can often involve the introduction of a Jersey entity as an investment or acquisition holding structure, particularly in a private equity context and where international investors are managing cross-border investments. Jersey entities may be formed quickly and cost efficiently with each type of entity providing its own degree of flexibility for structuring purposes. Jersey holding companies can be introduced into a structure in a variety of different ways ranging from incorporation of a new entity, merger or migration into Jersey (where permitted by the laws of the country of incorporation of the relevant entity) and through other forms of business combination such as pursuant to a scheme of arrangement or restructuring plan.
In this context, there are several advantages to using Jersey entities as follows:
- Jersey company law is very closely aligned to English company law and so there is a sense of familiarity in the constitution of a Jersey company and when navigating the legal framework of Jersey incorporated entities.
- Jersey is a tax neutral jurisdiction and a Jersey company can provide tax neutrality at a holding company level.
- Jersey does not levy stamp duty or any equivalent transfer tax on the transfer of shares in Jersey companies.
- Creditor protection in relation to distributions does not rely on distributable reserves, but is instead based on a requirement (subject to certain exceptions) for the directors who authorise a distribution to make a 12-month, forward-looking, cashflow based solvency statement in a prescribed form. Thus accumulated losses are not necessarily a bar to distributions of free cash.
- There is no requirement for distributable profits in order to fund a repurchase or redemption of shares out of a non-capital account, and there is no requirement for available profits in order to fund a repurchase or redemption out of capital; subject to a cashflow based solvency statement requirement, shares can be redeemed or repurchased out of any company account (including capital accounts).
- Jersey law does not impose any restrictions on financial assistance in connection with the acquisition of shares in the relevant company
Examples of Jersey processes
Jersey companies have been particularly popular in the private equity space due to the flexibility that can be worked into an exit. Jersey has long benefitted from a merger regime, which allows two or more companies (which do not have to be Jersey incorporated companies) to merge. In addition, Jersey company law provides for a Jersey company to enter into a scheme of arrangement with its members or creditors (or any class of them), subject to the sanction of the Jersey court. The statutory process is largely similar to English schemes, which can involve almost any kind of corporate restructuring, merger or acquisition so long as the appropriate approvals and court sanction are obtained.
Jersey company law provides flexibility on how assets and liabilities of the participating entities are dealt with and the final ownership structure, including an ability to cash out shareholders, and can therefore be used as an additional method to achieve takeovers and spin-outs etc.
As we have previously commented upon, the Jersey demerger regime can facilitate restructuring of Jersey companies in a number of ways, including:
- Executing a pre-sale restructuring or corporate simplification exercise;
- Introducing new holding structures to facilitate a reorganisation of different classes of assets or asset portfolios; or
- Allowing for existing businesses and risks to be identified and separated between entities within a group.
Finance and re-financing transactions including Jersey security interests
It is also worth noting that in relation to a finance or re-financing transaction that includes Jersey obligors, lenders can take comfort from the legal position in Jersey that their enforcement rights in respect of perfected Jersey security interests will not be curtailed in the event of insolvency of the grantor. The Security Interests (Jersey) Law 2012 provides that, if the grantor of a security interest becomes bankrupt or the grantor or its property is subjected to Jersey or foreign insolvency proceedings that does not affect the power of the secured party to appropriate or sell collateral, or otherwise act in relation to collateral in connection with enforcement. Lenders with the benefit of perfected Jersey security interests as a result of any restructure or refinance, can therefore take comfort from this.
Multi-jurisdictional restructuring expertise
Finally, and aside from the practical advantages touched upon above, Jersey's international reputation as a stable, well-regulated international finance centre can provide assurance for all stakeholders. Many businesses with an international reach can gain an advantage from their holding company (or intermediate holding stack) being incorporated (and sometimes managed and controlled) in Jersey, which can offer a tax neutral business environment and familiar corporate laws. For restructurings that may require implementation by way of a court sanctioned scheme, members and creditors can take comfort from the Royal Court of Jersey being well versed in matters of cross border restructurings. There are numerous authorities that can be pointed to demonstrating the willingness of the Royal Court to extend co-operation to other courts.
Appleby has recently been involved in several high-profile cross-jurisdictional restructuring matters. We are experts in dealing with instructions from public and private companies contemplating takeover offers, potential bidders and those seeking to compromise creditors, all of whom seek to utilise the scheme of arrangement framework as a means of achieving their desired corporate outcome. Our clients are particularly attracted to our ability to advise across the three Crown Dependencies, Jersey, Guernsey and the Isle of Man.
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.