Acquisitions of businesses can be subject to and conditional upon a number of approvals. Change of control or ownership of regulated companies and structures will inevitably be subject to regulatory approval in the jurisdiction where the target company is regulated. Procuring regulatory approval can also be necessary in circumstances where a regulated group is looking to restructure the business, perhaps in order to rationalise the structure and alleviate regulatory and other filing costs.
Appleby has seen considerable consolidation in the fiduciary services market in recent times and has advised upon a number of change of control scenarios in different contexts. This note provides an overview of the Jersey legal position and process of change of control of such regulated entities in Jersey. This note does not seek to cover other permissions that may be required, for example under business licensing or competition laws.
JERSEY LAW POSITION
The Jersey Financial Services Commission (JFSC or the Commission) regulates all registered persons, being companies, and certain inpiduals registered on their behalf, registered with the JFSC for the purposes of conducting regulated activity within the financial services sector in or from within Jersey. The JFSC considers the composition of the ownership structure of a registered person an essential element of an entity's ability to satisfy the JFSC's requirement that it is a fit and proper person to hold a registration under the Financial Services (Jersey) Law 1998 (the FS Law).
Under the FS Law, certain notification and pre-approval requirements, which allow the JFSC to vet and monitor shareholder controllers of regulated entities in Jersey, must be met. A direct or indirect change of control or ownership of a registered person that crosses statutory thresholds (see below) can trigger the need to notify the JFSC and procure confirmation of no objection, before the change is implemented.
Given that this requirement for regulatory approval can be triggered by an indirect change, a proposed acquisition or internal restructure may require a review of the ownership and control structure of both the registered person and, on a 'look-through' basis, of the entities and persons sitting above the registered person as part of an owning or controlling group in order to determine the prior notification or approval requirements.
WHAT ARE THE THRESHOLDS?
Article 14 of the FS Law provides that no person who is a shareholder controller (as defined below) of a Jersey regulated company shall increase, reduce or dispose of his or her holding in the company concerned so that the proportion of the share capital or voting rights held by the person in the company reaches, exceeds or falls below 20%, 33% or 50%, or so that the company becomes the subsidiary of such person or ceases to be such subsidiary, as the case may be, unless the person has notified the Commission in writing of his or her intention to increase, reduce or dispose of such holding, as the case may be, and the Commission has notified the person in writing that there is no objection to the person's so doing.
A shareholder controller is defined in the FS Law as a person who, either alone or with any associate or associates –
- directly or indirectly holds 10% or more of the share capital issued by the company,
- is entitled to exercise or control the exercise of not less than 10% of the voting power in general meeting of the company or of any other company of which it is a subsidiary, or
- has a holding in the company directly or indirectly which makes it possible to exercise significant influence over the management of the company.
The definition of associate includes any person with whom the first mentioned person has an agreement, arrangement or other obligation –
- to act together in exercising voting power,
- with respect to the acquisition, holding or disposal of shares or other interests in a company, partnership or other association.
When negotiating a proposed acquisition, care needs to be taken with regard to control of the exercise of voting rights to ensure that the buyer and seller so not inadvertently become associates before regulatory consent is obtained.
WHAT IS THE PROCESS TO OBTAIN CONFIRMATION OF NO OBJECTION OR NOTIFY?
The submission to the JFSC has two components:
- PRIOR APPROVAL APPLICATION BY INCOMING OR EXISTING SHAREHOLDER CONTROLLER
Any shareholder controller or prospective shareholder controller of a Jersey regulated entity will need to approach the JFSC to request confirmation of no objection to the proposed increase, reduction or disposal of their shareholding, if this crosses the statutory thresholds specified above.
A shareholder controller who disposes of any part of his/her shareholding in the registered person, such that the shareholder controller reduces its holding through the subsidiary, 50%, 33% or 25% thresholds, without first obtaining the Commission's no objection risks committing an offence.
- NOTIFICATION REQUIREMENT
The relevant regulated Jersey entity (or entities) is also obliged to notify the JFSC of the change. Under the FS Law, a registered person shall, before the end of one month beginning with the day on which the registered person becomes aware that any person has increased, reduced or disposed of his or her holding, as the case may be, or is about to do so, give written notice to the Commission of that fact. The relevant regulated Jersey entity will also be obliged, under relevant Code(s) of Practice, to deal with the JFSC in an open and co-operative manner. As such, the relevant regulated entity or entities should discharge its obligations under the Codes by informing the JFSC of the change in ownership structure.
In practice, the submissions of the incoming shareholder controller and the locally regulated entity are often made jointly. There is no prescribed form for the submission and it is open to the JFSC to request such additional information as they require. It is often helpful to include pre and post change structure charts with the submission, so that the change in the ownership structure can be easily identified.
Finally, it should be noted that if the change to the ownership structure does not take place within one year of procuring confirmation of no objection from the JFSC, the confirmation shall lapse and a new submission will need to be made.
CONSEQUENCES OF FAILURE TO OBTAIN CONFIRMATION OF NO OBJECTION OR NOTIFY
Breach of Article 14 of FS Law is an offence: the penalty is a 2-year term of imprisonment and an unlimited fine.
If a registered person fails to notify the JFSC of a change of control of which it is aware, it will also be guilty of an offence and liable to a 6-month term of imprisonment and an unlimited fine.
This note is not intended to constitute or substitute legal advice. The facts of any proposed acquisition or restructure need to be analysed in detail in order to properly advise on compliance with the requirements of the FS Law.
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.