On 1 September 2018, the Companies (Demerger) (Jersey) Regulations 2018 (the "Regulations") came into force, providing a statutory regime which will allow certain Jersey companies to be split into two or more companies.
The Regulations enable an eligible Jersey company (the "demerging company") to demerge into two or more companies (the "demerged companies"). The new regime is intended to strengthen the corporate law offering already available in Jersey and provide additional flexibility and cost-efficiencies to those using Jersey companies while providing the necessary protections for other interested creditors, shareholders and employees.
In overview, a demerger requires the following steps under the Regulations:
- a demerger instrument containing certain prescribed details must be signed by the demerging company;
- a special resolution must be passed by the shareholders (and each class) of the demerging company approving the demerger instrument;
- certificates in prescribed forms (including as to solvency, if applicable) must be signed by the directors;
- notices to creditors, shareholders and employees of the demerging company must be given;
- notice to the Jersey tax office must be provided and a certificate must be obtained in response; and
- if the directors cannot give a solvency statement in respect of the demerging company, court approval to the demerger must be obtained.
Notable features of the Regulations include:
- Freedom to determine destination of assets and liabilities: Subject to limited restrictions, the assets and liabilities of the demerging company can be allocated to the demerged companies as required. To the extent that any assets, liabilities or obligations of the demerging company are not expressly allocated to the demerged companies by the demerger instrument, the demerged companies will be deemed to be (i) entitled to those assets jointly in common in equal parts and (ii) subject to those liabilities and obligations jointly and severally.
- Split-up or spin-off: A demerging company can either demerge into new demerged companies and cease to exist (a "split-up" demerger) or continue to exist as a survivor company alongside at least one other demerged company (a "spin-off" demerger).
- Court approval: The Regulations allow for a demerger to be carried out without court approval if the directors of the demerging company give a statement of solvency in a prescribed form in respect of the demerging company. If a statement of solvency cannot be given, the demerging company must apply to court for an order permitting the demerger.
- Transfer by operation of law: Assets and liabilities of the demerging company are transferred to the demerged companies by operation of law; specifically, the Regulations provide that "all property and rights to which the demerging company was entitled immediately before the demerger was completed become the property and rights of the demerged companies in the parts stated in the demerger instrument".
The regime provides a useful alternative to a court-sanctioned scheme of arrangement or a company re-organisation effected by a transfer of assets and/or a novation of liabilities. The Regulations could be used to implement a demerger for various objectives, such as:
- the re-organisation of a company prior to a sale, listing or other transaction;
- the re-organisation of a company in order to focus on different business lines;
- splitting of assets to assist succession planning by a family business;
- warehousing of certain (perhaps illiquid) assets by a fund manager;
- "partition demerger" resulting in demerged companies with different shareholdings; and/or
- exiting certain shareholders by exchanging their shares in the demerging company for cash.
Only certain Jersey companies may take advantage of the Regulations. The following are not permitted to demerge under the Regulations:
- companies registered under the Banking Business (Jersey) Law 1991 or the Insurance Business (Jersey) Law 1996 (on the basis that specific legal procedures are already in place to govern transfers involving banking and insurance business);
- cell companies (or cells);
- companies which have unlimited shares or guarantor members;
- companies liable to tax in Jersey or which have Jersey resident shareholders (broadly); or
- companies which are subject to investigation or prosecution for a criminal offence.
It is worth noting that any regulatory licence held by a demerging company will not be automatically transferred by a demerger unless permission has been granted by the relevant licensing authority.
Process and documents
1. Demerger instrument: The demerging company must execute a demerger instrument setting out certain key information including:
- details of the demerging company, whether or not it will be a survivor company and any arrangements necessary to complete the demerger;
- if the demerging company's securities are to be converted into securities of a demerged company, how the conversion will be effected or, otherwise, any payment that shareholders will receive instead of securities in a demerged company;
- the proposed memorandum and articles of association of each demerged company and the names and addresses of their directors; and
- details of the undertaking, property, rights and liabilities of the demerging company and how these will be split between each of the demerged companies.
2. Board resolution: The demerging company's directors must pass a resolution that the demerger is in the best interests of the demerging company and stating that the directors are satisfied on reasonable grounds that (a) the directors can properly make a solvency statement in respect of the demerging company or, if the directors cannot give a solvency statement, (b) there is a reasonable prospect of obtaining the permission of the court to the demerger. The solvency statement requires a statement that, having made full inquiry into the affairs of the demerging company, the person making the statement reasonably believes that the demerging company is, and will remain until the demerger is completed, able to discharge its liabilities as they fall due.
3. Directors' certificates: The directors of the demerging company who vote in favour of the demerger must sign a certificate either containing a solvency statement or stating that there is a reasonable prospect of obtaining the permission of the court and the grounds for the statement in either case. If the directors of the demerging company have made a solvency statement, the directors of each demerged company (plus a director of the demerging company, if none of the directors of the demerged company are directors of the demerging company) must also sign a certificate stating that in their opinion the demerged company is in a position to carry on business and discharge its liabilities as they fall due for the 12 months immediately following the demerger and the ground for that opinion.
4. Shareholder approval: The demerger instrument must be approved by a special resolution of the demerging company's shareholders and, where there is more than one class of shareholders, by a special resolution of each class. Notice of the meeting at which the resolution will be proposed must include certain prescribed information.
5. Tax certificate: The demerging company must make a declaration to the Jersey Comptroller of Taxes stating that the demerging company is eligible to demerge. The Comptroller will either issue a tax certificate to the demerging company or advise the Registrar of Companies that the Comptroller considers that the demerging company is not eligible to demerge.
6. Shareholder objections: Any shareholder who did not vote in favour of the demerger may object to the demerger by giving notice to the demerging company within 21 days of the shareholder approval and by applying to the court within a further 21 days on the ground that the demerger would unfairly prejudice the interests of the shareholder. If the court is satisfied that the shareholder's application is well founded, it has discretion to make an order for relief, which could, for example, provide for the purchase of the shareholder's shares.
7. Notice to creditors: During the period beginning with the date on which the first notice to its shareholders is given and ending 21 days after the demerger is approved by the shareholders, the demerging company must send written notice of the demerger and make available the demerger instrument (from which commercially sensitive information may be redacted) to each of its creditors who, after the directors have made reasonable enquiries, are known to have a claim against the demerging company exceeding £5,000. If a solvency statement has not been given by the directors of the demerging company and permission of the court will therefore be required, the notice to creditors must also state this and provide certain additional information. The demerging company must also publish the notice to creditors in a Jersey newspaper (or via any other approved medium) by the earlier of 21 days from the date of shareholder approval or as soon as practicable after the last notice to creditors is sent.
8. Creditor objections: If a solvency statement has been made by the demerging company, any creditor of the demerging company who has a claim exceeding £5,000 may object to the demerger by giving notice to the demerging company within 21 days of the newspaper notice and (if the creditor's claim has not been discharged) by applying to the court within a further 21 days for an order restraining the demerger or modifying the demerger instrument. A copy of the application must also be sent by the demerging company to (broadly) each other creditor who has been notified of the demerger. If the court is satisfied that the demerger would unfairly prejudice the interests of the applicant or of any other creditor of the demerging company, the court has discretion to make any order in relation to the demerger, including an order restraining the demerger or modifying the demerger instrument.
9. Court application if solvency statement not made: If a solvency statement has not been made by the demerging company, the demerger cannot be completed unless an order of the court has been obtained permitting the demerger on the ground that the demerger would not be unfairly prejudicial to the interests of any creditor or shareholder of the demerging company. The Regulations provide for certain creditors and shareholders of the demerging company to be provided with a copy of the court application and to be heard at the court hearing.
10. Employees: Within 21 days of the date of the shareholders' approval of the demerger, the demerging company must provide its employees with notice of its intention to demerge and access to a copy of the demerger instrument (from which commercially sensitive information may be redacted). If, prior to the completion date of the demerger, an employee gives a notice of objection to the transfer of his or her employment contract, that contract will automatically be terminated on the completion date of the demerger and the demerging company may make a payment to the employee in lieu of notice. If an employee does not give notice of objection, his or her employment contract will be transferred to the relevant demerged company. The Regulations expressly preserve each transferring employee's continuity of employment, any obligation of the employer to contribute to a retirement scheme and also any collective agreement with an employees' representative body.
11. Registration of demerger: Provided that no shareholder or creditor objections have been made and court approval is not required (in which case different timescales apply), the demerging company may apply to the Registrar of Companies to complete the demerger 21 days after the date on which notice of the demerger is published (in a newspaper or via another approved medium). The application must be accompanied by copies of certain documents including the demerger instrument, new (or amended, if applicable) memoranda and articles of association for each of the demerged companies, board and shareholder resolutions, directors' certificates and the tax certificate. Provided that all requirements have been met, the Registrar of Companies will then register the demerger, including the registration of all new demerged companies and, if it is not intended to survive, the deregistration of the demerging company.
The new statutory regime is a helpful addition to Jersey company law that is likely to prove useful in a number of scenarios and offers a straightforward alternative to court-sanctioned schemes of arrangement and other structures which are currently available to effect demergers of Jersey companies. In particular, the flexibility to reorganise a share capital structure and even exit certain shareholders for cash consideration under the Regulations could have wide-ranging applications.
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.