SOMETIMES IT IS hard to keep up with the game of legislative and regulatory ‘cat and mouse’ played by offshore financial centres trying to gain a competitive edge over their nearest rivals. Guernsey has had something of a reputation for its speed of reforms, much to the chagrin of its bigger neighbour Jersey. But recent legal and policy developments in Jersey may have turned the game around.
Increasing the variety of available corporate vehicles has been a key objective for Jersey since autumn 2002 when the Companies (Jersey) Law 1991 underwent a major overhaul. The changes made included the introduction of no-par value companies (with no set nominal value per share). These offered greater flexibility for the contribution and extraction of capital by investors. Also simpler procedures for the merger of companies and ‘continuance’ or re-domiciliation of companies in and out of Jersey were introduced. These procedures continue to be very useful for international restructuring.
The company law reforms implemented in February 2006 have also been well received. The introduction of protected cell companies and incorporated cell companies were perhaps the most welcomed. The PCC is not new to offshore jurisdictions, but the Jersey model enhances the ring-fencing of assets and liabilities found in Guernsey. For example, in the event of insolvency of a cell, the only assets available to creditors are the assets of the cell with which the creditor contracted, as opposed to the assets of the other cells or the ‘non-cellular’ assets of the PCC. The ICC, when introduced, was unique to Jersey (but Guernsey has since followed this development). Each cell is itself treated as an individual company with separate legal identity. The ICC concept refl ects the best aspects of PCCs but is designed to overcome difficulties in jurisdictions unfamiliar with the cell company concept.
Both PCCs and ICCs are predicted to be popular vehicles for investments funds, commercial paper conduits, captive insurance structures and other areas where the legal segregation of assets is an attractive feature.
Other important company law changes were made in February 2006, particularly in relation to directors’ responsibilities when entering a variety of transactions. The relevant tests and thresholds for redeeming shares, purchasing own shares, providing financial assistance for the purchase of shares and paying dividends from certain profit sources have been rationalised.
The ability of Jersey companies to easily ‘whitewash’ financial assistance for the purchase of their own shares has often smoothed the completion of many international commercial transactions.
The whitewash procedure requires a special resolution, ie, of two thirds of the voting rights of shareholders, and the satisfaction of a statutory solvency test. Auditors’ reports were not required by law in the past. Recent changes altered the solvency test and added a requirement for a statement of solvency to be made by the directors. However, a subsequent position paper issued by the States of Jersey indicates that the general prohibition on financial assistance should be abolished early next year.
In August further changes aimed at minimising the differences between the outcome of a creditors’ winding up under the company law and that of a désastre (bankruptcy) of a company under the insolvency law came into force. These included the treatment of sales at undervalue and the giving of preferences to creditors in insolvency proceedings.
There are also proposed amendments in the pipeline for Jersey’s limited partnership law. It already provides a flexible partnership vehicle for sophisticated or institutional investors who wish to participate financially as limited partners, up to a fixed capital amount with the benefit of limited liability, but without taking part directly in the management of partnership affairs.
As it stands, Jersey limited partnerships do not have legal personality and are fiscally transparent for the purposes of Jersey taxation, allowing non-Jersey resident investors who act as limited partners in a Jersey limited partnership to be exempt from Jersey income tax on their share of the partnership profits. A new limited partnership with legal personality is now proposed.
The Economic Development Department first proposed that Jersey mirror Guernsey’s approach by including a provision that a limited partnership will have legal personality if at the time of registration the general partner so elects. However, following the consultation process, the Economic Development Department now proposes the introduction of an entirely new limited partnership with legal personality.
This new vehicle will co-exist alongside the existing limited partnership, giving investors maximum flexibility. One key benefit of a limited partnership having separate legal identity is that it is perceived to afford the limited partners a different tax treatment compared with ‘traditional’ limited partnerships.
It is also proposed that the limited partnership law be changed so that a general partner is not automatically a trustee for the limited partnership. The general partner will only be a trustee of those assets to the extent that the partnership agreement so provides.
Similarly as there may be circumstances where the limited partnership wishes to be de-registered without being formally dissolved, it is proposed to allow a limited partnership to be removed from the register and be de-registered without dissolution in circumstances where the registrar receives a request to this effect from the general partner.
The amendments should come into force next summer. The enhanced flexibility of limited partnerships is likely to increase their use as vehicles for private equity and venture capital schemes, as components in asset protection arrangements and perhaps most importantly, as vehicles for collective investment funds in Jersey.
The regulation of investment funds is also continuing to develop swiftly. We have seen the remarkable success of the Jersey expert funds regime which was deftly introduced two years ago by a change of policy by the Jersey Financial Services Commission. In combination with a concerted marketing effort by the island’s fund industry this has put Jersey back into contention for certain types of fund business where clients are jurisdiction shopping for a fund domicile.
A related policy initiative introduced by the JFSC two years ago also facilitates fast track regulatory approval for Jersey fund service providers wishing to take up appointments in connection with foreign funds which are not managed out of Jersey.
A key element of the expert funds regime (and a feature which justified the rolling back of the old ‘promoter policy test’) is that the funds sector in the island would shoulder responsibility for vetting the fit and proper person status of prospective investment managers for Jersey expert funds and would also monitor adherence by the investment manager to any investment or borrowing restrictions adopted for these funds.
A circular letter issued by the Jersey Financial Services Commission on 29 June indicates the level of the Commission’s high expectations for due diligence undertaken by Jersey based functionaries on prospective investment managers of expert funds.
The circular letter suggests an approach to due diligence including a requirement to take the prospective investment manager through the requirements of the expert fund guide as it applies to the fit and proper person status of the investment manager; to carry out and document due diligence checks undertaken on the investment manager and its principals; and to review the experience of the investment manager in relation to the requirements of the proposed fund.
The clear thrust of the circular letter is to try and promote a more uniform approach to due diligence across the funds industry in Jersey in connection with investment managers. The JFSC clearly expects lead functionaries to have and follow a formal procedure for due diligence. The degree of due diligence expected is one of proactively making enquires about the investment manager and not one of passively receiving and reviewing information and confirmations supplied by the investment manager or third party introducers.
The latest round of consultations is leading towards further refinement and reform of the regulatory regime for investment funds in Jersey. The intention is to extend the licensing regime under the financial services legislation in Jersey which already encompasses investment business, trust company business and insurance mediation to include fund service providers. This will bring the island more into line with the regulatory licensing regimes which apply in most other competitor jurisdictions for offshore funds business. Codes of practice will also be introduced to establish minimum standards and principles of conduct to be followed by fund service providers in Jersey.
Traded closed-ended funds
Further regulatory changes are aimed at accommodating the latest trend towards establishing closed-ended funds which then apply for admission to the Alternative Investment Market (AIM) in London.
Many of these are speculative type property funds but it seems likely that other asset classes with less risky investment profiles will join in this movement. The presence of an AIM application has meant that fast track approvals for expert funds have not been available in Jersey due to the way regulatory policy operates. However, that is about to change. The flexible and fast-track approval process which has been achieved for Jersey expert funds is being adapted to accommodate this trend towards investment trust style traded funds.
Earlier this year Jersey’s trust law strengthened the protection given to Jersey trusts against attack by persons in other jurisdictions which do not recognise trusts or which have ‘forced heirship’ rules. Any questions concerning the validity, interpretation, administration and exercise of powers of a trust or the capacity of a settlor must be determined in accordance with Jersey law and no rule of foreign law, including any rule concerning recognition of the concept of a trust or forced heirship, will affect such a question. This exclusionary provision also applies to foreign judgments inconsistent with it, regardless of any applicable law relating to the conflict of laws.
Such amendments are intended to be attractive to settlors from countries that have forced heirship rules or do not recognise the trust concept, since they provide that decisions made by foreign courts in relation to such issues that may be adverse to the settlor’s interests will have no bearing on the validity of the trust.
Other changes are expected to be made to the trust law soon but a new asset holding vehicle, the civil law foundation, is unlikely to be introduced until 2007 at the earliest. The foundation will combine the flexibility of a trust with the separate legal personality of a company. It is expected that foundations will be particularly beneficial to settlors from jurisdictions which are unfamiliar with the concept of trusts.
Jersey law and regulation has developed swiftly this year in many respects to support the island’s prominent position in international finance. Planned governmental and tax changes will also help keep Jersey ahead of the game.
Wendy Benjamin Partner
Appleby Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, Mauritius, Seychelles and Shanghai.