Andrew Munro discusses Guernsey’s approach to regulation and legislation, which has helped to further enhance the jurisdiction’s reputation as a leading specialist financial centre in Europe.
As you will see from this examination of significant recent and proposed changes to Guernsey legislation, Guernsey’s legislature has been busy of late.
This pro-active approach to regulation and legislation has no doubt contributed to the rise in funds under management and administration in Guernsey, which are reported to have risen 1.3 per cent (£3.6 billion) to £274 billion in the third quarter of 2012 and enhanced Guernsey’s reputation as a leading specialist financial centre in Europe, and given credence to its second place globally in recent rankings by The Banker.
In November 2012, the States of Guernsey approved preparation of legislation to amend the Companies Law. Although it is not yet known when this legislation will come into force, a summary of the proposed notable amendments to the Companies Law can be seen in the appendix to this article.
In brief there is a pan-Channel Island approach to the regulation of competition. Guernsey now regulates the abuse of a dominant position, anticompetitive arrangements and mergers and acquisitions. The Guernsey law is modelled largely on the Jersey legislation and is designed to facilitate a common approach to implementation. Guernsey has, however, has chosen to adopt a different approach on some issues.
The competition law is administered and enforced by the Guernsey Competition and Regulatory Authority (GCRA) in Guernsey.
Although Jersey and Guernsey remain separate markets for competition law purposes the GCRA and its Jersey equivalent share a common board and co-operate as the Channel Islands Competition and Regulatory Authorities (CICRA) to promote a pan-Channel Island approach to competition regulation.
Three Pillars of Competition Law
Both Jersey and Guernsey now have laws governing the three central elements of competition regulation, namely the abuse of a dominant position, anticompetitive arrangements, and merger control.
Abuse of a Dominant Position
Conduct which constitutes the abuse of a dominant position within the islands is prohibited. An example would be unfair purchase or selling prices (eg, price discrimination, excessive prices or predatory pricing).
Agreements between undertakings which have the object or effect of preventing competition in the islands are also prohibited. An example would be price fixing. In limited circumstances the Guernsey regulator may grant an exemption from this prohibition for a particular arrangement. Experience elsewhere suggests that the granting of such exemptions is rare.
The approval of the regulator is required before certain mergers and acquisitions can be implemented. The types of transactions that are most commonly caught by this are the acquisition of shares (and hence control) in a company, the acquisition of a business and joint ventures.
Notably, Guernsey has introduced different merger control thresholds from those in Jersey. This is the area in which the competition laws of the Channel Islands differ most markedly.
Instead of merger control thresholds based on the parties’ share of supply, a merger or acquisition will require the prior approval of the Guernsey regulator if the combined applicable turnover of the undertakings involved in the transaction arising in the Channel Islands exceeds £5 million; and of the undertakings involved in the transaction two or more each have an applicable turnover arising in Guernsey which exceeds £2 million.
Benefits of the Turnover Test
Some of the perceived benefits of Guernsey’s turnover test (as compared to the share of supply test currently in place in Jersey) include the fact it is more objective and likely to make it easier for companies operating in both islands to know whether they need approval for a merger or acquisition. It is also anticipated that the GCRA will have more time to focus on local matters because there will be fewer large international mergers requiring approval. This is in contrast to Jersey’s experience of the share of supply test, which has caught many international deals that in practice are likely to have very little effect on the Jersey market.
Pan-Channel Island Approach
Despite the various differences, a number of important factors underpin CICRA’s stated aim of developing a consistent pan-Channel Island approach to competition law administration and enforcement.
There is a shared Chief Executive and board of directors for islands, a Memorandum of Understanding signed between the two authorities aims to facilitate a closer working relationship and sharing of information between them, while CICRA’s website is designed to improve access to information on competition and related regulatory issues in the Channel Islands.
With this aim in mind, and as CICRA turns its attention increasingly towards the local markets, it is reasonable to expect the spotlight to fall, in particular, on how pan-Channel Island businesses with recognised influence in their spheres operate in the Jersey and Guernsey markets.
Whilst Guernsey is not the first jurisdiction to provide for foundations, the Foundations Law does provide a number of unique options for individuals wishing to take advantage of the benefits provided by foundations.
Whilst Guernsey is a common law jurisdiction, the Foundations Law has been drafted in such a way as to reflect legal drafting in civil law jurisdictions which do not usually recognise the concept of a trust, but which are familiar with foundations. It is anticipated that Guernsey foundations will be of particular interest to wealthy individuals, family businesses and entrepreneurs in ‘emerging market’ countries, many of which are civil law jurisdictions.
Foundations have characteristics of both a company and a trust, providing sufficient corporate characteristics for civil law jurisdictions to recognise them and sufficient trusts characteristics to make them an attractive option for succession and estate planning purposes. Most importantly, foundations are not a hybrid of companies and trusts, but are a legal concept all of their own, with their own specific origin and purposes.
Their uses include wealth protection and asset management, Inheritance/succession planning and the disapplication of forced heirship rules, charitable and non-charitable purposes, orphan vehicle for funds, private securitisation etc, pension funds, holding capital, income and specific assets and/or functioning as a trustee (as an alternative to a private trust company).
A Guernsey foundation is formed by one or more founders, which could be one or more individuals or bodies corporate, who provide assets to the foundation, the initial endowment. The initial endowment may comprise any property, movable or immovable, tangible or intangible, wherever situated. There is no minimum initial endowment required to set up the foundation.
A foundation therefore could be set up without transferring much capital or a significant asset, which may be desirable in certain circumstances. A foundation can be established for either a purpose/s or to benefit beneficiaries or both. The purpose/s can be charitable or non-charitable. This may be desirable for those founders wishing to set up a company like structure but with the flexibility of a trust.
Separate Legal Personality
Foundations have separate legal personality, like companies, and therefore can contract, sue and be sued, in its own capacity. However, foundations provide an even more flexible structure to companies as they can be adapted to fit each bespoke situation.
Like a company, the assets of the foundation belong to the foundation and not to the beneficiaries. This may be worrying to some, but this should be considered in light of the fact that the founder can retain certain powers over the foundation. In addition, because the beneficiaries are not the legal or beneficial owners of the assets, they have no say over the assets, which may appeal to some founders, particularly those with minor children or those with beneficiaries who may not agree on what is to be done with the assets.
A foundation is administered by a council, which acts like the board of a company, making the decisions on behalf of the foundation. It is possible to have a single councillor, individual or corporate.
Councillors have duties similar to a company director. Their duties are owed to the foundation and not the beneficiaries. Where a Guernsey foundation has been established for a purpose or with disenfranchised beneficiaries, a guardian must be appointed to act as an enforcer of the purpose/s or benefit/s.
Whilst there has been no case law in Guernsey, Jersey or England (all of which would be persuasive in a Guernsey court), it is expected that the duties owed by councillors and guardians may be held to be analogous to those of a company director or trustee in certain respects, particularly in relation to the question of to whom duties are owed to.
A foundation must be administered in accordance with its constitution, which is made up of a charter and rules (if any) much like the memorandum and articles of a company.
A founder can be an individual or a body corporate. The founder is named in the constitution and must subscribe to it (individually or by the entity registering the foundation). The fact that the founder can be a body corporate is useful where the individual behind the foundation may not want to act as founder and so the body corporate would provide the initial endowment and would be named on the Register and would sign the constitution.
A founder can determine certain matters and can retain certain powers in the constitution whilst alive if an individual or for 50 years from the establishment of the foundation if a body corporate. In addition, if the founder is a body corporate, this avoids any problems that may arise if the founder were an individual and they were to die or become legally incapable of managing their affairs.
A Guernsey foundation must make certain limited information public in a register maintained by the Registrar but, importantly, not all information provided to the Registry will be publicly available except in limited circumstances such as criminal investigations.
Generally, information is available to the beneficiaries of a foundation, although the Foundations Law provides for a class of beneficiary, known as disenfranchised beneficiaries, who are not entitled to certain information and certain rights.
This may appeal to those founders with minor children or where the founder does not want each of the beneficiaries to know their interests or the interests of other beneficiaries.
Registration and Regulation
Foundations need to be registered with the Registrar of Foundations, which can only be carried out by a Guernsey fiduciary licensee. Unless any councillor or guardian is a Guernsey licensed fiduciary (regulated by the GFSC), the foundation must have a local resident agent to maintain the foundation’s records. A Guernsey foundation must have a registered office in Guernsey.
Image Rights Law
Guernsey has introduced legislation, believed to be the first of its kind in the world, designed to protect personalities and images. Currently, copyright, trademark and patent legislation exists in many countries around the world (including in Guernsey), but there was no such legislation specifically providing for registration and protection of image rights - until now. Whilst almost any personality or image can be registered, it is envisaged that the protection afforded by the Guernsey legislation will be of particular interest to those in the public eye such as media and sports personalities.
What Can Be Registered?
Personality - the public perception of a person, which includes a natural person, a body corporate, two or more persons intrinsically linked in the eyes of the public, a group or a fictional character.
Images - which can include the name, voice, signature, appearances, expressions, mannerisms, photo, or any illustration or representation of a person.
Type of Protection Provided
A registered personality and associated image rights are the personal property of the proprietor. Image rights may be licensed to others and may also be assigned. Other rights and remedies are provided by the legislation.
Registration provides evidence that a right exists and protection commences on the date the application is made.
Personalities are registered for an initial period of 10 years and may be renewed for a further 10 years (without limit on how many renewals can be made). Images are registered for an initial period of three years and may be renewed for a further three years (without limit on how many renewals can be made).
An initial registration fee is charged as well as an annual fee. The initial registration of a personality and one image of a natural person currently costs £1,000.
In recent years legislative changes have brought about the repeal of significant elements of the Control of Borrowing (Bailiwick of Guernsey) Ordinance 1959 as amended (COBO Ordinance) such as the requirement to seek consent for the formation of Guernsey companies.
A number of aspects of the COBO Ordinance had, however, remained in place and included the requirement to obtain consent (subject to exemptions set out in the COBO Ordinance) for:
certain transactions by which money is borrowed in the Bailiwick of Guernsey;
the raising of capital by companies, including the raising of capital by the issue of founder shares on the formation of Alderney companies;
the issue of partly paid shares, certain other issues of shares and other securities; and
the issue of government securities which are to be registered in the Bailiwick of Guernsey.
On 27 February 2013 the legislation repealing the remaining provisions of the COBO Ordinance was approved by the States of Guernsey and came into force on that date.
After a public consultation in 2012, draft legislation covering LLP Law has been approved.
The key points include:
Guernsey LLPs would be bodies corporate with separate legal personality.
LLP members would have limited liability.
All members of an LLP would have the right to participate in management.
Members may be liable for their own negligence and other acts where they have acted and assumed responsibility.
LLPs would not need to file the partnership agreement with a public registry (but would need to hold it at the registered office).
LLPs would be entitled to opt out of unfair unprejudiced and derivative claims.
APPENDIX – Companies Law Proposed Amendments
Applications for incorporation of a Guernsey company will be able to be made by advocates and accountants registered with the Guernsey Financial Services Commission (the GFSC) for anti-money laundering and combating the financing of terrorism and anyone fully licensed under the four main categories (Investment, Banking, Fiduciary or Insurance) of the Guernsey regulatory regime.
Companies will be permitted to register an alternate name in non-roman script. In addition, a company whose incorporation pre-dates a trademark with the same name will not be prevented from continuing to use that name.
The restriction on the type of bodies corporate which can amalgamate will be removed.
Failure by a company to have at least one director will be made a ground to strike off the company.
Changes to the blanket prohibition on disqualified directors from other jurisdictions holding office as a director in Guernsey.
Directors will only be required to disclose the nature and extent of their interest in a transaction at meetings rather than the current overly prescriptive disclosures required (monetary value etc).
The duties of secretaries will be required to be performed by the directors where there is no secretary appointed, or by either if there is.
A unanimous resolution will be specified as one agreed to by every member entitled to vote.
It will be possible to close the register of members during the circulation period for a written resolution so as to avoid uncertainty should the membership change during this period.
The quorum provisions will be amended to refer only to voting rights for all kinds of company (rather than referring to share capital). Also, subject to appropriate safeguards, the variation or disapplication of the quorum requirements for variation of class rights meetings will be permitted.
The requirement for a detailed description of share capital in the annual validation is to be repealed and corporate service providers will be permitted to sign a declaration of compliance (annual validation) on behalf of a director/secretary.
A protected cell company will no longer need to prepare consolidated accounts for its core and its cells but may prepare them individually.
Provisions relating to appointment of auditors will be simplified.
Directors will be given a general power to issue shares to the extent permitted by the memorandum and articles or by ordinary resolution.
Share capital will be expressly permitted to be paid out as a distribution, including as a dividend.
There will no longer be a requirement to issue a consideration certificate when issuing shares.
A time limit of two years for the recovery of distributions from members when immediately after the distribution the company did not satisfy the solvency test will be introduced. Further, a ‘whitewash’ provision will be introduced in respect of directors’ personal liability in situations where the company would have passed a solvency test at the time of distribution and time of recovery.
Currently directors must have taken ‘every step’ to minimise potential loss to the company’s creditors to avoid civil liability for wrongful trading. This threshold will be amended to ‘every reasonable step’ to avoid an unreasonable burden being placed on directors.
In addition to the matters set out above, the Department has identified a range of other ancillary amendments that are required including:
Procedures for amalgamating subsidiaries will be simplified.
Provisions relating to redemptions of shares should permit partly paid shares to be redeemed.
Provisions relating to when a company is authorised to purchase its own shares will be simplified.
The definition of ‘director’ will be clarified to ensure the obligations and rights of directors, alternate directors and shadow directors are clear and explicit.
Andrew Munro is a member of Carey Olsen's Guernsey trusts and private wealth practice. He is an advocate of 10 years' standing with 20 years' corporate and legal experience. He has covered all core areas of offshore non-contentious practice and has managed many large transactions including Guernsey firsts.
British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Jersey, London, Luxembourg, Shanghai and Tokyo.