Mark Dunlop provides an indepth analysis of recent amendments to Jersey's company law, designed to bring greater flexibility to the jurisdiction's company law regime.
The Companies (Amendment No. 11) (Jersey) Law 2014 (the Amendment Law) came into force on 1 August 2014. The Amendment Law makes a number of significant amendments to the Companies (Jersey) Law 1991 (the 1991 Law) which are designed to bring greater flexibility to Jersey's company law regime. This article outlines a number of the key amendments made by the Amendment Law.
Maintenance of Capital
A revised distribution regime
Under the 1991 Law, a company (other than an open-ended investment company) may only make a distribution if the directors who are to authorise the distribution make a solvency statement in the prescribed form. A distribution is defined in the 1991 Law as "every description of distribution of the company's assets to its members as members, whether in cash or otherwise."
The 1991 Law has been amended to provide that only certain types of distribution will be regulated by the distribution regime. A distribution will only be regulated if it (a) reduces the net assets of the company or (b) is in respect of shares which are required to be recognised as a liability in the accounts of the company.
The ‘net assets of the company’ is defined as the aggregate of the company's assets less the aggregate of its liabilities. If there is any question as to whether a distribution reduces net assets, this is to be determined in accordance with generally accepted accounting principles.
The net assets test will help to clarify the legal treatment of certain transactions (such as the giving of a guarantee by a subsidiary company in respect of the indebtedness of its parent company).
Out of Court Procedure for a Reduction of Capital
Under the 1991 Law, certain reductions of capital required confirmation by the Royal Court.
The Amendment Law introduces a new ‘out of court’ procedure for the reduction of capital.
A reduction of capital may now be sanctioned by a special resolution supported by a solvency statement given in the prescribed form by the directors authorising the reduction.
If the company would still prefer the reduction of capital to be sanctioned by the Royal Court, the court procedure remains as an alternative.
Transfers to a Share Premium Account and a Stated Capital Account
The Amendment Law has rationalised the ability to make transfers to capital accounts. In the case of a par value company, any amount may be transferred to its share premium account from any other account of the company (other than the capital redemption reserve or the nominal capital account). In the case of a no par value company, any amount may be transferred by the company to its stated capital account from any other account of the company.
Ratification of Unlawful Distributions
There may be situations where a company has made a distribution in breach of the 1991 Law. For example, the directors of a company may have paid an interim dividend without making a solvency statement.
There was no ability under the 1991 Law to ratify a distribution (even if the failure to make the solvency certificate was an oversight and the company was solvent at the time that it made the distribution).
The Amendment Law introduces a new court procedure which enables an unlawful distribution to be ratified. The Royal Court may make an order that the distribution is to be treated for all purposes as if it had been made in accordance with the 1991 Law if the Royal Court considers that certain solvency conditions are satisfied and the Royal Court does not consider that it would be contrary to the interests of justice to do so.
Removing the Prohibition on the Issue of Shares at a Discount and Removing the Restrictions on the Payment of Commissions
The Amendment Law relaxes certain other provisions relating to the maintenance of capital. A company may now issue shares at a discount and there are no restrictions on a company paying commissions in connection with a person subscribing for shares.
Directors' Duties and Shareholder Ratification
Under the 1991 Law, it is possible for the members of the company to authorise or ratify a breach by the directors of their statutory duties under Article 74 of the 1991 Law (including the duty to act honestly and in good faith with a view to the best interests of the company).
Before the Amendment Law, any resolution authorising or ratifying a breach of duty would need to be a unanimous resolution passed by all of the members of the company. In addition, the company must also be solvent.
This procedure remains so that it is possible to authorise or ratify an act or omission with the unanimous consent of all members (provided that the company is solvent).
The Amendment Law introduces new provisions under which an authorisation or ratification can now be given by an ordinary resolution of the members or (if the articles of association require) special resolution of the members. Therefore, a majority of members may now authorise or ratify an act or omission (provided that the company is solvent).
Under the Companies (Exemptions) Jersey Order 2014, this new ratification procedure will not apply to certain types of investment funds.
Special Resolutions and Thresholds
Before the Amendment Law, a special resolution may be passed by a two-thirds majority of members voting in person or by proxy or, if the articles of association specify a greater majority than two-thirds, that greater majority.
The Amendment Law makes it clear that different thresholds can be applied to different special resolutions. For example, it is possible to specify in the articles of association that a two-thirds majority is needed in relation to all special resolutions other than a particular type of special resolution where (for example) a 90 per cent majority is required.
The Amendment Law further clarifies that unanimity may also be specified in the articles of association as the required majority.
Shareholder Written Resolutions
The 1991 Law allows shareholders to pass written resolutions (unless prohibited by the articles of association).
The 1991 Law requires a written resolution to be passed by all the members who would be entitled to vote on the resolution if it were proposed at a meeting.
The Amendment Law retains this mechanic but allows the articles of association to specify a different majority (which may not be less than two-thirds in the case of a special resolution).
Redemption or Buy-Back of Shares
Redemption or buy-back of shares in specie is permitted as well as in cash.
The Amendment Law clarifies that when a company redeems or purchases its own shares, the payment may involve a cash consideration or a non-cash consideration or a combination of the two.
The buy-back of shares is extended to include depository certificates.
The 1991 Law procedure relating to the buy-back of a company's own shares has been extended to cover depositary certificates (i.e. depositary receipts). A company may therefore purchase its own depositary receipts.
On-market purchase of shares - If a company purchases its own shares on a stock exchange, the special resolution authorising the purchase must specify a date on which the company's authority to purchase is to expire. The expiry date for such on-market purchases is now five years after the passing of the special resolution.
Under the 1991 Law, the only way of structuring a demerger is by way of a court sanctioned scheme of arrangement. The 1991 Law has been amended to allow subordinate legislation to be passed enabling the undertaking, property and liabilities of a company to be divided between 2 or more companies.
The demerger regulations have yet to be passed by the States of Jersey. When passed, the ability to effect a statutory demerger will bring additional flexibility to Jersey's company law offering. The possibility of effecting a demerger will have a range of potential uses such as the restructuring of a portfolio of assets, the re-organisation of a company in order to effect a more attractive sale structure and the establishment of robust vehicles for the ring-fencing of assets and liabilities.
Public and Private Companies
Calculation of the Number of Members of a Company
Under the 1991 Law, a private company is treated as a public company if (inter alia) it has more than 30 members. In determining the number of members, the 1991 Law excludes a member who is a director or is in the employment of the company. The Amendment Law extends the scope of person who will not count towards this 30 member threshold. In essence, directors or employees of a subsidiary company, holding company or subsidiary of a holding company are also now excluded from the threshold test.
In addition, the Amendment Law enables subordinate legislation to be passed amending (inter alia) the 30 member limit. It is expected that there will be further industry consultation as to whether this 30 member limit should be increased.
Definition of Prospectus
The Amendment Law allows subordinate legislation to be passed to amend the definition of prospectus in the 1991 Law. Under the existing definition of prospectus, an offer to issue shares is not a prospectus if the offer is communicated to not more than 50 persons. It is expected that there will be further industry consultation in order to widen the definition of prospectus (e.g. to increase the number of people who may receive a prospectus).
Order to Allow Audit Exemption
The Amendment Law allows subordinate legislation to be passed enabling certain companies to disapply the requirement for auditors. Under the Companies (Exemptions) (Jersey) Order 2014, a certified fund (as defined) may disapply the requirement to have auditors if no units in the fund have been issued to any person (other than a person connected with the establishment or promotion of the fund). This will therefore cover a fund company which has not successfully launched.
The Amendment Law makes a number of changes concerning more administrative provisions of the 1991 Law. These include the following:
AGMs are no longer required: The default position is that a private company will no longer need to hold an AGM. However, a private company will be required to hold an AGM where it has "opted in" to this requirement.
Continuance of a Jersey company overseas: The 1991 Law contains provisions which enable a Jersey company to continue overseas. The time periods involved in the process have been shortened by the Amendment Law.
Merger provisions: The 1991 Law contains provisions enabling Jersey companies to merge. The Amendment Law has streamlined the timing of a number of provisions making this merger process more efficient.
Corporate directors: Under the 1991 Law, certain entities cannot act as a corporate director. The scope of prohibited persons has been extended to include a limited liability partnership.
Striking-off: The Companies Registrar is given new powers to strike-off a company which does not have a registered office in Jersey.
Overseas branch register: An overseas branch register may contain all the names of its members and not just those who are resident overseas.
Takeover offers: New provisions have been inserted which clarify the practice in this area. An offer is not prevented from being a takeover offer if it is not made to overseas shareholders in order not to contravene the law of an overseas country or territory. In addition, an offer is still a takeover offer even if the laws of an overseas country or territory make it impossible for a shareholder to accept an offer or make it more difficult to do so.
Representation of a body corporate at meetings: The Amendment Law has clarified that more than one corporate representative may be appointed.
Proxies: The articles of association of a company may specify the time by which shareholder proxies have to be received by the company. Under the 1991 Law, this may not be more than 48 hours before the relevant meeting. The Amendment Law introduces provisions to ensure that any part of a non-working day is not counted towards the 48 hours.
There are a number of improvements made by the Amendment Law. The amendments are designed to assist those who structure their business activities through Jersey companies. The amendments build on changes made to the 1991 Law in recent years and promote the certainty and flexibility of Jersey's company law. Bedell Cristin was a major participant in the drafting and consultation process relating to the Amendment Law and Bedell Cristin is well placed to advise on the practical implications arising from these changes.
Mark Dunlop, Partner, Bedell Cristin, Jersey