INTRODUCTION

This briefing is intended to serve as a brief guide to the types of companies available in Jersey.

The Companies (Jersey) Law 1991 (the "Law") is a comprehensive, modern statute governing all aspects of the regulation of the formation and administration of private companies in Jersey.

Prior to 2002, Jersey companies could only be incorporated as limited liability companies, issuing shares having a nominal value. However, following substantial amendments to the Law in recent years, the following forms of company are now available in Jersey:

  1. par value companies;

  2. no par value companies;

  3. guarantee companies;

  4. single member companies;

  5. unlimited companies; and

  6. cell companies.

The introduction of the no par value company is a major innovation, permitting for the first time a simple mechanism for return of capital to shareholders without requiring the sanction of the Royal Court, as is the introduction of cell companies.

Cell companies are companies which, once established, have the ability to create cells separate from themselves, each of which may hold separate assets (and liabilities), therefore enabling the assets (and liabilities) of each cell to be isolated from the assets (and liabilities) of the cell companies themselves and of any other cells.

A cell company may be a public or private company, a par value or no par value company or a guarantee company and it may be a limited liability or unlimited liability company, and the Law now provides for two forms of cell company: the protected cell company and the incorporated cell company.

A certain degree of combination of the categories of companies is permitted - a no par value or a par value company (which, by definition, has limited shares in issue) may also issue unlimited shares or have guarantor members.

BENEFITS OF USING A JERSEY COMPANY

Using a Jersey company can be beneficial in terms of company law provisions and tax treatment. Additional benefits include separate legal identity, limited liability for shareholders and ease of transfer of ownership.

Share capital can be denominated in any currency and issued in various classes, including redeemable shares. These features, combined with the possibility of selecting one of three different tax regimes available in Jersey, enable Jersey companies to be structured to meet a wide variety of business purposes, from commercial trading and joint ventures to investment vehicles.

PAR VALUE COMPANIES

Definition A company is a par value company if:

  1. it is registered with share capital;

  2. its shares are expressed as having nominal value; and

  3. its memorandum of association states that it is a par value company, or it was incorporated prior to 1 September 2002.

A par value company can have guarantor members but cannot issue no par value shares.

Share capital account and share premium account

A par value company is equivalent to a company limited by shares. On an issue of limited shares having a par value, the proceeds representing the nominal value are transferred to the company's share capital account and any premium is transferred to the company's share premium account. The concept of maintenance of share capital continues to apply to par value companies. Therefore, any reduction of a par value company's share capital requires the sanction of the Royal Court.

Restrictions on the sources from which the monies to pay for the redemption or repurchase of its shares still generally apply, as set out below.

Redemption

The nominal element of the redemption price of limited shares of a par value company may be redeemed from the following sources:

  1. from the company's realised capital and revenue profits less its realised capital and revenue losses;

  2. from the company's realised revenue profits less its revenue losses, whether realised or unrealised;

  3. from the proceeds of a fresh issue of shares made by the company for the purpose of the redemption.

The premium element of the redemption price of limited shares of a par value company may be redeemed from the following sources:

  1. from the company's share premium account of any class of shares;

  2. from the same sources available to meet the nominal element; or

  3. if authorised by a special resolution, from the company's unrealised capital or revenue profits less its capital or revenue losses, whether realised or unrealised.

In all cases, the directors who authorise the payment on redemption must reasonably believe that, immediately after payment:

  1. the company will be able to discharge its liabilities as they fall due; and

  2. the realizable value of the company's assets will not be less than:

(a)in the case of a payment from a share premium account, the amount of the company's liabilities; or

(b) in the case of a payment from unrealised capital or revenue profits, the aggregate of the company's liabilities and the amounts standing to the credit of its capital accounts.

Purchase of own shares

The sources which are available to be used to pay the purchase price of limited shares of a par value company are the same as are available for redemption.

The purchase by a Jersey par value company of its shares in issue requires the sanction of a special resolution (unless the company is a wholly owned subsidiary of a Jersey company, in which case no resolution is needed).

If shares are purchased otherwise than on a Stock Exchange, they may only be purchased pursuant to a contract approved in advance by an ordinary resolution of the company.

The shares to be purchased do not carry the right to vote on the resolution sanctioning the purchase or approving the contract.

Winding up

On a winding up, the holder of a limited share of a par value company may be liable to contribute up to the unpaid amount on that share in respect of which he is liable.

NO PAR VALUE COMPANIES

Definition

A company is a no par value company if:

  1. it is registered with shares which are not expressed to have nominal value. The memorandum of association will state the limit (if any) on the number of shares of each class that the company is authorised to issue; and

  2. its memorandum of association states that it is a no par value company.

A no par value company can have guarantor members.

Stated capital account

A no par value company has a stated capital account, instead of a share capital account and a share premium account. The stated capital account is credited with:

  1. the cash received by the company for the issue of no par value shares;

  2. the value, as determined by the directors, of the non-cash "cause" (or consideration) received by the company for the issue of no par value shares; and

  3. every amount which the company by special resolution resolves to transfer into the stated capital account from its profit and loss account or from any capital or revenue reserve.

Unlike the share capital account of the par value company, a no par value company's stated capital account can be used to fund a redemption or repurchase of its shares. This has the major advantage of giving investors a greater degree of flexibility when seeking to recover invested capital. The stated capital account cannot otherwise be reduced save pursuant to a court-sanctioned reduction of capital.

Redemption

A no par value company may use its stated capital account to redeem its redeemable shares. This allows a return of contributed capital to members, without requiring court sanction.

A no par value company may also use the following sources to redeem its shares (broadly similar to those available for redemptions of redeemable shares of a par value company):

  1. from the company's realised capital and revenue profits less its realised capital and revenue losses;

  2. from the company's realised revenue profits less its revenue losses, whether realised or unrealised;

  3. from the proceeds of a fresh issue of shares made by the company for the purpose of the redemption; or

  4. if authorised by a special resolution, from the company's unrealised capital or revenue profits less its capital or revenue losses, whether realised or unrealised.

There is no obligation to make any transfer to a capital redemption reserve. In all cases, the directors who authorise a redemption of shares must reasonably believe that, immediately after payment:

  1. the company will be able to discharge its liabilities as they fall due; and

  2. the realizable value of the company's assets will not be less than:

(a)in the case of a payment from the stated capital account, the amount of the company's liabilities; or

(b) in the case of a payment from unrealised capital or revenue profits, the aggregate of the company's liabilities and the amounts standing to the credit of its capital accounts.

Repurchase of own shares

The sources available to fund the repurchase price of shares in a no par value company are identical to those available for redemptions. The repurchase of the limited shares of a no par value company requires the sanction of a special resolution (unless the no par value company is a wholly owned subsidiary of another Jersey company).

If shares are purchased otherwise than on a Stock Exchange, they may only be purchased pursuant to a contract approved in advance by an ordinary resolution of the company. The shares to be repurchased do not carry the right to vote on the resolution sanctioning the purchase or approving the contract.

Winding up

On a winding up, the holder of a limited share of a no par value company may be liable to contribute up to the unpaid amount on that share in respect of which he is liable. This should, in practice, be limited to the outstanding balance of any agreed subscription price.

Conversion of shares

Par value shares may be converted into no par value shares by alteration of the memorandum of association. All of the company's par value shares must be converted. The alteration of the memorandum of association must be approved by special resolution of the shareholders (and any class of shareholders) of the company.

No par value shares may be converted into par value shares by alteration of the memorandum of association. All of the company's no par value shares must be converted. The alteration of the memorandum of association must be approved by special resolution of the shareholders (and any class of shareholders) of the company.

Uses of a no par value company

Potential uses for no par value companies include:

  1. closed-ended funds. While the Law contains express provisions allowing the redemption or repurchase monies for shares of an open-ended investment company which holds a permit under the Collective Investment Funds (Jersey) Law 1988 to be paid from capital, this does not currently apply to closed-ended funds. Using a no par value company, however, now permits a different form of exit strategy to listing or winding up;

  2. open-ended funds. It will not be necessary for an open-ended investment company which does not hold a permit under the Collective Investment Funds (Jersey) Law 1988 to issue management shares to the fund manager in order to raise funds from which to repay the nominal element of any shares being redeemed;

  3. group re-structures. The Law now makes it easier for capital to be moved within a group of companies, where a transfer or winding up may have adverse tax consequences; and 4. distributions of capital. The Law now allows capital assets to be distributed to members who may otherwise suffer substantial tax liability on income or dividends received.

GUARANTEE COMPANIES

A company is a guarantee company if:

  1. it consists only of guarantor members; and

  2. its memorandum of association states that it is a guarantee company.

The memorandum of association will state that each guarantor member undertakes to contribute such amount to the assets of the company as may be required to meet the company's liabilities and any expenses of a winding up if the company is wound up while he is a member (or within twelve months thereafter). However, this guarantee amount will not exceed the maximum amount specified in the memorandum. Guarantor members are liable to contribute only if the Royal Court is satisfied that past and present members who hold (or held) limited shares (if any) are unable to satisfy the contributions required from them.

Guarantee companies have existed in the United Kingdom for some time. As a contribution is only required on a winding up, this type of company has been considered inappropriate for true business enterprises, and guarantee companies in the United Kingdom have, therefore, generally been established as charitable organizations or to carry on non-commercial undertakings, such as trade associations.

In an offshore environment, the uses of a guarantee company may be wider. For example, some jurisdictions treat guarantor members differently to shareholders for tax purposes and, in particular, may treat distributions by the company to a guarantor member as capital gains rather than income.

Unlike the United Kingdom, 'hybrid' companies are permitted in Jersey. These are companies with both shareholders and guarantor members. As certain jurisdictions differentiate between holders of equity and guarantor members, there may be tax advantages resulting from the split between control and economic ownership of a 'hybrid' company.

SINGLE MEMBER COMPANIES

Previously, where a Jersey company has a single registered member for a period of more than six months, that member (if not a body corporate) loses the protection of limited liability. However, since 1 September 2002, a private company is able to carry on business with a single member without that member becoming jointly and severally liable with the company for payment of the company's debts. This may allow a greater degree of flexibility in the management of some companies, and may be particularly relevant to owner-operated businesses or sole traders seeking to manage their exposure to liability.

If the number of members of a private company decreases to one, a statement that the company only has one member and the date on which that event occurred must be entered on the register of members. Where the number of members increases to two or more, a statement that the company has ceased to have only one member and the date on which that event occurred must be entered on the register of members.

If a single member company which is a limited company enters into a contract with a director who is also the single member, the terms of the contract must be set out in a written memorandum or in the minutes of the first board meeting after the making of the contract.

Notwithstanding anything to the contrary in the articles of association, a single member present personally or by proxy shall be sufficient to constitute a quorum at any meeting of the company.

In order to ensure that shareholder decisions are properly formulated and evidenced, a written record of a decision taken by the sole member must be provided to and retained by the company. Failure to do so is an offence but does not affect the validity of the decision.

UNLIMITED COMPANIES

A company is an unlimited company if:

  1. it is a par value company or a no par value company (ie not a guarantee company);

  2. there are no members who are holders of limited shares; and

  3. there are no guarantor members.

(However, please note that companies may issue classes of limited shares and of unlimited shares. Further, a company may have guarantor members as well as holders of unlimited shares, although it would not be an unlimited company).

The memorandum of association must state whether liability arising from the holding of a share is unlimited or limited.

On the winding up of a company, whether unlimited or not, the liability of a member holding unlimited shares to contribute is not limited in any way. This contrasts with the liability of a holder of a limited share, which is restricted to any unpaid amount owing to the company in respect of such share.

The approval of the Royal Court is not needed to extinguish or reduce a capital account established in respect of an issue of unlimited shares (although a special resolution is still required). This ability to receive a return of capital reflects the greater risk being taken by the holder of unlimited shares.

Unlimited companies (and unlimited shares) have been permitted in England for some time. However, given the lack of attraction of unlimited liability, it is not surprising that few English unlimited companies have been established, and it is not anticipated that this form of company will see much use in Jersey.

CELL COMPANIES

A cell company is a corporate vehicle that is permitted to segregate its assets and liabilities between different cells of itself, for different purposes, with the result that a creditor's recourse against the cell company is limited to whichever cell was transacted with. Where a cell becomes insolvent, the remaining cells of the structure are not affected and continue to operate as normal.

Cell companies are available in many jurisdictions, both onshore and offshore (for example, segregated account companies in Bermuda and protected cell companies in Guernsey). With effect from 1 February 2006, the Law permits the establishment of cell companies in Jersey.

The major issue affecting cell companies has always been the recognition of their validity by other, mainly onshore, legal systems, which do not generally permit such concepts.

Jersey's solution has been to create the incorporated cell company (the "ICC"), as well as the protected cell company (the "PCC").

Jersey cell companies do not have their permitted activities limited by statute as many cell companies in other jurisdictions do. The Jersey Financial Services Commission (the "JFSC") will instead monitor the uses of cell companies and issue guidance as to their preferred use if such is thought necessary.

The benefits of a Jersey cell company are not only limited to new structures. It will be possible, with the JFSC's permission, for a foreign body corporate to change its status to a Jersey cell company as part of the process of redomiciliation to Jersey.

If you would like further details on cell companies, please ask for our memorandum entitled "Cell Companies in Jersey".

Jersey

Heather Bestwick, Partner

Cayman Islands

Wayne Panton, Partner

London

David Whittome, Partner

British Virgin Islands

Jack Boldarin, Partner

Hong Kong

Hugh O'Loughlin, Partner

Dubai

Rod Palmer, Partner

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.