Traditionally, family offices have looked towards GPLP models as the go-to investment platform, but more recently, investors are taking an interest in cell companies, such as the protected cell company (PCC), and the incorporated cell company (ICC).
According to PWC's Family Office Deals Study 2022, family office deals came to a staggering USD 227.6 billion globally in 2021 and for the first time in history, these investments accounted for 10% of the entire deals market. This increasing trend towards direct investments has been described as a disruptive force by investment professionals.
In this article, Ian Rumens, Head of Private Client – Jersey, explores the key features of PCC and ICCs and what makes them attractive to family offices.
What is a PCC & ICC?
A cell company is a form of corporate body with a separate legal personality which permits the assets and liabilities of a company to be segregated into different cells. The key advantage is that in an insolvency situation, the recourse of any creditors will be limited to the specific cell that they transacted with.
A protected cell of a PCC is not a separate legal entity (although it is treated as if it were for many purposes) and transacts business through the PCC. An incorporated cell of an ICC is an entirely separate legal entity which may transact and enter into agreements with third parties in its own name.
Why are PCC and ICCs attractive to family offices?
A cell company can provide a convenient and cost-effective vehicle where each cell can constitute a separate sub-fund with separate investment strategies and asset classes. Essentially the family office can place assets and liabilities into distinct cells, be that by sector, asset class or risk.
Where family offices lack the relevant expertise for a diverse range of assets, they can appoint specialist investment managers to each cell and segregate each investment from one another in a structure which they control.
Often a family office will provide one cell of the cell company to each family member or use a cell for a club deal funded by a pool of investors. This gives each family member the option to invest or not in a family venture. The investment cell arrangement is often used as part of a next-generation education program.
What are the key features of a PCC & ICC?
- Separate legal personality
A PCC is a single legal entity that contains multiple protected cells. Each cell has its own memorandum and articles of association, shareholders, and directors, but it is not a separate legal entity from the PCC itself. Each cell of an ICC is a separate legal entity and a company in its own right.
- Naming conventions
The name of a PCC or ICC must clearly indicate it as such, stating the letters "PCC" or "ICC" or the words "protected cell company" or "incorporated cell company" within the naming convention.
- Segregation of assets and liabilities
A PCC segregates its assets and liabilities into cellular and non-cellular categories. Cellular assets and liabilities belong to specific cells, while non-cellular assets and liabilities belong to the PCC itself. The directors of a PCC must ensure that cellular assets are kept separate from non-cellular assets and kept separate from those of other cells. Each incorporated cell of an ICC has its own established assets and liabilities, like a regular company.
- Recourse of creditors
In an insolvency situation, if a creditor transacts with the PCC, they have recourse to non-cellular assets. If they transact with a specific protected cell, their claim is limited to the cellular assets of that cell. Creditors of an incorporated cell have recourse only to the assets of that specific cell and not the assets of the ICC or other cells within the structure.
- Taxation and structure
A PCC generally submits a single tax return as a single legal entity. In an ICC, each incorporated cell is treated as a separate entity for tax purposes, with its own tax treatment.
- Formation, shareholders, directors, and registered
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Both PCC and ICC have their own formation process, with a memorandum and articles of association. Each cell has its own board of directors. Shareholders acquire shares directly in the cells, and the rights and conditions attached to the shares are outlined in the cell's articles of association. Cells have the same company secretary and registered office as the cell company.
- Accounts and annual returns
The cell company is responsible for including details of each cell in its annual return. However, each cell is responsible for preparing its own accounts.
What are the key takeaways?
The last decade has seen the firepower and influence of family offices in the private markets exponentially increase and this has gone hand in hand with the growing trend of alternative structures being engaged in the preservation, enhancement, and investment structuring of managing family capital.
It is hard to argue against family offices increasingly using a range of bespoke structures which may include trusts, private trust companies and foundations investing via alternative structures like JPFs, JPUTSs, partnerships and CCs to achieve their aims. The challenge for Family Offices is finding an offshore service provider with a family office client team which has the necessary combination of skills coupled with the client service delivery style to service the demands of the modern-day, evolving family office.
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.
