Guernsey and Jersey have long been popular places used by private equity investors in acquisitions of target businesses given the advantages they offer over other jurisdictions. We're taking a closer look at some of these benefits and why the private equity sector is increasingly turning to Guernsey and Jersey corporate structures.
Incorporation of a Guernsey or Jersey company and traditional stack
Typically, private equity transactions involving Guernsey and Jersey companies use a Topco, Midco and Bidco acquisition stack that's common in the UK. Guernsey and Jersey have experienced corporate service providers that can incorporate entities quickly, including on a same-day basis, subject to the usual requirements.
Entities can be structured in whatever way works best for the transaction. This may include, for example, setting up nominee entities or EBTs for proposed management shareholders as such arrangements are tax-efficient and flexible. Guernsey or Jersey-incorporated "qualifying asset holding companies" (QAHCs) are another option which benefit from several UK tax breaks. For more information on QAHCs and the benefits of Channel Islands incorporated companies, please click here.
It's also possible for Jersey companies to be incorporated as, or converted to, no-par value companies. Guernsey companies are free to issue shares of no-par value. This is when a standard company's shares have no specific nominal (par) value. This capital structure can be helpful, as a company can issue shares without regard to authorised share capital, which can effectively be unlimited for a no-par value company. It's also helpful for companies with management incentive arrangements as shares can be issued quickly.
More broadly, Guernsey and Jersey companies benefit from a flexible but familiar company law, which is often reviewed by industry and updated by the legislators to ensure it remains a modern and flexible company law regime. Both islands are considered to have robust financial, legal and professional services industries, in politically stable and corporate-friendly jurisdictions.
Transaction documentation
Guernsey and Jersey company constitutional documents are flexible and can include the wide swathe of bespoke governance, economic and procedural rights that may be needed for a private equity acquisition. These documents can also take care of complex shareholding arrangements alongside adjacent shareholder or investment agreements.
In this regard, Jersey law offers familiarity to commonwealth private equity investors underpinned by a more beneficial corporate law system.
Where possibly complex securities are considered, such as issued loan notes to partially fund a deal structure, Guernsey and Jersey also have a strong but sophisticated regulatory environment for broader securities issuances. Such arrangements can be used subject to following required procedural steps and are subject to certain beneficial exemptions.
Returns of capital and distributions
One of the most beneficial reasons for setting up a Guernsey or Jersey acquisition stack or acquisition entity in a private equity context, is Guernsey and Jersey's maintenance of capital regime, combined with its flexible companies law.
Unlike in the UK, distributions under Guernsey and Jersey law can be made without needing distributable profits or reserves. Instead, the directors of a Guernsey or Jersey company must be comfortable that it satisfies statutory solvency requirements.
This essentially requires the directors to confirm that the Guernsey or Jersey company will be able to settle its liabilities as they fall due (for example, a solvency analysis based on cash flow), and for Guernsey companies only, that the company is balance sheet solvent. Distributions can also be debited from any account of the company, other than its nominal capital account or capital redemption reserve.
The same relaxed rules on maintenance of capital apply to redemptions and share buybacks, subject to the usual checks. As such, Guernsey and Jersey companies offer a variety of flexible means with which to return capital to shareholders in private equity contexts. It's also worth noting that in Guernsey and Jersey there's no restriction on financial assistance.
If shares are issued for non-cash consideration in a Guernsey or Jersey company, there's no requirement under the Guernsey and Jersey companies law to complete a third-party valuation on the issuance of those shares.
Tax and economic substance
Central to any decision on how to structure any deal (including private equity transactions), is the tax treatment of the holding company structure. Noting that Guernsey and Jersey are regarded as being the forefront of international tax standards around the world, they are also tax neutral jurisdictions – find out more about this here. The main rate of corporate income tax in Guernsey and Jersey is 0% - there are tax rates of 10% and 20% for income on certain activities, but these generally don't apply to a holding company.
As with several other offshore financial centres, both Guernsey and Jersey have adopted economic substance requirements which apply to Guernsey and Jersey tax resident companies (and certain partnerships) that carry on certain activities. Acting as a holding company is one such activity, although Guernsey and Jersey companies are generally able to satisfy the applicable requirements.
Neither Guernsey nor Jersey levy any capital gains tax, and there is also no local transfer tax and/or stamp duty levied on the share sales in a Guernsey and Jersey company. Another benefit with using a Guernsey or Jersey stack in a private equity transaction is it's possible, subject to certain exceptions, for a Guernsey or Jersey company's accounts not to be audited.
It's also possible for Guernsey and Jersey companies to be tax resident in a jurisdiction outside Guernsey and Jersey, with the result that they can cease to be Guernsey or Jersey tax resident. This allows Guernsey and Jersey companies to be used in international structures where there's a preference for the flexible corporate law provided by a Guernsey or Jersey company, but also a need for a holding company that is tax resident elsewhere.
Exit
Exiting from a Guernsey or Jersey company or company stack provides many benefits for private equity. As previously mentioned, Guernsey/Jersey's company law and maintenance of capital regime gives significant flexibility in returning capital to shareholders.
As said above, there's also no local transfer tax and/or stamp duty levied on the share sales in a Guernsey or Jersey company. It's also possible to structure an exit so that there's no UK stamp duty or stamp duty reserve tax, which can be useful for private equity exits. Dissolving surplus solvent Guernsey and Jersey entities is a straightforward process which doesn't need any court sanction.
Other benefits
Guernsey and Jersey company law also give several other distinct advantages for corporate vehicle mobility, including but not limited to:
- A bespoke merger law, allowing two or more companies (which can include non-Jersey companies) to merge, and which includes simplified intra-group and intra-subsidiary mergers for Guernsey and Jersey companies; and
- Comprehensive migration procedures, letting Guernsey and Jersey companies migrate outside of Guernsey or Jersey where suitable.
More information on Jersey's merger law on take-private transactions can be found here.
TISE (The International Stock Exchange) listings
Where investor or institutional debt is used to fund any Jersey private equity acquisition stack, the debt can also be listed on The International Stock Exchange (TISE). Among other advantages, TISE is a "recognised stock exchange" for the purposes of the Quoted Eurobond Exemption (QEE), which allows an issuer to make payments of UK source interest on the listed securities gross without deducting UK withholding tax.
More information on TISE listings' many advantages can be
found here. Our listings team has extensive
experience supplying listing agent services for TISE listings. WCML
is a Category 1 and 2 sponsor of TISE, which means we're able
to act as a sponsor for all listing purposes.
Other listings
We're also seeing an increase in Guernsey and Jersey Topcos being used as vehicles for international listings. This might be because under the Guernsey and Jersey companies law it's possible for a Guernsey or Jersey issuer company to issue uncertificated securities which, when listed on the London Stock Exchange, can be traded through the CREST system on Euroclear.
It's also possible for a Guernsey or Jersey issuer company to list on the NSYE and NASDAQ and trade its shares in dematerialised form via the US direct registration system known as 'DRS'. Further information on this can be found here.
Summary
Walkers' Guernsey and Jersey Corporate team has extensive experience in private equity transactions, which is also supported by specialist regulatory, finance and dispute resolution practice groups. We offer extensive legal services to clients across all matters under Guernsey and Jersey law.
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.
