With a new Conservative majority government a few weeks into the job, attention is beginning to turn to the EU referendum which the Conservatives said they would call.
As estate agents will tell you, it’s all about location, location, location. Similarly for the UK electorate in such a referendum, they will need to decide whether they should remain in the same place where they are (better the devil you know and all that) or to up sticks to another place where they can reside in relatively splendid isolation (or at least that’s the hope of some) – this specific debate though is for another time.
However, the issue of the EU referendum has been brought to the fore recently by HSBC which stated that it might consider moving its HQ out of the UK and cited concerns, amongst other matters, over the UK potentially leaving the EU. Hot on its heels, Deutsche Bank has announced that it has set up a working group to consider the impact of a Brexit (ie the UK quitting the EU) and whether it should repatriate any of its business out of the UK, and Airbus’ UK boss has been reported as saying that Airbus might reconsider its investment in the UK in the event of a Brexit.
This article briefly considers the issue of redomiciling, what might drive it and how it can be effected.
Why and how to redomicile
There have been a number of examples of groups (in particular re/insurance groups) redomiciling from one jurisdiction to another. New domiciles have included Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland.
A number of factors have driven such groups to redomicile including one or more of the following:
- Streamlining a group structure (eg by moving to a structure with certain key hubs/operating platforms)
- Optimising capital management
- Better aligning a group with where its investor base is located
- Taking advantage of a more friendly tax regime; and
- Moving to a lighter-touch, more accessible regulatory regime
A redomicile can be effected in a number of ways and will depend on what mechanisms are available in the relevant jurisdictions concerned. A pure redomiciliation, where the same entity (eg a holding company), redomiciles to another jurisdiction is quite rare.
In a number of cases, the redomicile is effected by way of the insertion of a new holding company above the existing one, such that the shares of the shareholders in the former holding company are swapped for shares in the new holding company. One way of achieving this is by way of a scheme of arrangement. Other mechanisms can include a takeover or a merger.
In addition to regulatory and other strategic considerations, tax planning will be critical in any proposed redomicile.
In practice, a redomicilaition will mean that the group in question will be effectively managed and controlled from the new domicile.
EU re/insurance groups
For re/insurance groups based in the EU, it is likely to have been Solvency II (which is due to come into force in January 2016), rather than the UK’s EU referendum, which will have forced them to take a long and hard look at their group’s corporate structure (and to continue to do so).
This does not necessarily mean that such groups will look to redomicile but they will be keen to minimise capital requirements by not having more operating subsidiaries than they require. This could involve a restructuring and no longer having a legal entity incorporated in certain jurisdictions.
Where a group has separately regulated subsidiaries in different jurisdictions, this will inevitably result in increased costs and management time being incurred in dealing with different regulators which in turn will create inefficiencies. Also, each subsidiary will need to meet its own capital requirements, and the result of this may well be that the sum of the capital requirements of these various subsidiaries will exceed the capital requirements if there were only one consolidated regulated subsidiary.
Such a consolidated subsidiary could, of course, take advantage of passporting rights which would allow it to carry on business throughout the EEA on either a freedom of services or freedom of establishment basis. Indeed, this ability has resulted in there being a shift away in recent times from groups having a number of different subsidiaries in different EEA jurisdictions to having one key subsidiary which then operates throughout the EEA (in many cases by way of branches). This would be achieved by collapsing a few subsidiaries and transferring their business into a consolidated subsidiary by way of, for example, a portfolio transfer and/or a cross-border merger.
Where groups have done so, they have reported this has increased the relevant group’s flexibility and transparency and reduced regulatory reporting requirements. It has also enabled groups to manage their capital more effectively by taking advantage of built-in diversification and by having a consolidated solvency requirement.
It is hard to predict whether, despite the increased publicity around the issue, any redomiciles/repatriations, or even for that matter restructurings, will actually take place in the near future. However, it is probably unlikely that we will see a trend being set, but more likely that any developments will be isolated, ad hoc ones – time will tell on this though.
What can, however, be said with some certainty is that the UK government will do its best to prevent any high-profile redomicile out of the country.
Securing a yes vote to remain in the EU is likely to go some way to achieving this.