Much has been written about the usefulness and flexibility of Guernsey protected cell companies (“PCCs”), particularly for investment fund vehicles. It is well known that a standard non-cellular Guernsey company can, with the consent of the Guernsey Financial Services Commission (“GFSC”), be converted into a PCC. This is a well-trodden path for investment fund companies that belatedly decide to create different sub-fund options for one reason or another. Less well known is that fact that a PCC can be converted the other way, into a normal non-cellular company. The effect of conversion is that the individual cells are merged and investors in the various cell sub-funds join together as investors in a single consolidated fund.
One of the very first conversions from a PCC to a non-cellular company for an investment fund was carried out by Letterstone Emerging Europe Fund Limited (“LEEF”) earlier this year. AO Hall’s Corporate team acted as legal adviser throughout the process. LEEF is a great example of the flexibility of the Companies (Guernsey) Law, 2008, as amended (the “Companies Law”) which contains the PCC legislation, as LEEF also started life as a non-cellular company. When its manager, Letterstone Limited, decided to add new sub-funds for further investment, it did so by converting LEEF into a PCC and adding two new fund cells.
However, like most Eastern European property funds, LEEF suffered significantly during the credit crunch and subsequent recession. Because of this, its management had been looking for areas to save costs and protect investors’ capital. One area of saving was achieved by the decision to convert LEEF from a PCC into a non-cellular company.
The process for conversion is set out in Part V of the Companies Law. The basic requirements to convert include:
- The written consent of the GFSC;
- The company as a whole must pass a special resolution (75%) approving the conversion and any consequential amendments to the company’s name and memorandum and articles;
- The holders of shares in each cell must as a separate class pass a special resolution (75%) approving the conversion; and
- Copies of all resolutions, the GFSC’s consent, the amended constitutional documents and a declaration of compliance with the requirements of the Companies Law must be filed with the Registrar of Companies.
The declaration of compliance requires the directors of the company to certify that the company satisfies the statutory solvency test and that there are no creditors of the company whose interests will be unfairly prejudiced by the conversion.
The Registrar then gives notice of the conversion for such period as he thinks fit, subject to a minimum period of 28 days, following which the conversion becomes effective.
Most importantly, the Companies Law specifically provides that, where a PCC is converted into a noncellular company:
- All property and rights to which the core and the cells of the PCC were entitled remain the property and rights of the converted company; and
- The converted company remains subject to all criminal and civil liabilities, and all contracts, debts and other obligations, to which the core and each cell were subject before the conversion.
Accordingly, it is not necessary for any contracts or other rights or obligations of the individual cells to be novated or assigned to the converted company as these are automatically transferred by virtue of the Companies Law.
What the Companies Law does not deal with is the practical process of converting shares in the core or a particular cell of a PCC into a new class of shares in a consolidated company. Obviously it is vital that an up-to-date valuation of the shares in each component is carried out, and a conversion formula is derived from this valuation. That formula should then form part of the conversion proposal put to and approved by the shareholders.
In summary, the ability to convert a PCC into a noncellular company provides another example of how Guernsey’s Companies Law continues to provide innovative solutions and ongoing flexibility to corporate vehicles established in Guernsey. This is particularly so for investment funds, which despite adverse economic conditions, continue to be attracted to Guernsey’s legal and regulatory regime.