Whilst the M&A pipeline remains relatively strong, getting deals to completion is challenging due to the tightening of available credit and uncertainty with asset valuations. In this climate PLCs, other large corporates and PE houses are looking at alternative and more creative structures to gain access to deals that might not be available via traditional M&A. The use of a Jersey JV vehicle is one such alternative structure which can be used in a try-before-you-buy sense and as a precursor to traditional M&A activity in the future.
Rather than using the home jurisdiction of one of the parties, or the jurisdiction where the JVs business is to be located, seeking a neutral venue to provide a level playing field for all parties is becoming more important and this is where going offshore provides a feasible solution.
The primary motivation for choosing an offshore jurisdiction is often to take advantage of favourable tax regimes that do not levy a corporation tax on profits of the JV vehicle. The impact of this is that a tax neutral position can be maintained for all participants.
Benefits of using a Jersey JV vehicle
There are both commercial and structural benefits to using a Jersey JV vehicle which include:
- Jersey company law being based on English company law but with greater flexibility (for example, in relation to capital extraction etc);
- an extremely favourable corporate tax regime;
- no stamp duty on the transfer of shares in Jersey companies;
- Jersey's close proximity to and same time zone as London makes closing transactions simpler;
- fast-track formation of companies (same day if required);
- being any easy way for two or more parties to pursue a partnership or strategic alliance
- allowing investors to gain a better understanding of the assets or regions involved (before one of the parties decides to go at it alone);
- getting exposure to new and emerging markets especially where, for example, restrictive foreign ownership regulations apply; and
- going some way toward addressing the issue of valuation gap between traditional M&A players where markets are either (or both) unpredictable or volatile and uncertain because of external factors such as – the European economy, for example.
One of the key advantages of using a Jersey holding company is the flexibility of Jersey company law in relation to returns to investors - whether by means of dividend, redemption of share capital or share buy-back. In particular, monies payable on the redemption of redeemable shares or on the buy back of shares by a Jersey company, may be funded from any source - including capital. A Jersey company may also make a distribution from a wide range of sources, not merely from distributable profits.
A Jersey holding company also facilitates a tax efficient exit through stamp duty savings and is also suitable for an IPO.
A zero rate of income tax applies to virtually all Jersey companies.
However, if required, it is possible to ensure that a Jersey company is tax resident in another jurisdiction provided that
- it is centrally managed and controlled in another jurisdiction outside Jersey;
- it is tax resident in that other jurisdiction; and
- the highest rate of corporation tax in that other jurisdiction is 20% or above.
No stamp duty is payable on the transfer of shares in a Jersey company and there is no corporation or capital gains tax in Jersey. Jersey levies no annual taxes or charges by reference to a company's authorised or issued share capital. Although Jersey has recently introduced a goods and services tax at a rate of 3 per cent, companies beneficially owned outside Jersey which do not supply goods or services in Jersey will generally qualify for "international service entity" status - effectively bringing them outside the scope of the goods and services tax regime provided that a fee of £100 is paid each year.
Returns to investors
It is possible to structure returns to investors by way of capital returns by means of redemption or buy back or cash distributions (or a combination of these methods). Jersey company law is very flexible on the sources of funding for redemption of share capital and in relation to requirements for distributions.
Redemption and buy back of shares
Monies payable on the redemption of redeemable shares or on the buy back of shares by a Jersey company may be funded from any source - including capital.
The directors responsible for authorising the redemption or buy back payment will be required to make a statement that they have formed the opinion that:
having regard to:-
the company will be able to -
immediately following the date on which the payment is to be made, the company will be able to discharge its liabilities as they fall due; and
- the prospects of the company and to the intentions of the directors with respect to the management of the company's business, and
- the amount and character of the financial resources that will, in their view, be available to the company,
- continue to carry on business, and
- discharge its liabilities as they fall due
for a period of 12 months after the date of such payment (or, if sooner, a solvent winding up of the company).
Therefore, provided that the solvency statement can be made, there is considerable flexibility in funding the redemption or share buy back.
A Jersey company may make a distribution from a wide range of sources, not merely from distributable profits. Therefore, distributions may be made from capital without a need to obtain Court approval for a reduction of capital (as was previously the case).
A distribution may be debited from any account of the company (including the share premium account and the stated capital account) other than the capital redemption reserve or the nominal capital account. The fact that distributions may be made from the stated capital account of a no par value company but not the nominal share capital of a par value company may lead to an increased use of no par value companies in the future.
A distribution may only be made if the directors authorising the distribution make a solvency statement in the form referred to above.
Jersey company law historically prohibited a company giving financial assistance in respect of the acquisition of its own shares. This prohibition has now been removed and the amendments make clear that any previous common law prohibition on financial assistance is not renewed by virtue of the removal of the statutory prohibition.
An acquisition often involves the issue of loan notes in connection with the acquisition financing. The Channel Islands Stock Exchange (CISX) was designated by the UK Inland Revenue as a recognised stock exchange under Section 841 of the UK Income and Corporation Taxes Act 1988 in 2002. This designation means that qualified debt securities listed on the CISX are eligible for the "Quoted Eurobond Exemption" which allows an issuer within the UK tax net to make payments of interest on the listed securities gross without deduction for tax.
Ogier Corporate Finance Limited (OCFL) is a full listing member of the CISX and is able to act as sponsor for listing purposes, having extensive expertise in this area.
OCFL sponsored over 100 listings in 2011 and in 2008 listed debt securities issued by Best Buy Distributions Limited which was the 3000th listing on the CISX.
Further details of the services provided by OCFL are available on request.
Exit by IPO
Jersey incorporated companies are increasingly being used for listing on the Alternative Investment Market of the London Stock Exchange and also on the main board of the London Stock Exchange. A separate briefing on the advantages of using a Jersey company for a listing is available on request.
Ogier also advises on BVI, Cayman and Guernsey law and is, therefore, able to advise on more complex cross-border transactions involving those jurisdictions.
Relevant examples of Jersey JV vehicles:
- Hutchison Ports Holdings Limited, a subsidiary of Hutchison Whampoa in relation to the establishment of a Jersey holding structure and joint venture vehicle for a major UK port.
- Thomas Cook Group plc and The Co-operative Group on the Jersey-incorporated joint venture company to be used for the proposed merger of the high street travel and foreign exchange businesses of each of these UK household names.
- PetroChina and British chemicals group INEOS formed INEOS Investments (Jersey) Limited, a Jersey joint venture company, in relation to the refining operations in Grangemouth (Scotland) and Lavéra (France). PetroChina paid US$ 1.015 billion cash for the shares in the joint ventures.
- Lanxess and INEOS together established INEOS ABS (Jersey) Limited, Jersey, to which the Lanxess' Lustran Polymers was transferred.
- a number of Jersey joint venture/co-investment style vehicles used for acquisition and related purposes include:
- Heineken and Carlsberg, on the recommended cash offer (GBP 7.8bn, EUR 10.5bn, USD 15.5bn) by Sunrise Acquisitions Limited for UK brewer Scottish & Newcastle; and
- JPMorgan Asset Management and Australia's Colonial First State on the successful by Northwest Electricity Networks (Jersey) Limited bid for United Utilities Electricity.
- Segro and Moorfield Real Estate Fund II established a Jersey joint venture vehicle to acquire the UK Logistics Fund for £314.7 million from Hermes Real Estate, Legal & General and LaSalle Investment.