Key Structuring Issues
Complex tax, accounting and employment matters are amongst those which drive the choice of acquisition structure for private equity funded transactions. Some of the most common types of private equity acquisition transactions are the leveraged buyout (LBO) and the management buyout (MBO).
Where an LBO/MBO transaction involves a domestic or international business with a UK-domiciled management team, the use of Jersey acquisition structures has gained traction with UK private equity advisers for a number of reasons.
This briefing explains why Jersey companies, employee benefit trusts (EBTs) and Channel Islands Stock Exchange (CISX) quoted Eurobonds have become integral components of the LBO and MBO transaction planning process.
Acquisition Structure – Debt & Equity
A typical Jersey debt and equity acquisition structure is comprised of:
Click here to view diagram.
The key Jersey-connected parts of the structure include:
- Jersey group holding company/acquisition-vehicle
- Jersey EBT; and
- a CISX quoted Eurobond.
A tiered Jersey debt and equity holding structure:
- enables structural subordination of intra-group/ acquisition financing (ie.splits debt/equity investment)
- facilitates the requirements of both the PE backer and Target group management
- provides UK resident non-UK domiciled Target group management with remittance based taxation options for future exit (eg. UK CGT)
- allows for simplified dividend flows to PE investment vehicles and therefore ultimate PE investors; and
- should not be subject to tax/stamp duty in the UK on any future disposal.
- the EBT facilitates the alignment of target management objectives with those of the PE shareholder
Jersey Group Holding Company/ Acquisition Vehicle
The principal advantage 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.
A Jersey company may make a distribution from a wide range of sources, not merely from distributable profits.
A zero rate of income tax applies to all Jersey companies when they are a locally regulated company.
Where a Jersey company is managed and controlled in a country where all or part of the company’s income is taxed at a rate of 20% or more the company is treated as tax resident in that other country (eg. in the UK). The effect of this is that the Jersey company should not be dual resident for UK DRIC purposes.
On an exit, 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.
As an alternative exit, Jersey companies are also suitable vehicles for IPO and have been listed on all the world's major exchanges.
Rewarding, motivating and retaining senior employees and attracting new high profile executives to portfolio companies requires a well structured, tax efficient and effectively administered remuneration package.
As part of the LBO/MBO process, it is usual for share based incentive plans to be designed to align the activities of executives and senior employees with the requirements of the PE group investor. Share plans are typically operated in conjunction with an EBT. An EBT is generally an offshore trust where the trustee's duty is to act in the interests of the employees (and certain qualifying former employees) who are beneficiaries under the EBT.
Jersey EBTs that form part of structured LBO/MBOs, fulfil a number of functions depending on the plan structure, the stage in its life-cycle and the Target company structure.
It is common for EBTs to allow for multiple share plans to be managed through a single trust arrangement for a group of companies.
Incentive plans for the PE management team are often more creative and can be tax efficient depending on their country of residence and domicile. Plans include structuring of carried interest, share incentives, bonus deferral and partnership interest management.
Quoted Eurobond Listing
The CISX has seen a dramatic increase in the listing of quoted Eurobonds since December 2002 when it was designated by the UK Inland Revenue as a recognised stock exchange under Section 841 of the UK Income and Corporation Taxes Act 1988 (ICTA).
Many of these Eurobonds have been issued in connection with private equity transactions. Typically, the debt issuing entity will be a UK tax resident company formed in connection with a private equity funded acquisition.
The ICTA designation is significant because qualifying debt securities listed on the CISX are eligible for the quoted Eurobond exemption. That exemption allows an issuer within the UK tax net to make interest payments on listed securities gross ie. without deduction of UK withholding tax of up to 20%.
Other key advantages of listing on the CISX include:
- unlike other European stock exchanges, the CISX is not bound by any EU Listing Directives and is able to be considerably more flexible in its approach
- the CISX does not require an issuer to appoint a local paying agent in the Channel Islands or for the notes to be issued in a clearing system
- the CISX is aware of transaction time constraints which affect issuers and will commit to meeting an agreed transaction timetables; and
- listing fees levied are competitive with other Eurobond exchanges.