Companies (Jersey) Law 1991: Proposd Amendments - Freen Paper - Summary of Responses

STATES OF JERSEY

COMPANIES (JERSEY) LAW 1991: PROPOSED AMENDMENTS – GREEN PAPER –

SUMMARY OF RESPONSES

Presented to the States on 11th February 2013 by the Minister for Economic Development

STATES GREFFE

2013   Price code: D  R.10

Economic Development Department

Summary of Responses

Green Paper dated 25 November 2011 proposing  Date: 5 February 2013 amendments to the Companies (Jersey) Law 1991

SUMMARY OF CONSULTATION

On 25 November 2011, the Minister published a Green Paper seeking the views of the public over proposed amendments to the Companies (Jersey) Law 1991 ("the Law"). The purpose of the proposed amendments was to confirm and strengthen the competitiveness and standing of the Jersey company, a vehicle used both for local business needs and as one of the key tools of the international finance industry'.

The consultation period closed on 17 February 2012. The Green Paper was made available on the internet and in paper form.

The Green Paper identified 34 separate proposals for amendment. Some of the proposals were of a substantive nature and invited detailed response to 46 specific questions. Other proposals were of a relatively minor nature designed to clarify or ensure parity with connected legislation.

To assist in the consultation process and further inform the responses, possible solutions were provided for all the issues outlined. It was made explicit in the introduction to the Green Paper that these solutions were drawn from a wide provenance and did not necessarily represent the views of Government.

OVERVIEW OF CONSULTATION RESPONSES

In all, two individual responses were received by the Economic Development Department, one from Appleby and one from the Association of Investment Companies. One further combined response was also received from five Jersey Law firms (Bedell Cristin, Carey Olsen, Mourant Ozannes, Ogier and Voisin).

No additional responses were received by Jersey Finance Limited.

Comments were also received from the Funds Division of the Jersey Financial Services Commission ("JFSC") and the Deputy Registrar of Companies.

In addition to the public responses, the Economic Development Department commissioned two external reports (one from a practising UK barrister and one from a Professor of Law and Finance at the University of Oxford).

The responses and reports are analysed below. Given the number of proposed amendments and for ease of exposition, the text of the Green Paper is reproduced in small type.

PROPOSED AMENDMENTS AND RESPONSES

1. Registrar's approval for the circulation of prospectus (Articles 1 and 29) (Article 5 of the Companies (General Provisions) (Jersey) Order 2002)

Responses

Q1  Which (if any) of the identified proposals (or which combination of them)

is to be preferred as a solution to the issue?

The combined response considered that option (ii) would be the simplest option, with the Ministerial Order providing maximum flexibility. Another respondent considered that either or both' options (ii) or (iii) would be preferable. The third considered that a combination of (i) and (iv) would provide the most flexibility.

One report thought that option (i) put considerable burden on the Registrar, added uncertainty and could be seen as slow and inefficient from the point of view of the issuer. Option (ii) might also point to uncertainty through allowing the Minister to make changes from time to time and giving the impression of political regulation of (and thereby interference with) the issuing of securities. The author considered option (iii) to provide the most appropriate mechanism for change.

Q2 What definition of prospectus should be adopted or at what level should

any exemption criteria be set?

One report considered that the exemption levels should be set with reference to the main target markets in which such prospectuses are likely to be issued.

Another respondent suggested that Jersey followed the Guernsey position where the consent of the Registrar is not required if the securities are to be listed on an IOSCO approved exchange. In this way, investor protection would be achieved through compliance with the exchange requirements and the need for any duplicating approval from the Registrar would be avoided.

One respondent recommended that the exemption levels should mirror those in the UK legislation and EU Directive, exempting prospectuses as follows:

• the total consideration for the securities being offered does not exceed 5,000,000 in a 12 month period (or equivalent amount);
• the offer is made to fewer than 150 persons (raising this from the existing 50 person threshold);
• the offer is made only to qualified investors'; or
• the securities being offered have a minimum denomination of 50,000 (or equivalent amount).

The combined response also gave a detailed proposal, considering that the Jersey prospectus rules should not apply where:

• the total consideration for the securities being offered does not exceed 100,000 (or equivalent amount) (in essence, a de minimis rule);
• the securities are to be listed on certain nominated exchanges (and, to these ends, it recommends nominating those exchanges currently set out in Schedule 4 of the Collective Investment Funds (Unregulated Funds) Order 2008);

• the offer is made to fewer than 100 persons (raising this from the existing 50 person threshold) and, further, in calculating the number of persons, certain defined persons should be excluded (institutional investors, high net worth individuals and other sophisticated investors);
• there is a minimum subscription of 100,000 (or equivalent amount); or
• the securities being offered have a minimum denomination of 100,000 (or equivalent amount).

The JFSC raised the following points:

• An amendment to the definition of prospectus' in Article 1(1) of the Law so that it does not apply to an invitation communicated to fewer than 100 persons (as opposed to the current 50) would create a disparity with Article 3(3) of the Collective Investment Funds (Jersey) Law 1988, which also uses the limit of 50 as part of the definition of an offer to the public'.
• There is a difference between merely doing away with the requirement for the registrar's consent to the circulation of a prospectus and exempting certain offers from all (or some) of the prospectus rules altogether. If the latter approach is adopted, this will need to be considered in the light of the Collective Investment Funds (Certified Funds – Prospectuses) (Jersey) Order 2012 ("the CFPO") and the Jersey Listed Fund Guide, which requires that an offer document complies with the requirements set out in the Schedule to the CFPO.

The combined response further proposed that the exclusion for director and employee share options schemes, currently present in Article 3(2)(c) of the Companies (General Provisions) (Jersey) Order 2002, be moved from the Order and into the definition in the Companies Law itself.

Q3 Would the definition or applicable criteria for exemption be best set by

Regulation or by Ministerial Order (whether on the advice of the Registrar or otherwise)?

One respondent considered that Ministerial Order would provide maximum flexibility. All other respondents considered the precise form of subordinate legislation to be immaterial or did not comment.

Government Position

The Government considers that it would, as a matter of principle, be appropriate to introduce new exemptions to the rules relating to prospectuses contained in Part 3 of the Companies (General Provisions) (Jersey) Order 2002 so that those rules no longer apply to offers of securities to sophisticated investors who would have little or no need for the information prescribed by those rules.

The Government intends to proceed with option (ii), i.e. to introduce a provision into the Law, which allows for the definition of prospectus' to be amended from time to time by Ministerial Order.

Further consultation will take place with the Jersey Financial Services Commission and other interested parties about the precise scope of the proposed exemptions.

2. Clarification of treatment as a public company (Article 17(2)(c))

Responses

All respondents who responded to this point supported the possible solution. Government Position

The Government intends to move ahead with amendments that are in line with the possible solution presented.

3. Calculation of number of members for change of status to public company(Article 17A)

Responses

Q4  Does the identified solution give rise to any potential concerns and, if

so, how would they best be dealt with?

One respondent raised no concerns about the identified solution. Another considered that the threshold membership test should be abolished but, if not, the identified solution should be adopted subject to that' in sub-paragraph (ii) being changed where it occurs to any' (i.e. to create a wider exemption).

Q5 Should consideration be given, in the alternative, to raising (or

abolishing) the threshold membership level or, indeed, replacing it with a different test? What implications would arise in each circumstance and what extra considerations and/or protections would be needed?

One respondent raised no concerns over the existing threshold level but did suggest that consideration be given in certain circumstances to a system of aggregating' members for the purposes of counting. This would ensure that if, for some reason, investment in a company needed to be split amongst several nominees or related investment vehicles, the different members which resulted, and which representing in essence a combined' holding, would not all count towards the threshold figure.

One report noted that the solution only seemed to work for subsidiary companies and, arguably, the same logic should apply to a member of a company who is a director or employee or a parent or sister company.

The combined response considered that the threshold membership level should be abolished. English law did not provide for the distinction on the basis of number of shareholders and there was no reason of principle or practice for Jersey to retain it.

This view was echoed by the academic commentator who declared himself to be unclear as to what function is served by having a minimum number of members requirement.

The JFSC queried whether, if the 30-member limit for private companies were abolished, a requirement should be introduced that all companies which are Collective Investment Funds should have to be public companies.

Government Position

The Government intends to abolish the 30-member limit for private companies. Its original purpose, which was to limit access to private status, no longer has any relevance in a modern company law regime.

This will require a number of amendments to be made to the Law:

1. Article 3(3) will need to be repealed;
2. Article 16(1) will need to be amended so as to delete the words which has not more than 30 members';
3. Articles 16(2) to 16(10) will need to be repealed;
4. Article 17(2)(a) will need to be repealed;
5. Articles 17(3) to 17(6) will need to be repealed;

6. Article 17(8) will need to be amended so as to delete the words the making of an order under paragraph (6) or' and the relevant Act of the court' and as the case may be';
7. Articles 17A and 17C will need to be repealed.

In the light of this proposal, the JFSC's query concerning whether if the 30-member limit for private companies were abolished, a requirement should be introduced that all companies which are Collective Investment Funds should have to be public companies will be considered further.

4. Date of company status change (Article 17B)

Responses

Q6  Is there a preferred alternative to the date of the change being linked

with the issue of the altered certificate and, if so, on what basis is it to be preferred?

One respondent considered that the change of status should take place on the date of the special resolution. However, one commentator felt such a solution would be unsatisfactory since nobody outside of the company would know of its altered status.

The combined response agreed with the proposed solution. The academic commentator agreed, noting it to be entirely in keeping with the general principle of the significance of the issuance of the certificate of incorporation with regard to matters of corporate status in company law, which principle is importantly manifested in Article 9(3) and elsewhere as described.

Government Position

The Government intends to move ahead with amendments that are in line with the possible solution presented.

5. Prohibition on commissions and discounts (Article 35(1))

Responses

All respondents who commented on these issues, agreed to the possible solutions identified (without distinction between options).

Government Position

As set out below, the Government intends to abolish the prohibition against discounts and commissions contained in Articles 35 and 36 of the Law. Accordingly, this proposed amendment will no longer be necessary.

6. Removal of vestigial provisions on commissions (Article 36)

Responses

Q7  Is there any compelling argument for retaining the 10% cap on

commissions?

One response recommended the adoption of the position in Guernsey (viz abolition of the cap and disclosure obligations, but the retention of express authorisation through a company's Articles).

The remaining responses considered that a 10% cap was unnecessarily restrictive and offered no compelling reason for its retention. The combined response expressed the view that the fiduciary duty to act honestly and in good faith in the best interests of the company provided sufficient protection to existing shareholders.

The combined response further considered that making the payment of commission contingent upon express authorisation in the Articles merely provides a trap for the unwary'. Instead, the default position should be a permissive one i.e. a regime which allowed for commissions to be paid, with any exclusions or fetters on this permission having to be expressed in a company's Articles.

One report concluded that the retention of the 10% cap appeared outmoded and, in most cases, would offer no meaningful protection for creditors. However, it recommended caution, expressing concern that to jettison the cap could theoretically permit a 100% commission and effect what would amount to a full return of capital i.e. the issue of shares for no net gain.

The academic report supported the relaxation of commission rules, concluding that to abandon restrictions regarding payments in to capital accounts seemed entirely consistent with the move away from the traditional capital maintenance regime (and, in particular, the lack of significance which now attached to capital accounts when payments are made out to shareholders).

Q8 Should the rules on payment of commission be relaxed for both private

and public companies or should public companies retain both some form of cap' and disclosure obligation?

One respondent thought that the market and investors would expect some form of limit or disclosure for the purposes of transparency. It proposed the removal of the existing cap, but the retention of a disclosure obligation where the commission exceeded 10% of the capital raised.

The combined response considered that any dilution of the rules on commissions should be taken across public and private companies, not least because directors' duties apply equally across both cases. They noted that disclosure obligations are no longer present in the UK law (at s.553 of the UK Companies Act 2006) and gave anecdotal evidence of clients expressing surprise at such obligations remaining in Jersey law.

Government Position

Upon further reflection the Government considers that there is a compelling case for repealing Articles 35 and 36 of the Law altogether and intends to do so. The prohibitions contained in those Articles no longer fulfil any useful purpose and are unduly restrictive.

Given that a company is free to set the nominal value of its shares, it is doubtful that the prohibition against discounts offers any real protection for creditors.

As for the prohibition against the payment of commissions out of capital, this now appears out of step with modern Jersey company law in which the significance of the maintenance of capital concept has been much diminished. There is no longer a prohibition against the giving of financial assistance and it is now possible for both par value companies and non par value companies to make a distribution to shareholders out of capital (subject to the making of a solvency statement by the directors).

The abolition of the statutory prohibition against the issuing of shares at a discount to their nominal value or the payment of commissions out of capital would not prevent a company from including an equivalent prohibition in its Articles of association, if that were considered appropriate.

7. Enabling transfers to capital accounts (Article 39 and 39A)

Q9  Are there any identifiable downsides or risks presented through the suggested

extension to a par value company of what might be considered a capitalisation mechanism'?

Q10  Given that the Law typically requires shareholder approval (e.g. through a special

resolution) only in cases where there is likely to be an impact on shareholders' legal or contractual rights, should the requirement for a special resolution be retained in relation to transfers from profit and loss accounts or from any capital or revenue reserve accounts into stated capital accounts and (dependent on the above) transfers into share premium accounts respectively?

Responses

Q9  Are there any identifiable downsides or risks presented through the

suggested extension to a par value company of what might be considered a capitalisation mechanism'?

The responses unanimously supported the suggested extension and were unable to identify any downsides or risks in introducing the further flexibility. The reports thought that the suggested change seemed fair, that, generally speaking, the law should aim for symmetry in such matters and that, given the move away from traditional capital strictures (and the lack of importance attached by the market to a company's legal capital figures) there was little reason to object to the assimilation of treatment across both share types.

Q10  Given that the Law typically requires shareholder approval (e.g. through

a special resolution) only in cases where there is likely to be an impact on shareholders' legal or contractual rights, should the requirement for a special resolution be retained in relation to transfers from profit and loss accounts or from any capital or revenue reserve accounts into stated capital accounts and (dependent on the above) transfers into share premium accounts respectively?

The majority of responses considered that the law should not require shareholder approval for transfers into stated capital or share premium accounts. The combined response suggested that such approval requirements as may be considered necessary could be placed into the Articles of association. One respondent recommended that the requirement for a special resolution be retained. Another reserved a general concern about the change reaffirming share premium as capital' (which, in light of recent case law, it thought might limit the opportunities for Jersey in providing solutions for structured transactions).

Government Position

The Government consider that there is merit in providing for the symmetry and flexibility which would flow from extending to par value companies the ability currently only enjoyed by no par value companies to move profit funds into capital accounts.

As to the procedure for doing so, it was implicit in the wording of the question that requirements for shareholder approval in such matters were looking to be retained only where shareholders' legal or contractual rights were likely to be impacted.

None of the responses identified how such rights might be adversely affected by the removal of the shareholder sanction in such a case. The one respondent who came out in favour of retaining the special resolution procedure for such transfers offered no justification for that view.

As such, the Government will look to remove the requirements for a special resolution in Article 39A(3)(c) and ensure that the parallel abilities to be introduced for par value companies contain no such procedural requirement.

8. Branch Registers (Article 49)

Responses

Q11  Are there any contingent issues which might arise from non-resident

shareholders being able to be placed on branch registers?

None of the respondents considered there were any issues arising from non-resident shareholders being able to be placed on branch registers.

The academic report suggested that, if the primary reason for keeping an overseas branch register was to use it as a reference source for identifying members in a specific jurisdiction, the utility of the branch register could be undermined by confirming the proposed position.

The other report pointed to a possible risk that, in a dispute involving the company and shareholders, the court in the overseas country might seek to exercise extra- territorial jurisdiction over a non-resident member simply by virtue of the name being included on that register.

The JFSC stressed the importance of making it clear that a full register of members (including those on the branch register) must be maintained in Jersey.

Government Position

Having considered the issues raised, none of the respondents considered that there were any contingent issues, but did identify certain practical benefits for companies whose shares are listed on foreign exchanges. Therefore, while the Government notes the points raised in the reports, it intends to proceed with clarifying this point in the manner suggested.

9. Redemption and repurchase of shares in specie (Articles 55 and 62)

Responses

There was unanimous support for the proposal, with all those who expressed a preference, opting for the first of the two possible solutions.

Government Position

Subject to the views of the law draftsman, the Government will look to introduce clarifying wording in line with the first of the possible solutions.

10. Repurchase of shares represented by depositary receipts (Article 57)

Responses

Q12  Are there likely to be any practical issues or undesirable consequences

with assuming this approach?

No practical issues or undesirable consequences were identified in any of the responses or reports, all of which supported the possible solution set out (whilst reinforcing that any amendment should not affect or displace existing mechanisms). One of the responses suggested that provision should be made to allow depositary receipt holders to vote directly or appoint their own proxies rather than vote through a proxy nominated by the receipt holder but appointed by the issuer who is the registered shareholder.

Government Position

The Government will look to implement changes in line with the identified solution.

In addition, it intends to consult further about the suggestion of amending the Law so as to make it possible for the holders of depositary receipts to exercise voting and other rights directly as if they were registered shareholders.

11. Authority to undertake on-market share repurchases (Article 57(4)(c))

Responses

There was unanimous support of the proposed extension to five years. Government Position

The Government will look to implement changes in line with the identified solution.

12. Surrender of shares (Article 60)

Responses

Whilst two of the responses supported the proposal, the combined response did not, citing concerns about how such a surrender might work as a means to defeat security interests which had been taken over the shares in question.

Further reservations were also expressed in the responses, questioning what safeguards could be introduced to guarantee there was no tacit connection with other supposedly unrelated transactions for value and how to ensure that the shareholder's decision to surrender was genuine and truly for no consideration.

The combined response, along with others, questioned whether there was any real business need for such provisions.

Q13  Would a surrender of shares be likely to have any practical impact on

the issued or authorised share capital of a company and, thereby, on the company's creditors. If so, how should this be dealt with (cf Article 55(17) on redemption of shares)?

Subject to the comments summarised above, the general view was that upon surrender, the issued share capital would need to be reduced accordingly, with a transfer of an amount equal to the reduction from the nominal capital account either to another capital reserve or to the profit and loss account (both options were suggested).

One report did seek to highlight the many issues which would be raised through the introduction of such a provision, issues which largely surrounded the treatment of the released' capital. The other report considered that it would be desirable to align the mechanism closely with Article 55, noting that Art 55(17) equivalent provisions may be necessary for no par value companies.

Q14  Should the Law provide for the accounting treatment occasioned by the

surrender and, if so, what should that treatment be?

Save for the suggestions surrounding the transfer mechanisms (as above), the general view was that the law should not prescribe the accounting treatment.

Government Position

The prevailing thread running throughout the responses to the consultation is that there is no strong commercial need for this proposed amendment. No respondent has identified a tangible benefit to legal, accounting or commercial practice though many have identified issues, some of them relatively complex, which would need to be addressed and resolved if the amendment were to go ahead as suggested. Further, it is already possible to achieve much the same result by using the power under Article 57 to repurchase the shares in question for nil (or nominal) consideration.

For these reasons, the Government does not intend to take forward this amendment.

13. Abolition of the court sanction for reduction of capital (Articles 61 – 63)

Responses

Q15 Are there clear benefits in retaining the court procedure as the only (or

an optional) route for reduction of capital in private companies e.g. in providing protection for minority shareholders, comfort and certainty to directors, foreign courts, financial authorities etc?

One respondent noted that the familiarity of the court procedure in UK equity capital markets, combined with GAAP's recognition of it as an established means of transferring capital to distributable profit, supported its retention. Further support for its retention was the Royal Court's willingness to sanction reductions even where Article 115 distributions would be available.

The combined response agreed that there were clear benefits in retaining the court procedure as an optional route e.g. where there are complicating factors, uncertainty over solvency and for reasons of familiarity and established tax treatment. In other circumstances, however, the ability to reduce capital by way of an out-of-court process could be beneficial for both types of company e.g. for costs reasons.

Q16 Were the court procedure to be abolished or rendered discretionary:

1. would the combination of a special resolution and directors' solvency statement stand as a sufficient replacement for the existing court procedure or should further safeguards or conditions be considered?
2. what additional provisions would be necessary in order to replicate the requirements of existing court orders?

One respondent was concerned as to whether an out-of court procedure might be capable of abuse by members/directors who might force through a reduction with undue haste to the detriment of creditors or minority shareholders. They noted that perhaps one mechanism for the protection of minority shareholders and creditors in out-of court reductions would be to graft sufficient time into the procedure to allow those parties to consider matters, and leave the onus on them to go to court to challenge the reduction should they wish to.

The combined response expressed the view that the combination of a special resolution and directors' solvency statement should stand as sufficient replacement for the existing court procedure. It considered that the provisions necessary in order to replicate the requirements of existing court orders should be modelled on equivalent provisions in the UK Act. It further considered that it would be helpful if the amendments were to clarify that a reserve arising on a reduction of capital that had not been the subject of a court confirmation was to be treated as a realised profit.

Q17  Should an out-of-court share capital reduction procedure be provided

for public companies as well as private companies?

Two respondents were not in favour of an out-of-court procedure being available to public companies. One of them expressed the view that this could have an adverse impact on the reputation of Jersey public companies if minority shareholders were disadvantaged in some way and considered that parity with the UK on this matter was to be preferred.

The combined response did not see any reason to distinguish between private and public companies in this respect, and believed that the reduction of capital of public companies by way of an out-of-court procedure may be welcomed by clients in some cases.

Q18  Would an out-of-court procedure for either type of company make

Jersey a more attractive jurisdiction for incorporation or risk having an adverse effect on the reputation of Jersey companies?

As noted above, one respondent expressed the view that this could have an adverse impact on the reputation of Jersey public companies if minority shareholders were disadvantaged in some way.

The combined response expressed the view that the amendment would make Jersey more attractive as it would lower the cost of doing business. It did not consider that the amendment would have an adverse effect on the reputation of Jersey companies.

Government Position

The Government intends to proceed with the proposal to introduce an out-of-court procedure for reductions of capital for both private and public companies. It considers that this would achieve consistency with the provisions relating to distributions and repurchases, which already enable a company to effect a return of capital to shareholders without the consent of the court.

Those provisions rely instead on the combination of a special resolution and a solvency statement made by the directors to protect shareholders' and creditors' interests. It is envisaged that the same procedural requirements will apply to an out- of-court reduction of capital.

For the reasons given in the responses the Government considers that companies should continue to be able to seek the sanction of the court for a reduction of capital as an alternative to the out-of-court procedure.

14. Ratification of breach of director's duty (Article 74(2))

Responses

Q19  Is there a case for introducing an express ability in the Articles to adjust

the resolution requirements for ratification of director's default? If so, is there an equal case for adjusting the Law to mirror s239 of the UK Act in providing for a lower default requirement, e.g. ordinary resolution?

The combined response expressed the view that the default position should be that an ordinary resolution of shareholders is required, with similar provisions to the UK Act in relation to the eligibility to vote. It was also thought that a company should be permitted, in its Articles of association, to provide for a higher threshold approval requirement.

Another two respondents agreed that ratification should be by ordinary resolution (or subject to a higher threshold set out in the Articles). One of these respondents suggested that ratification by resolution passed at a meeting rather than a written resolution would give members a better opportunity to express their views.

Another respondent considered that amendment to ensure that only voting shareholders need consent was appropriate but that a single statutory threshold would be appropriate, rather than allowing Articles to vary the threshold.

The JFSC stated that some hedge funds are set up in such a way that only the holders of management shares are entitled to vote. Other shareholders have an economic interest only and would therefore not be involved in any decision to ratify a breach of duty by the directors.

Q 20 In any event, should specific provision be made in the Law (as in

s239(3) & (4) of the UK Act) to disregard the vote not only of any director whose default is being ratified (should that director also be a member) but also any member connected with him?

The combined response expressed the view that these provisions should be included, provided that they would not apply in circumstances where unanimous shareholder approval (of all shareholders entitled to vote) was in fact obtained (this being to deal with situations where all of the shareholders are also directors and the action being ratified is an action taken by all such directors). The other respondents also expressed the view that the votes of the defaulting director and any connected member should be disregarded.

Government Position

The Government intends to amend Article 74(2) so that:

1. an act or omission of a director need only be ratified by those members of the company who are entitled to vote;
2. ratification requires an ordinary resolution or such higher majority as may be specified in the company's Articles of association;
3. any director whose breach of duty is the subject of the proposed ratification and any members connected with him shall not be eligible to vote on the resolution.

For the purposes of (iii) it is proposed that the definition of persons connected with a director' contained in section 252 of the Companies Act 2006 be incorporated into the Law.

It is not intended that the proposed amendments should affect the ability of a company to ratify a breach of duty by a director under the Duomatic principle, i.e. by unanimous consent of all shareholders entitled to vote. Appropriate wording will be included in Article 74(2) to clarify this.

15. Annual general meetings (Article 87)

Responses

One respondent agreed with the possible solution and also suggested that an amendment to the law could also be made to allow retrospective ratification of a failure to hold annual general meetings where the waiver was not obtained.

Another respondent agreed with the proposed solution but expressed the view that provision would still be needed to allow a member (or a certain minimum percentage of members) to requisition an annual general meeting and noted that Article 87(6) of the Law would no longer be needed if the agreement to dispense with an annual general meeting was included in a company's Articles of association.

The combined response supported the proposed solution and noted that, in addition to the reasons given in the Green Paper, they consider the requirement for any new member, within two months of becoming a member, to have to agree specifically to adhere to an agreement waiving the requirement for an annual general meeting, to be administratively inconvenient.

The academic response noted that under English law the Companies Act 1985 made it possible for private companies to opt out of holding annual general meetings by passing an elective resolution - essentially an ordinary resolution which had a 21 day notice period. However, each member was given the right to compel a company which had made such an election to hold an annual general meeting. However, the UK's Company Law Review led to the abolition of any requirement, even presumptive, for private companies to hold an annual general meeting and consequently only public companies are required to hold an annual general meeting under the current UK Act.

The JFSC indicated that, should the proposal go ahead, it might require a COBO fund that is a private company to hold an AGM, and a Collective Investment Fund to be a public company.

Government Position

Having considered the responses the Government has concluded that it would be beneficial to amend Article 87 so that a private company is no longer required to hold an annual general meeting unless its Articles of association expressly require it to do so.

This will remove the administrative inconvenience highlighted in the responses of having to put in place an agreement between shareholders to dispense with an annual general meeting.

The original proposal envisaged that an agreement to dispense with the annual general meeting could be enshrined in the company's Articles of association. This would have meant that existing private companies wishing to take advantage of the new dispensation (in all likelihood the vast majority) would have had to amend their Articles. Upon further reflection the government has concluded that this would create an unnecessary administrative burden and that it would be more appropriate to require those few private companies that wish to hold an annual general meeting to make specific provision for this in their Articles.

The Government considers that public companies should continue to be required to hold an annual general meeting, unless the meeting is dispensed with by agreement between all the members in accordance with Articles 87(4) – (7).

The Government does not consider that it is necessary to include a specific provision in Article 87 enabling members to requisition an annual general meeting. The Law already makes provision (in Article 89) for members to requisition a meeting of the company.

16. Thresholds for special resolutions (Article 90)

Responses

Q21  Is there any argument for restricting the ability to apply different

thresholds in respect of different special resolutions?

One respondent expressed the view that the clarifications outlined in the consultation paper should be adopted and states that the application of different thresholds in respect of different special resolutions should be a matter for the shareholders. Another respondent stated that this greater flexibility is likely to be of benefit to the Island.

Another respondent stated that the possible solution makes perfect sense but notes that there is always the risk that entrenching particular provisions may result in undue power to minority shareholders and/or could lead to deadlock where major decisions are concerned. However, the respondent states that if members wish to create such a structure, that is indeed a matter for them and the law should be flexible enough to allow members to do so.

The academic response notes that the substance of the proposed approach would be to achieve consistency with what is possible under UK law.

The combined response supports the possible solution and states that the respondents are not aware of any compelling arguments to restrict such ability.

The JFSC drew attention to the provisions relating to the passing of resolutions contained in its Guide on Open-Ended Unclassified Collective Investment Funds.

Government Position

The Government intends to proceed with the proposed amendment.

17. Consent to short notice of general meetings (Article 91)

Responses

Q22  Is there any basis for reducing the short notice threshold to 90% for

Jersey public companies?

The combined response supported the possible solution and noted that the respondents did not see any reason of policy or practice to treat public companies in a different way to private companies in respect of such threshold for consent to short notice. Two other respondents agreed. Another respondent agreed and noted that consistency with the UK market, where most of Jersey's public companies raise capital, would appear desirable.

The academic response and another response agreed that the current test should be read as a two limb test. The academic response noted that moving to a single limb test would conflict with the goal of consistency with the UK provision as subsection 307(5) of the UK Act requires both a majority in number and the requisite voting threshold. It also noted that reducing the short notice threshold to 90% for Jersey public companies would no longer be consistent with the UK as the EU Shareholder Rights Directive (2007/36/EC) has required the UK to disapply the short notice provisions as regards companies admitted to trading on regulated markets. It suggested that the merit of changing the requirement for both public and private companies to a 90% threshold would be greater ease of use and suggested that it might be appropriate to use a formula that permits companies to insert a higher threshold if they wish by their Articles, as in the UK.

Government Position

The Government intends to amend Article 91 so as to reduce the threshold for consent to short notice to 90% or such greater majority as may be specified in the company's Articles of association. This amendment will apply to both public and private companies.

Upon further reflection the Government does not consider it desirable or necessary to move to a single limb test.

18. Corporate representatives (Article 93)

Summary of Issue

It is not clear under Article 93 of the Law whether more than one corporate representative can be appointed by a corporate member of a company to attend at a meeting of the company, a class of shareholders or a meeting of creditors.

Subsection 323(1) of the UK Companies Act 2006 has clarified this point for UK companies, specifically allowing for more than one such representative. Subsection 323(4) further provides for what happens when representatives of the same corporate member vote in the same way and in opposite ways.

Possible Solution

It is proposed that Article 93 be amended to mirror s.323 of the UK Companies Act 2006 and specifically provide for multiple corporate representatives and to determine how concurring and conflicting exercise of their voting powers is to be treated.

Responses

All responses supported the proposed solution.

Government Position

The Government intends to proceed with the proposed amendment.

19. Resolutions in writing (Article 95)

Views are sought on the identified issue and solution and, more particularly, as follows:

Q23  Which, if any, of the more detailed procedures present in the UK Act should be adopted

(e.g. circulation requirements) and on what basis?

Q24  Do these proposals otherwise give rise to any potential concerns and, if so, how would

they best be dealt with?

Responses

Q23  Which, if any, of the more detailed procedures present in the UK Act

should be adopted (e.g. circulation requirements) and on what basis?

The combined response supported the possible solution and considered that the detailed provisions could be left to be dealt with by a company in its Articles of association. This would enable companies to tailor the procedures to their particular requirements. In some cases, those procedures could mirror the UK Act provisions, however in other circumstances companies may prefer other arrangements.

Another respondent agreed that it would be beneficial to allow written resolutions to be passed by a specified majority that is less than unanimous and agreed that the Articles of Association of a company could allow flexibility with regard to procedural requirements.

Another respondent expressed the views that currently a written resolution must be signed by all members who are entitled to vote, that the elaborate provisions contained in sections 288 to 300 of the UK Act are unnecessary and probably too inflexible. They considered that there is much to be said for the Law not being too prescriptive and, on matters of internal administration such as this, leaving it to the company to determine its own procedures in its Articles.

Another respondent suggested that it should be clarified that the written resolution may be proposed by members as well as directors.

The academic response noted that it seems desirable to amend Article 95 to clarify that it is permitted to introduce a lower than unanimity requirement for written resolutions in specific cases.

Q24  Do these proposals otherwise give rise to any potential concerns and, if

so, how would they best be dealt with?

The academic response noted that the principal concern of consultees in the UK when proposals on this subject were suggested, was that a meeting offered an opportunity for an exchange of views and written resolutions might deprive a minority shareholder of the opportunity to persuade others. However, it also noted that votes may be cast by proxy and a decision made before a meeting in fact takes place and that, where there are a small number of members, a minority shareholder will be able to contact other shareholders and offer his opinions. The response noted that the key protection recommended by the Company Law Review for minority shareholders was a requirement that the proposal be sent to all shareholders at the same time and that this is now reflected in the UK Act. It also suggested that it is probably desirable to establish minimum criteria for what could constitute a written resolution and noted that, whilst section 296 of the UK Act mandates some form of written communication, Article 95(1B) of the Law might at present, if construed at its broadest, be thought to permit a company to allow for oral communication as other provision'.

Government Position

The Government intends to proceed with the proposed amendment to Article 95 to make it clear that a written resolution may be passed by such majority as is specified in the company's Articles of association (provided that, where the written resolution procedure is being used to pass a special resolution, the requisite majority shall not be less than two-thirds of all shareholders entitled to vote).

In order to prevent abuse of the written resolution procedure the Government considers it desirable to include a requirement (similar to that contained in the UK legislation) that the proposed resolution is circulated to all shareholders at the same time.

For the avoidance of doubt, it is not to be inferred from the fact that the Government has decided to proceed with the proposed amendment that it considers that Article 95 in its present form requires unanimity for a written resolution to be passed. The proposed amendment is intended to eliminate any existing uncertainty on this point and should not affect the validity of any written resolution passed by fewer than all members entitled to vote prior to the coming into force of the proposed amendment.

20. Delivery of Proxies (Article 96(4))

(Article 40(1) of the Companies (Uncertificated Securities) (Jersey) Order 1999

Responses

The four respondents who responded on this possible solution, including the combined respondents, agreed with it.

Government Position

The Government intends to proceed with the proposed amendment.

21. Auditors and the exercise of discretion by the Commission (Article 102)

Responses

Q25  Is there any perceived need or requirement to continue to allow all

forms of entity, including corporations sole, unincorporated associations and limited partnerships, to be able to seek authorisation to audit non-market-traded companies?

The combined response deferred to the view of accountancy firms and practitioners on this question.

Another respondent noted that it appeared overly prescriptive to force auditors to adopt a legal form that may not be their preference. No other respondents addressed this question.

Government Position

The Government does not intend to proceed with this amendment at this moment in time. Further consultation is required with the Jersey Financial Services Commission and representatives of the accountancy profession.

22. Ability for dormant public company to dissolve without audit (Article 108)

Responses

Q26  Is either of the two proposed solutions to be preferred over the other,

and, if so, on what basis?

The combined response considered that solution (ii), as the wider approach, was preferable. Another respondent suggested that solution (ii), if it were to be generally available to all types of public companies that were dormant for a defined period of time, would provide maximum flexibility and would be the preferable solution. That respondent suggested that it would be possible to have both solutions (i) and (ii), i.e. that certain classes of public companies (as specified by Order of the Minister for Economic Development from time to time) could be permitted to pass a waiver resolution, and there could be a default provision applying to all classes of public companies that they could be exempt if they have been dormant since formation.

Another respondent recommended that the narrower UK position be adopted.

Another respondent suggested that both solutions as alternatives would be preferable.

The academic response noted that the UK has distinct exemptions for dormant companies and for small companies and in neither case is a resolution required. The response stated that if it is thought useful to exempt, or permit exemption, from audit for small public companies, this could usefully be proposed as a consultation question in its own right.

Q27  With regard to solution (ii), would generalised exemption provisions be

likely to have any otherwise undesirable consequences for which additional provision should be made?

The academic response noted that the Guernsey model raises the possibility of harm to minority shareholders and to mitigate this it requires a 90% majority vote and provides for the resolution to be rescinded at any time on the request of more than 10% of the members. It noted that, moreover, the Guernsey Commerce and Employment Department specifically prohibit particular types of company from making such an election. Large companies may not make such an election unless they are dormant, but small companies may do so. The Guernsey model therefore permits audit exemption in two cases, companies other than large companies and large companies which are dormant.

The JFSC pointed out that in the Guernsey model the only protection for the holders of non-voting shares is the ability of 10% of the members of the company (by value) to require that the waiver resolution be rescinded (as they would not be entitled to vote on the resolution itself). It also queried how a member would contact another member.

Government Position

The Government proposes to adopt the waiver mechanism envisaged by solution (ii), albeit in a simpler form to that which exists under the Guernsey legislation.

In future it will be possible for the members of a public company that is currently required by Article 113(1) to have its accounts audited to pass a waiver resolution exempting the company from this requirement. To prevent abuse of this exemption such a resolution would require unanimous consent from all shareholders entitled to vote. Furthermore, the proposed amendment will provide that the waiver resolution shall cease to have effect if 10% of the members (by value) require this. It is considered that this would afford a sufficient level of protection for the holders of non- voting shares.

23. Extending offence of providing false or misleading information to auditor(Article 113(B)(4)

Responses

Q28 Are there any identifiable downsides or dangers presented through the

proposed statutory extension of the existing provisions?

Four respondents did not identify any such downsides or dangers. However, one of those respondents did suggest that an individual should not be required to provide information that would be protected by legal professional privilege, mirroring the position in sections 499 and 501 of the UK Act. Another of these respondents suggested that there should be an ability for the person who is required to provide information to recover any costs and expenses of so doing, presumably from the company, and that there should also be restrictions in relation to privilege and self- incrimination.

The fifth respondent raised several issues. They questioned whether there is a perceived need for auditors to have access to information from a wider class of persons than currently provided for in Article 113B(4) of the Law, i.e. the officers and the company secretary. They questioned whether there was evidence that auditors do need a right of access against employees and whether, even if there was such a need, it would be justifiable for criminal penalties to be imposed (and if so on whom they should be imposed – the company or the employee) for contravention of such a right. They noted that most employees do not have unfettered rights of access to information and that such a provision might place them in an unfair or difficult position, e.g. if a conflict occurred between what an auditor wanted and what a director was willing to provide. Finally they questioned whether there was a risk that this could drive up the cost of auditing if auditors felt that, to discharge their professional obligations properly, they had to use their extended powers to request information.

Q29 Is there any need arising in practice or law to qualify the right of access

to information and explanations with reference to timing e.g. should it be expressed as a right of immediate access, a right of access as soon as reasonably practicable etc?

The combined response expressed the view that a failure to provide immediate access, information and explanations should not amount to a criminal offence, only failure to do so in a reasonable time.

Another respondent suggested that Article 113B of the Law should specify that information or access should be provided as soon as reasonably practicable' rather than requiring immediate access.

Another respondent suggested that reasonableness would appear to be appropriate as to timing.

Government Position

The Government intends to proceed with the proposed amendment. It considers that there is no good reason why the auditor's right to require information should be limited to current officers or secretary of the company only. As a matter of principle, it seems right that former officers and secretaries of the company should be under an obligation to provide the auditor with such information as he may require relating to the period during which they held office.

The Government considers that it is desirable that the power to require information should extend to current and former employees, who are (or were) not also officers. Such persons may well hold valuable information about the affairs of the company which might not otherwise be readily available to the auditor.

The Government accepts that employees (unlike officers of the company) do not have unfettered rights to information, but does not consider that this is likely to place them in a difficult position vis-à-vis the auditor. There is no prospect of criminal liability attaching to an employee or ex-employee who is unable (as opposed to unwilling) to provide the information requested by the auditor.

The Government is not aware of any empirical evidence to suggest that the cost of audits is likely to increase if the auditor's powers to require information are extended to a wider circle of persons.

The Government agrees that specific provision ought to be made in Article 113B to make it clear that any information obtained from a person pursuant to an amended Article 113B(4) cannot be used in criminal proceedings against that person other than proceedings under Article 113C, and that the auditor's right to require information does not extend to information that is otherwise protected by legal professional privilege.

24. The scope of the term distribution' (Article 114(2))

Responses

Q30 Is this further exclusion necessary?

Three responses, including the combined response, considered this further exclusion to be desirable. One respondent questioned whether any exclusion from the definition of distribution is really necessary but suggested that if there is a particular concern about group company guarantees, a specific inclusion could be made for them. The academic response also queried whether there is really a significant problem and suggested that there should be little risk of a commercial transaction between a company and its shareholder being characterised as a distribution save in egregious cases.

Q31 If so, are the ambit and exercise of the proposed exclusion suggested

above clear and workable as a matter of practice or should they be limited further e.g. to group company guarantees?

Three respondents agreed that the proposed exclusion was clear.

One respondent suggested that the wording suggested by the proposed solution may lead to other problems and cited the example of a loan made by a subsidiary to a parent. They noted that, at first sight, there is no reduction in the subsidiary's asset value because the loss of one asset – cash – is replaced by another asset, i.e. a chose in action against the parent. But they queried what would happen if the parent's financial position was precarious and there was a risk that the loan might not be repaid in full and whether that type of consideration should be relevant in ascertaining whether the subsidiary's net asset position has been reduced or whether the suggested solution is only concerned with nominal asset values rather than the ability to pay.

The academic response queried whether the suggested amendments would be entirely appropriate. The response raised a concern in relation to the interaction of Part 17 and Part 12 of the Law, noting that, under Jersey law, the propriety of payment of distributions has largely been divorced from the question of whether they are paid from capital. The response suggested that, if an amendment were introduced to narrow the range of transactions that constitute a distribution this might have an unwelcome side effect of creating doubt as to whether transactions outside the new statutory formulation of distribution might nevertheless, if they are entered into at a time when the company's capital is impaired, be characterised as an unlawful return of capital. It was suggested that any amendment would need to make it clear that this would not be the consequence.

The academic response also suggests that there may be difficulties with the suggested approach to valuation, noting that the accounting treatment is not necessarily determinative of whether there is a reduction in the net assets. The response suggests that another way to approach the question of the cost of the transaction to the company would be to ask what the market value of such a guarantee would be and suggests that the accounting treatment tends to result in an all or nothing' approach with the liability being introduced at full value or excluded entirely.

Q32  Is there likely to be any adverse impact or unintended consequence in

not requiring an Article 115 solvency statement for this type of transaction?

The combined response and one other response stated that no adverse impact or unintended consequence was foreseen.

Government Position

The Government understands the need for certainty in this area of law. However, in light of the response to the consultation, it considers that further reflection and consultation are required before deciding how best to proceed with the proposed amendment. It is intended that this is addressed as part of the current set of amendments.

25. Ability to ratify a distribution (Article 115)

Responses

The combined response supported the proposed solution and suggested that any such proposed amendment should also make it clear that the ability to ratify distributions also extends to distributions made before the changes to the Law become effective.

Q33  Are there any identifiable downsides or dangers presented through the

introduction of such a mechanism?

Three respondents, including the combined respondents, did not identify any such downsides or dangers.

One respondent suggested that there should be safeguards to ensure that such ratification should only be permitted if the company was solvent at the time of (a) the ratification, (b) the distribution, and (c) a sufficient period after the distribution.

Q34  Should shareholder approval be required as part of any retrospective

ratification procedure (i.e. following a directors' solvency statement) and, if so, at what level should shareholder approval be required?

Three respondents, including the combined respondents, did not consider shareholder approval to be necessary.

One respondent was of the view that the ratification ought to be done by the members entitled to vote because the ratification process is, in effect, approving a director's prior action which was otherwise in breach of the director's duties to the company. They suggested that it would be odd for directors to be allowed to ratify their own breaches of duty where distributions are concerned but not in respect of other activities. The response noted that consideration should also be given to whether a member or director who received a distribution should or should not be allowed to participate in the ratification process. The response also noted that a company's membership may have changed between the date of distribution and the date of ratification, and that it would be the latter members who would be ratifying a distribution made in favour of the former members.

Q35  If shareholder approval is not required, should the ratifying directors be

subject to any other requirement or sanction e.g. an obligation to notify members or the recipients of the formerly unlawful distribution?

Three respondents, including the combined respondents, did not consider that the ratifying directors should be subject to any other requirement or sanction.

Government Position

The Government is sympathetic to the argument that the legislation in its current form creates an unnecessary trap for the unwary' and agrees in principle that there should be a procedure for validating a distribution made without a prior solvency statement, subject to appropriate safeguards. It considers, however, that further reflection and consultation are required before a decision is made as to how best to achieve this.

26. Characterisation of Distributions (Article 115)

Responses

Q36  What (if any) are the pertinent domestic or international tax

repercussions flowing from the confirmatory language proposed?

The combined response notes that the precise treatment of certain returns made to shareholders can be a very important issue in terms of the rules of some foreign jurisdictions and that therefore any such proposed amendment to the Law requires careful consideration. The response notes that, in practice, this will require consultation with suitably qualified people in the relevant jurisdictions which will take time.

Government Position

The Government does not intend to proceed with this proposed amendment, as it is not clear that it would serve any pressing practical need.

27. Takeover Offers to Shareholders in Restricted Jurisdictions (Article 116)

Responses

Q37  Are the exceptions currently offered by the UK legislation sufficient for

Jersey companies or would greater (or lesser) protections and notification procedures be advisable?

The combined response expressed the view that equivalent protections to those offered by section 978 of the UK Act would be sufficient for Jersey companies and suggested that as there are now several Jersey companies which are listed on the London Stock Exchange (including some FTSE 100 companies) a consistent approach between Jersey and the UK would be highly desirable. Another three respondents considered that similar provisions to the UK provisions would suffice.

Government Position

The Government intends to amend Article 116 of the Law so as to introduce a provision equivalent to section 978 of the Companies Act 2006.

28. Merger and continuance notification periods (Articles 127FC & 127R)

Responses

Q38  Are the notification periods for both mergers and continuance generally

considered to be too long i.e. should they be reduced from 28/30 days to 21 days or 14 days?

The combined response suggested that the periods should be reduced to 21 days and that it would be useful if shareholder and creditor notices and objection periods could run concurrently in those cases where they are not currently able to do so.

Another respondent expressed the view that, given Jersey's proximity to Europe and the UK, conformity with equivalents such as the European cross border merger regime or the UK takeover requirements would appear reasonable.

A third respondent expressed the view that, if all members and creditors with claims of £5,000 or over actively consent to the merger or continuance, the statutory periods could be shortened or waived altogether. Absent such consent, the respondent was of the view that these periods should not be reduced to less than 21 days which they suggested was usually adequate time to obtain legal advice and, if necessary, obtain an ex-parte interim court order restraining the merger/continuance.

Q39  Should there be an ability to curtail the statutory notification periods if

the companies involved in the merger or continuance can demonstrate that all members and relevant creditors have been notified and that all have actively consented?

Those who responded to this question agreed that there should be such an ability.

Q40 For mergers, should any curtailment of the statutory notification period

be contingent upon a company achieving active consent not just from all members but from all known creditors (rather than merely those creditors with a claim exceeding £5,000)?

One respondent suggested that requiring the consent of all known creditors is likely to be impracticable and seems to set an impossibly high threshold. However, the respondent saw merit in requiring the consent of all creditors where creditors whose individual claims may be less than £5,000 nevertheless make up a significant proportion of the company's overall debts (e.g. 20%).

The academic respondent expressed the view that the unanimous consent exception seems capable of expediting proceedings in appropriate cases and suggested that the critical issue is whether, for creditors, those with claims of less than £5,000 should be excluded from the unanimous consent requirement on the basis that they are not entitled to receive notice in any event. However, the respondent noted that all creditors have the right to object during the relevant notification period and suggested that to exclude small creditors might potentially prejudice their interests.

The respondent suggested that the rationale for excluding small creditors would presumably be that requiring genuine unanimous consent might be disproportionately expensive but argued that the same argument might be made about shareholders, but that no exemption to unanimity is proposed for members with a small value holding. The respondent queried whether there is any reason why companies wishing to avail themselves of this procedure would be more likely to have small creditors than small shareholders. Finally, the respondent suggested that one possible option might be, by analogy with a reduction of capital, to provide for approval on the basis of unanimity of those with claims exceeding £5,000 plus a third party guarantee of payment for the rest.

Two other respondents, including the combined respondents, did not think that any curtailment should be so contingent.

Government Position

The Government intends to proceed with the proposal to shorten the notice periods from 30 days (in the case of a continuance overseas) and 28 days (in the case of a merger) to 21 days in both cases.

In future it will be possible for the 21-day notice and objection periods for creditors and for shareholders to run concurrently where this is not currently possible.

Furthermore, it intends to amend Articles 127FJ and 127T of the Law so as to make it possible to abridge the notice periods in cases where all the members and all known creditors of the company have consented to the proposed continuance or merger.

In the case of mergers, the Government has concluded that it would not be appropriate to exclude creditors with claims below £5,000 from the unanimous consent requirement. Such an exclusion would be difficult to reconcile with the fact that all creditors (regardless of the size of their claim) have the right under Article 127FE to object to the proposed merger.

29. Demerger and division  

Responses

Q41 What are considered to be the chief legal and tax considerations of

permitting company demergers outside of the traditional scheme of arrangement' model?

The combined response supported the proposed amendment and considered that there are a number of circumstances where the ability to demerge and divide assets could be useful. For instance, it suggested that in relation to mergers and acquisitions, the ability to carry out a demerger which ensures that the target companies only hold assets which it is intended to sell could be very useful. It stated that whilst a scheme of arrangement could also be used to achieve a demerger, in practice some clients may prefer to pursue a statutory demerger as it may be perceived to be a less costly route and approval requirements may be less onerous.

Another respondent stated that although there is uncertainty in the UK on the tax treatment of foreign distributions, it does not envisage that the precise legal mechanism of the demerger would affect the tax treatment of shares received in the demerged entity.

A third respondent stated that the chief legal considerations would be protection of creditors, protection of shareholders and clear identification of asset ownership and that the demerger agreement would need to clearly address these.

A fourth respondent agreed that the Law should, if possible, provide a separate, non- court mechanism for demerger (unless creditors and members object) rather than relying on a scheme of arrangement. The response identified some practical legal issues which could arise as being (i) how are debts to be transferred to the demerged entities? (ii) how are claims to be transferred to the demerged entities? (iii) what would happen to non-consensual liabilities e.g. liabilities in tort or statutory liabilities? (iv) would the dividing company have automatic rights of indemnity from the demerged companies for tax or other liabilities?

Q42 Is there a market demand for demerger provisions of this type and, if so,

to what degree does it extend to cross-border demergers and to demergers into non-company bodies corporate?

The combined response considered that there is a market demand for demerger provisions involving Jersey companies but saw less need for the provisions to deal with cross border demergers. The response noted that in practice the same position could be achieved using the migration provisions of the Law (albeit this would take longer than a straight cross border demerger) and that cross border demerger provisions would also require some thought in terms of the interface of Jersey and relevant foreign law. For these reasons the combined respondents inclined to the view that it would be best to focus efforts on Jersey company demergers,

Another respondent stated that if a market demand for mergers is identified, they saw no reason why it should not extend cross-border and into non-company bodies corporate. They expressed the view that there should always be a court intervention.

The academic response noted that the UK demerger provisions follow on from section 427A of the Companies Act 1985, introduced in 1987 to ensure compliance with the Sixth Company Law Directive. It noted that during the Company Law Review there was discussion of the possible need for a statutory merger provision (similar to that found in Part 18B of the Law) but this was not ultimately taken forward and there was no discussion of any need for a demerger provision.

Government Position

Given the broad support for this proposal the Government intends to introduce a regulation making power into the Law, which will allow for the introduction of a demerger procedure, which does not require the implementation of a court- sanctioned scheme of arrangement.

The Government will consult further about the detail of the proposed procedure.

30. Definition of relevant supervisory body' (Article 135(3))

Responses

The three respondents who responded on this question, including the combined respondents, agreed with the possible solution.

Government Position

The Government intends to proceed with the proposed amendment.

31. Creditors' winding up (Article 169A)

Responses

The three respondents who responded on this question, including the combined respondents, agreed with the possible solution.

Government Position

The Government intends to proceed with the proposed amendment.

32. Quoracy at a creditors' meeting (Article 169A)

Responses

The three respondents who responded on this question, including the combined respondents, agreed with the possible solution.

Government Position

The Government intends to proceed with the proposed amendment.

33. Striking off a company with no valid registered office (Article 205)

Responses

Q43  Is it considered appropriate to be able to strike off a company where it

has been without a registered office for a specified period?

The combined response expressed the view that that this is a question of policy for the Jersey Financial Services Commission but that the firms consider it appropriate to strike off a company where it has been without a registered office for a specified period. Another two respondents agreed that such striking off is appropriate whilst another respondent considered that this is only appropriate where it is also possible to reinstate the company. The academic response considered the provisions of Delaware law and notes that these provide strong support for the proposed amendment to the Law.

Q44  If so, what should the specified period be?

The combined response considered that three months seems an appropriate period. Another response suggested that the specified period should be six months from the date of service of a notice by the registrar in accordance with Article 67(6) or (8) of the Law or an unsuccessful appeal to the court under Article 67B of the Law. A third response suggested a period of not less than two years and suggested that the former registered office should be obliged to take reasonable steps to inform the company or its owners that it has ceased to have a registered office and is liable to be struck off.

Government Position

The Government intends to amend Article 205 of the Law so as to confer on the registrar a power to strike off a company that is without a registered office. It is envisaged that this power will be exercisable in accordance with the existing procedure under Article 205, i.e.:

1. if the registrar has reason to believe that the occupier of the premises that are the company's registered office no longer authorises their use for that purpose, he may give notice to the company requiring it to change its registered office within 14 days;
2. if the company does not comply with this notice, the registrar may publish on his website and serve on the company a notice pursuant to Article 205(6) stating that at the end of the period of 3 months following the date of the notice the name of the company will be struck off the register and the company dissolved unless the company complies with the requirements of Article 67;
3. if the company does not comply with the notice, Articles 205(7) – (11) take effect.

34. Electronic Communications (Various)

Responses

Q45  Is one or other of the identified solutions to be preferred and, if so,

why?

The combined response expressed the view that solution (i) is to be preferred as it is simpler and notes that a company can make more detailed provision for electronic communications in its Articles of association, should it wish to do so.

Another respondent suggested introducing a generalised clarification confirming that nothing in the Law prevents the circulation of notices and equivalent documents by electronic means unless, in the case of those emanating from a company, that company's Articles of Association specifically provide otherwise.

A third respondent suggested that a general provision is preferred, with flexibility as to how it may be implemented.

A fourth respondent thought solution (ii) may be better and, with reference to the example given in the Green Paper, believed administrative or internal notices issued by the company could legitimately be sent by electronic means but that electronic means would not be suitable for third party notices or statutory or public notices not least because the electronic means would only be conveying a copy rather than an authentic instrument.

The academic response noted that the UK Act is drafted so as to state explicitly at each point throughout where it is contemplated that electronic communication may be employed. It suggested that, even if this is thought to be unnecessarily detailed and a more general provision is made, it is probably desirable to make legislative provision as regards procedural aspects of electronic communication, which will assist in co-ordinating expectations of users of the Law.

The academic response further noted that, in the UK and Delaware, for electronic communication to be validly used by a company in communicating with shareholders, the recipient must have consented to receive communication by that means and that a fax or email, when coupled with prior consent to receive communication in this form would constitute due notice. However, the response noted that posting documents on a website would not by itself constitute notice without a specific communication to the shareholder notifying them of the presence and significance of the materials on the website. Another general principle adopted in the UK is stated to be that the communication must be legible and permit the recipient to retain a copy. The response noted that the UK has also, as regarded communications sent to a company, adopted the consent principle and specified the circumstances under which an electronic communication will be deemed to be authenticated.

Finally the academic response noted that different considerations may be thought to apply as regards communications between a company and the Registrar and noted that in the US the SEC requires electronic filing of all information that issuers of publicly-traded securities are required to send to it. Further, that the UK Act requires the Registrar to permit electronic communication of notifiable documents and contains provision for this to be made mandatory in the future by the Secretary of State.

Q46  In relation to the second solution, which types or categories of

communications should be opened up to electronic methods?

For example:

- administrative or internal notices issued or circulated by the company itself e.g. notices to shareholders under Article 87(2) or terminating company agency under Article 23(4)?

- third party notices to and from the company e.g. notices to and from the Commission under Article 16 or to and from the Registrar under Articles 42(2), 67(5) etc?

- statutory or public notices e.g. a notice of intention to merge under Article 127FC(5)(a) which is currently required to be published by a company in a newspaper circulating in Jersey' (with no reference to electronic publication on the web pages of such a newspaper)?

The combined response considered that such communications should include notices, proxy forms and other communications between a company and its shareholders where the Articles of Association permit this or they have otherwise consented to the same. The combined respondents noted that, in relation to communications with the JFSC/Registry, this would depend on the ability of the JFSC/Registry to receive the same in such manner.

Another respondent stated that whilst it is desirable for companies to be allowed to use electronic communications, not all forms of electronic communications may be suitable and careful consideration needs to be given to which ones may be utilised.

Government Position

Following further reflection and consultation with interested parties the Government has decided not to proceed with the proposed amendment on the grounds that existing legislation already makes adequate provision for the use of electronic means of communication between a company, its members and third parties: see Article 11 of the Electronic Communications (Jersey) Law 2000.