London’s Alternative Investment Market (AIM), which describes itself as “the most successful growth market in the world”, was developed to meet the needs of smaller companies. A flexible approach to regulation and a streamlined admission process have made it the ideal market for small growing companies seeking to develop their businesses in a supportive environment.
In recent years, AIM has attracted large numbers of foreign trading groups seeking access to London’s capital markets. These organisations will often choose to list through a company incorporated in an offshore jurisdiction because it brings all of the benefits of a listing on AIM with additional tax advantages and increased flexibility in terms of company law.
In 2005 and 2006, for example, more than 20 Jersey holding companies listed on AIM compared with just one over the preceding two-year period. The majority, but not all, of these businesses operate in China, India and the Far East.
There are a number of factors that are making Jersey the jurisdiction of choice for many of these businesses.
Tax neutrality at the holding company level
Jersey offers a simple and favourable tax regime with no capital gains, capital transfer or corporation taxes. No stamp duty is payable in Jersey in respect of the transfer of shares in a Jersey company and, in some cases, this alone has been an important motivation to use a Jersey company.
A Jersey company seeking to list on AIM will generally apply for ‘exempt company’ status and, as such, will pay no tax in Jersey on income arising outside the island. Indeed, the States of Jersey has indicated that it intends to propose legislation to replace the exempt company by the end of 2008 with a general zero rate of tax.
With the exception of collective investment funds, exempt companies do not have to make any withholdings in respect of Jersey income tax from interest or dividend payments to shareholders (whether or not resident in Jersey) or payments of directors’ fees to non-Jersey resident directors.
A flexible company law regime
It is important to choose a holding company structure that will be familiar to investors. Jersey company law is based on English company law, so there are many similarities between the two regimes. Jersey and English companies — familiar to investors around the world — share the same constitutional structure.
However, in certain important areas, Jersey company law provides a greater degree of flexibility and the duties imposed on the directors of a Jersey company are in line with the older UK Companies Acts, not the new 2006 Act. This enhances the attractiveness of a Jersey holding company.
For example, Jersey company law requires directors to act honestly and in good faith with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. This may be contrasted with the position under the UK Companies Act 2006 where a director, in promoting the success of the company, will be required to have regard to the interests of the company’s employees, and to the need to foster business relationships with suppliers and customers, and to the impact of the company’s operations on the environment (the so-called ‘enlightened shareholder value’ provisions).
Where it is necessary or desirable for shareholders of a Jersey company to benefit from an equivalent level of protection as is provided under the English Companies Act, or where this is required by the relevant AIM listing rules, such protection can be included in the articles of association of the Jersey company. For example, a Jersey company listing on AIM may impose similar obligations in relation to disclosure of interests in shares as those contained in part 22 of the 2006 Act.
It is possible to establish a Jersey company quickly and cheaply and there are a number of ways in which a Jersey company can be introduced to an existing group structure, including a scheme of arrangement, share-for-share exchange or continuance of a foreign company into Jersey.
The proposed amendments to Jersey company law scheduled for the end of 2007, including removal of the prohibition on financial assistance for public and private companies, simplification of the rules on distributions and the introduction of treasury shares will provide even greater flexibility for AIM-listed companies.
A favourable regulatory environment
The AIM admission document will usually constitute a ‘prospectus’ for Jersey purposes and the consent of the Jersey Registrar of Companies is required before it can be circulated. Application for consent is made to the Jersey Financial Services Commission (JFSC). The application process is straightforward and the JFSC’s published timescale for reviewing the admission document and issuing the consent is one week. In most cases the review is completed within that timescale so that the Jersey approval process does not have an impact on the timing of the admission to listing.
The Jersey law requirements in relation to the content of the admission document are not regarded as onerous and the JFSC may consent to the circulation of an admission document that is not fully compliant, provided that the substance of the document is not affected and the non-compliance is not calculated to mislead. In practice, ensuring that an admission document meets the Jersey content requirements is unlikely to present any difficulty.
A Jersey company may undertake a preliminary marketing of its shares using a draft admission document (i.e. a preliminary or pathfinder prospectus) before obtaining the Jersey Registrar’s consent to its circulation as long as the usual ‘red herring’ language appears on the face of the document making clear that the ‘red’ does not constitute an offer or invitation to acquire shares in the Jersey company.
The UK Takeover Code
Currently, the UK Takeover Code applies to a Jersey company listed on AIM if it is deemed by the Panel on Takeovers and Mergers to have its place of central management and control in Jersey. However, the Code will soon be put on a statutory footing in Jersey. Shareholders will then have the benefit of knowing that the Code applies, provided management and control of the company takes place in Jersey. If it is desirable to avoid the application of the Code, then this will still be possible provided management and control take place outside Jersey and the UK.
Uncertificated securities
CRESTCo has been recognised as an approved operator for the purposes of Jersey law, which means that Jersey companies listed on AIM can use the CREST system to hold and transfer their shares and other securities in electronic or paperless form.
The main purpose of securing a listing on AIM is usually to secure further investment by accessing London’s capital markets. In this context, one of the key attractions of Jersey is that investors are familiar with the jurisdiction as a very well-regulated international finance centre. Jersey is also in the same convenient time zone as London with a business day that begins before Tokyo closes and continues well into New York trading time, making it particularly attractive to overseas trading groups. Jersey also benefits from being geographically close to Europe but independent from the European Union.
Listed funds
The attractions of a Jersey corporate structure and Jersey’s reputation as a leading offshore funds jurisdiction have also enabled Jersey to capitalise on the growing demand for AIM-listed funds. The new streamlined authorisation process for listed closed-ended funds introduced earlier this month by the JFSC is generating considerable interest from fund managers and is likely to lead to further growth in this important market.
The rate of growth in the number of trading businesses seeking to access AIM through a Jersey holding company shows no sign of slowing in 2007. In particular, there is considerable interest from India where recent rule changes have made it easier for Indian businesses to list on overseas exchanges.
Jersey holding companies are also proving popular for businesses seeking a listing on other international exchanges including the main market of the London Stock Exchange. Last year also saw one of the first Jersey holding companies to list on the New York Stock Exchange.
The experience gained by Jersey practitioners in establishing these structures and the level of service and responsiveness of Jersey service providers combined with constructive legislative and regulatory developments will ensure that Jersey is well placed to capitalise on the continued demand.
Jonathan Rigby is a partner at Mourant du Feu & Jeune.
