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CP 132 – Share class feature proposals for closed-ended funds

On 23 November 2020, the Central Bank of Ireland published a consultation paper entitled “Guidance on share class features of closed-ended QIAIFs” (“CP132”). The proposed guidance set out in CP132 seeks to address a number of operational matters for certain categories of closed-ended qualifying investor alternative investment funds. The proposals relate to guidance on (i) the issue of shares at a price other than net asset value; (ii) excuse and exclude provisions; (iii) stage investing; and (iv) management participation. It is proposed that the guidance will apply to QIAIFs which generally use private equity type strategies or invest in illiquid assets.

 

Our advisory considers the proposals set out in CP132.

 

Click to view advisory

To see or not to see? How the law on privilege has developed in Guernsey, Jersey, the Cayman Islands and the British Virgin Islands

It is of the utmost importance that confidentiality in legal communications is maintained within the context of financial services. In this article we revisit and provide an overview of the fundamental principles surrounding legal professional privilege, consider how the case law has developed in this area with reference to local (where applicable) and English judgments and set out some practical guidance to be taken from these decisions, with reference to the law in Guernsey, Jersey, Cayman and the BVI.

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For all financial service businesses in the Channel Islands, the Cayman Islands and the BVI (“BVI”) it has always been of the utmost importance that confidentiality in legal communications is maintained. In this article we revisit and provide an overview of the fundamental principles surrounding legal professional privilege, consider how the case law has developed in this area with reference to local (where applicable) and English judgments and set out some practical guidance to be taken from these decisions.

Legal Professional Privilege

Privilege is a rule of substantive law and is a fundamental legal right, not a matter of discretion. Legal professional privilege protects confidential communications between a client and its lawyer from production to third parties or to the relevant Court. There are two main forms of legal professional privilege: legal advice privilege and litigation privilege. For both forms of privilege, it is matter of substance over form, meaning:

1. a document must be confidential to remain privileged. If that confidentiality is lost so will its privileged status;

2. labelling a communication as “privileged and confidential” does not make it so; and

3. copying an otherwise non-privileged communication to a lawyer or communicating with a lawyer for a purpose that is not seeking legal advice or is not in contemplation of litigation will not make it privileged.

Litigation privilege

Litigation privilege is premised on the basis that parties should be able to prepare for proceedings without the risk that an opponent has sight of communications or documents which are brought into existence as part of those preparations. Unlike legal advice privilege (discussed below), litigation privilege can apply to communications between a lawyer and a client, a lawyer and a third party or a client and a third party.

To attract this privilege, litigation must be reasonably contemplated or in existence. In the case of Director of the Serious Fraud Office v Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006, the Court of Appeal considered what proceedings might be covered by litigation privilege. The Court considered that “proceedings” could extend to criminal proceedings and that prosecution could be “reasonably contemplated” where lawyers were engaged to conduct the internal investigation. Therefore, a company’s internal investigations in the context of regulatory proceedings may attract privilege, in certain circumstances. The fact that those proceedings have not yet commenced is not necessarily determinative, with each case turning on its own facts.

Litigation must also be the “dominant purpose” for which the document was created and / or the advice was sought. The dominant purpose must be giving or receiving legal advice in relation to the litigation or for collecting of evidence for use in the litigation. This raises the question as to whether privilege attaches if a document is, for example, produced for a number of purposes. The Court will examine all the circumstances to determine the dominant purpose subjectively.

The “dominant purpose” approach was followed in the Cayman Islands by Smellie CJ in the case of Johnston v Arbitrium (Cayman Islands) Handels A.G [1997 CILR 36].

BVI law also follows English law in the area of privilege and has codified the same pursuant to the Evidence Act, 2006 (the “EA”). As regards litigation privilege, section 114 of the EA provides a general protection against production of evidence which involves disclosure of confidential communications or of the contents of a document which was either (i) created for the dominant purpose of providing or receiving professional legal services in relation to legal proceedings (anticipated or pending), or (ii) for the dominant purpose of preparing for or conducting the proceedings.

Legal advice privilege

Legal advice privilege applies to confidential communications between a client and a lawyer which are created for the dominant purpose of giving or receiving legal advice.

Legal advice privilege applies to any document that meets all of the following criteria:

1. the document is a confidential communication;

2. it passes between the lawyer (this includes in-house and external lawyers) and the client (which is construed narrowly to mean individuals who are authorised to give instructions and receive advice; it does not capture all employees of the client company); and

3. it is prepared for the purpose of giving or receiving legal advice.

Unlike litigation privilege, legal advice privilege is also available in non-contentious circumstances and can apply whether or not litigation is pending or contemplated. Draft communications between a lawyer and a client attract privilege even if they are never actually sent. Further, the working papers and notes of lawyers are generally privileged. If any of the above criteria are absent, the communication will likely lose its privileged status.

As to what constitutes legal advice, this has been interpreted widely to include material which evidences the substance of confidential communications between clients and their lawyers. As Lord Scott said in Three Rivers No 6 [2004] UKHL 48, the test is whether the advice relates to “the rights, liabilities, obligations or remedies” of the client under private or public law. If it did, then the question was whether the occasion on which the communication took place, and the purpose for which it took place, were such as to make it reasonable to expect the privilege to apply.

As with litigation privilege, legal advice privilege is also subject to the dominant purpose test as recently confirmed by the Court of Appeal in Civil Aviation Authority v R Jet2.com Ltd [2020] EWCA Civ 35. In that case Airline Jet2 sought disclosure of correspondence connected with a Civil Aviation Authority press release in the UK. The drafts had been circulated internally including to the in-house lawyers. Privilege was asserted, amongst other things, on the basis that in-house lawyers were copied in. However, the Court of Appeal upheld the earlier decision that the correspondence was not privileged in circumstances where the dominant purpose was commercial as opposed to legal in nature and found that the involvement of a lawyer did not automatically engage the protection of legal advice privilege. Simply copying in a lawyer may not therefore be determinative.

Who is the client?

As to who is the “client” this, again, has been the subject of some debate and controversially in Three Rivers No 5. [2003] EWCA Civ 474 the Court of Appeal overturned the decision of the Court at First Instance and determined that communications passing between a lawyer and employees who were non-clients i.e. not authorised individuals for the purposes of obtaining legal advice within a corporate entity, did not attract privilege. Whilst it was argued that the internal documents were privileged because they were prepared with the dominant purpose of obtaining legal advice, that was rejected as they did not form part of the communications between the lawyer and its true client.

This restrictive approach was confirmed in The RBS Rights Issue Litigation [2016] EWHC 3161 (Ch). In this case, records of interviews conducted with employees were held not to be covered by legal advice privilege as the “client” was only those individuals authorised to seek and receive legal advice. The case concerned the disclosure of records of interviews and concluded that information from an employee is to be treated as no different from information from third parties even if that information has been collated to be shown to a lawyer to enable advice to be given.

The EA also defines “client”. The “client”, as defined in section 113 of the EA, takes on a wider meaning than the English common law definition, including:

1. an employee or agent of a client;

2. a person acting, for the time being, as manager, committee or other person however described, under a law that relates to a person of unsound mind and in respect of whose person, estate or property, the person is so acting; or

3. if the client has died, the personal representative of the client.

Furthermore, in relation to confidential communications made by a client in respect of property in which the client had an interest, it also includes a successor in title to that interest.

Practical considerations

Whilst controversial, the narrow definition of “client” (albeit broader in the BVI) remains and it is imperative that financial businesses in the Channel Islands, the Cayman Islands and the BVI consider carefully their internal processes if they are to protect their communications. We would highlight the following practical considerations for such financial businesses:

1. carefully consider how to define the “client” in the engagement letter;
2. only the defined “client” should deal with lawyers;
3. only the defined “client” should prepare briefing notes, letters of instruction, meeting agendas or minutes;
4. make it clear to other employees that no documents containing information relevant to the seeking of legal advice should be created without express clearance from the defined “client”; and
5. discourage non-”client” employees from reporting to the defined “client” on the relevant matter, or from copying anyone else to those communications.

Whilst not binding in Guernsey, Jersey, the Cayman Islands and the BVI, but highly persuasive, there is a strong possibility that recent case law in England would be followed in these jurisdictions. The Courts could apply the more generous approach to legal advice privilege as has been adopted by, for example, Singapore and Hong Kong. However, there is little certainty that it would do so. Companies should therefore exercise an abundance of caution and seek legal advice as to their internal processes at the earliest opportunity.

UK Real Estate and Jersey Property Unit Trusts – Tax issues, Advantages and Regulatory Treatment

Jersey property unit trusts (“JPUTs”) remain a popular vehicle for investments into UK real estate assets. As with many offshore vehicles, they offer light touch regulatory treatment and tax neutrality, with potentially advantageous treatment under the UK’s income, capital gains, stamp duty and value added tax regimes.

A JPUT is a type of Jersey trust in which an asset or assets – most commonly UK real estate – is held by one or more trustees for the benefit of the holders of units in the JPUT under the terms of a trust instrument. A Jersey trust is not a legal entity in the same way as a company and the trustees are responsible for holding and managing the trust assets, although the management may be delegated.

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Introduction

Jersey property unit trusts (“JPUTs”) remain a popular vehicle for investments into UK real estate assets. As with many offshore vehicles, they offer light touch regulatory treatment and tax neutrality, with potentially advantageous treatment under the UK’s income, capital gains, stamp duty and value added tax regimes.

A JPUT is a type of Jersey trust in which an asset or assets – most commonly UK real estate – is held by one or more trustees for the benefit of the holders of units in the JPUT under the terms of a trust instrument. A Jersey trust is not a legal entity in the same way as a company and the trustees are responsible for holding and managing the trust assets, although the management may be delegated.

Advantages of using JPUTs

Whilst some of the reasons why JPUTs initially became popular have changed, they remain a commonly-used structure for the following reasons:

  • Track record: JPUTs are a well-established structure for UK real estate investments and are familiar to investors, lenders, advisers, regulators and tax authorities in the UK and elsewhere.
  • JPUTs are highly flexible with the ability for the trust instrument (discussed below) governing the terms of the JPUT to be customised to suit commercial objectives.
  • Tax neutrality: Income and capital gains taxes are not payable in Jersey by the JPUT trustees; stamp duty is not payable in Jersey or the UK on transfers of units in a JPUT; and JPUTs may be structured to be transparent for UK income tax purposes and may elect to be transparent for UK capital gains tax purposes (including in relation to the sale of the JPUT’s underlying assets).
  • JPUTs are relatively easy and quick to establish with potentially light touch and fast regulatory approvals.

Trustees and the trust instrument

One or more Jersey corporate entities are usually appointed to act as trustees of the JPUT. For English law property and regulatory reasons it is common for two trustees, being Jersey-incorporated SPVs, to be appointed as trustees for the JPUT. Alternatively, a corporate trustee provided by a Jersey-domiciled trust and company service provider with expertise in real estate investments may fulfil this function.

The trustees owe certain fiduciary duties to the unitholders of the JPUT. A trust instrument setting out the terms on which the trustees hold the assets for the unitholders is required in order to constitute a JPUT (as well as initial trust property) . Jersey maintains a flexible and modern trust law regime which is well-suited to reflecting the commercial intentions of investors, and a rich book of jurisprudence in which established principles have been tested and clarified.
In some instances, the trustees may also appoint a manager to manage the property of the JPUT on behalf of the JPUT. This function can, however, also be undertaken directly by the trustees.

Regulation of JPUTs

JPUTs are subject to similar regulatory requirements as other investment vehicles in Jersey. Where they hold a single asset with a small number of investors, a simple regulatory consent under the Control of Borrowing (Jersey) Order 1958 (a “COBO consent”) is usually all that is required. COBO consents normally take around five business days to be obtained from the Jersey Financial Services Commission.

Where the JPUT will hold multiple assets but will have less than 50 investors, the Jersey Private Fund (“JPF”) regime may be suitable. JPFs are one of Jersey’s most popular Jersey fund authorisation regimes for sophisticated investors which utilises a fast-track, light-touch regulatory approval process to aid speed-to-market and limit costs of setup.

Similarly, a JPUT which will be offered to more than 50 investors and hold multiple assets will likely fall within the Collective Investment Fund regime in Jersey and would need to apply for a fund certificate on that basis.

UK Tax implications

In April 2019, the UK’s capital gains tax and corporation tax regimes were changed so that gains made by non-residents on direct and certain indirect disposals of UK commercial real estate are subject to UK capital gains tax. Fortunately, certain exemptions were introduced which remain relevant to the use of JPUTs:

  • JPUTs can elect to be treated as transparent for any capital and corporation gains subject to certain conditions (including unanimous and irrevocable unitholder consent). Investors in JPUTs making such an election would be taxed in their own names on any gains made through the JPUT so that investors who are tax exempt can remain so, and double taxation will be avoided.
  • In certain circumstances funds which are widely held and meet particular reporting requirements can elect for exemption from capital gains and corporation tax on the UK property gains. As above, individual investors would be taxed on gains made through the JPUT.

Confidentiality

Because JPUTs are not legal entities they are not required to file publicly-available information on the Jersey Companies Register. For this reason, the trust instrument (being the key constitutional document of a JPUT), the register of unitholders, and the consent issued by the JFSC, are not publicly available documents.

Other considerations

Investment into UK real estate through JPUTs is often by private acquisition of all of the units of a JPUT. The units are generally priced at net asset value taking into account any SDLT savings.

The holding of assets through the JPUT means that the commercial considerations around buying and selling units are similar to those around buying and selling shares in a private property company. In practical terms, an investment or transfer will be approved by the trustees (and potentially the manager if there is one) on the terms of the trust instrument and on the trustees clearing AML checks on each new investor. An investor into a JPUT would equally need to conduct due diligence on the JPUT itself as well as the underlying assets.

Lenders to JPUTs or the JPUT’s investors will typically require a security package including a Jersey law security interest over the units in the JPUT and one or more direct UK charges over the underlying property. For this reason, JPUT trust instruments generally contain provisions which permit the trustees of a JPUT to provide security (although this may be subject to certain conditions being met). The lender may also require other security, such as an English law debenture over the JPUT’s assets in the UK and security over the JPUT’s revenue which may be by way of security over the JPUT’s bank accounts (and, subject to the terms of the JPUT trust instrument, care must be taken here to obtain unitholder consent if the JPUT has been structured as a Baker trust). Such lending will typically be conditional upon the lender being satisfied that the JPUT has all relevant corporate and regulatory consents and that the trust instrument contains provisions protecting the lender’s position as secured party.

Ireland update - Fifth Anti-Money Laundering Directive implementation – committee stage amendments on virtual asset service providers

In our September 2020 advisory, we commented on the publication of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2020 (the “Bill”), which will amend the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (the “CJA 2010”) to transpose elements of the Fifth Anti-Money Laundering Directive (“5AMLD”).

On 19 November 2020 an updated version of the Bill was published which includes the amendments of the Select Committee on Justice (the “Amended Bill”).1 Under the Amended Bill, the CJA 2010 will be updated to impose anti-money laundering and counter-financing of terrorism (“AML/CFT”) obligations on a wider range of virtual asset service providers (“VASPs”) than those which were captured under the Bill as initiated.

The Amended Bill will amend the CJA 2010 to meet latest international standards and go further than the 5AMLD requirements in this area.

 

Click to view full advisory

Central Bank of Ireland Publishes Findings from its Fitness and Probity Thematic Inspections

On 17 November 2020, the Central Bank of Ireland (the "Central Bank") published an industry letter to all regulated financial service providers setting out its findings from thematic inspections assessing the level of compliance with obligations under the Central Bank's fitness and probity regime. The findings focus on five key issues:

  1. the role of the board of directors in the fitness and probity process;
  2. the level of due diligence being conducted by firms;
  3. outsourcing of roles which are subject to the fitness and probity regime;
  4. engagement with the Central Bank; and
  5. the role of the compliance function.
Firms should consider the contents of this letter and determine what, if any, action needs to be taken. Our advisory provides an overview of the issues raised in the Central Bank's letter.

 

Click to view advisory

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