Jersey Company Law Series: Demerger – The Procedure and Effect

• Demerger allows a Jersey company to divide its assets and liabilities, by operation of law, between two or more companies

• Flexible and cost efficient alternative to schemes of arrangement, asset sale or liquidation while protecting creditors' interests

• The demerger instrument is critical as it sets out the terms and means of the demerger, including the destination of assets and liabilities

What is a Demerger

The purpose of the Regulations is to enable a company to divide its assets and liabilities between two or more companies and for the transfer of such assets and liabilities to be by operation of law.

A split up demerger means that the original entity may cease to exist and there would be two or more new entities continuing the business. A spin off demerger means that the original entity continues with one or more new entities set up. Both options are available in Jersey.

Terminology in the Regulations

The terminology in the Regulations includes the following:

• demerging company means the company that is demerging;

• demerged companies means the resulting companies;

• survivor company means the original company if it continues to exist; and

• new company means any company resulting from the demerger that is not a survivor company.

Which Entities are Eligible to Demerge?

The demerger regime is applicable to Jersey companies demerging into Jersey companies and the Regulations specifically set out a list of companies not eligible to demerge, which includes (but is not limited to) cell companies (or its cells), unlimited companies, companies with guarantor members, and companies that are liable to tax in Jersey.

Banking and insurance businesses are also excluded from the regime on the basis that procedures are already in place in relation to transfers of such businesses.

A Flexible Option for Jersey Companies

Whilst a Jersey company may also wish to consider a scheme of arrangement, sale of assets or liquidation, demergers may also be an attractive option, as it remains a cost efficient, flexible method of splitting assets and liabilities and provides necessary protections for shareholders and creditors.

A demerger may be used in the following circumstances (noting that this list is not exhaustive):

• for succession planning for a family or other business where assets could be split between two or more companies;

• for splitting out assets or risks which are not compatible with the rest of the business;

• for splitting out different strands of businesses which would allow management to focus on each strand separately;

• to split out and "warehouse" illiquid assets for a fund;

• to prepare a company for a sale and to split out assets or risks that may not be of interest to a potential buyer; or

• to enable easier analysis of a particular part of a business for investors.

The process to demerger is set out broadly below, under "Process - the Steps to Demerger".

Protection of Shareholders, Creditors and Employees

Solvency

The demerger regime is designed to ensure third parties are suitably protected. As a general policy direction by the Jersey lawmakers, this protection is ensured by focusing on solvency.

Each of the directors of the demerging company who vote for the demerger have to sign a certificate including either a solvency statement or a statement that the directors are satisfied on reasonable grounds that there is a reasonable prospect of obtaining the permission of the Court to the demerger.

A "solvency statement" is a statement that, having made full enquiry into the affairs of the demerging company, the person making the statement believes that the demerging company is, and will remain until the demerger is completed, able to discharge its liabilities as they fall due.

Each of the proposed directors of the demerged companies also have to sign a similar certificate in relation to the expected solvency of the demerged companies for the twelve month period immediately following the demerger. If the proposed directors are all new directors then one of the existing directors who signed the solvency statement of the demerging company will also need to sign the post demerger certificate.

It is an offence to sign any of these certificates without having reasonable grounds to do so and to give any false or misleading or deceptive information. The offence is punishable by imprisonment up to two years and a fine.

Where solvency is an issue, the Court will only sanction a demerger if it is satisfied that the demerger would not be unfairly prejudicial to the interests of any creditors or shareholders of the demerging company.

Shareholders

A demerger must be approved by special resolution of the shareholders (so at least two-thirds majority). The shareholders must have the relevant information provided to them in order that they may make an informed decision. If a shareholder objects to the demerger, they can let the demerging company know and then make an application to Court. If the shareholder would be unfairly prejudiced by the demerger then the Court can make any order that it thinks fit for giving relief.

Creditors

Where a solvency statement has been made, any creditor with a claim of over £5,000 (a "Creditor") has to be sent notice of the demerger and a notice should also be published in a local newspaper or published in another approved manner. A Creditor can also review the demerger instrument (see "Demerger Instrument" below for further details of the demerger instrument), which may have commercially sensitive information redacted. A Creditor can object to the demerger, serve a notice on the demerging company of such objection and, if its claim is not paid, it may apply to the Court for an order either restraining the demerger or modifying it, on the basis that the Creditor (or any other creditor) is being unfairly prejudiced.

If Court approval is being sought to the demerger then a Creditor has a right to be heard by the Court.

Employees

Unless specifically mentioned, the contracts of employment between the demerging company and its employees will automatically transfer to one of the demerged companies with no changes to the terms and conditions.

All employees have to be sent notice of the demerger and they can review the demerger instrument, which may have sensitive information redacted.

An employee can object to the transfer of his/her contract of employment. If the objection is still in place at the time of the demerger, the employee would be treated as having resigned from the demerging company with effect from the date of the demerger.

Effects of Demerger

Where do the assets and liabilities of the demerging company end up following a demerger?

Subject to certain limitations, the demerger instrument will specify where each of the demerging company's assets and liabilities go.

The demerger instrument is a critical document in the demerger process and must be executed by the demerging company. There are certain requirements in the Regulations around what needs to be included in the instrument and, in general terms, this document sets out the terms and means of affecting the demerger. The requirements are set out under "Demerger Instrument" below.

What if the demerger instrument doesn't refer to specific assets ("Omitted Assets") or liabilities ("Omitted Liabilities")?

The demerger instrument should ideally include sweep up language to cover Omitted Assets and Omitted Liabilities (even if certain assets and liabilities are not specified). If it does not, the default position is as follows:

• Omitted Assets will be held jointly in common in equal parts between the demerged companies in equal shares; and

• Omitted Liabilities of a civil nature will be equally held jointly and severally by the demerged companies.

Ideally all assets and liabilities will be included in the demerger instrument.

Process - the Steps to Demerger

The process of a demerger (assuming the non-court approval process is followed) is broadly as follows:

Step 1 – A demerger instrument is prepared, which will deal with the split of assets and liabilities, as well as other practical details of each demerging company (such as its constitutional documents and directors);

Step 2 – The demerging company's directors must pass a resolution approving the demerger, make the required solvency statements and, after passing the resolution, each director must sign a confirmation certificate;

Step 3 – The demerging company's shareholders must approve the demerger by special resolution – such shareholders then have 21 days from approval being given to object to the demerger. In addition, within 21 days of shareholder approval, the demerging company's employees must be provided written notice of the intention to demerge;

Step 4 – Written notice must be sent to the Creditors of the demerging company (together with a public notice of the demerger being placed in the Jersey Gazette) – Creditors then have 21 days of such notice to object to the demerger; and

Step 5 – Assuming that a) the shareholders of the demerging company have approved the demerger and have not objected, b) no employee has objected to the demerger and c) no Creditor of the demerging company has objected to the demerger (each within the applicable time frames), the demerging company may apply to the Registrar of Companies in Jersey to register the demerger and, upon registration by the same, the demerger will become effective.

Demerger Instrument

A demerger instrument must state the terms and means of effecting the demerger and in particular:

• the details of the demerging company;

• whether it is to be a survivor company or not;

• the names and addresses of the directors of the demerging company;

• details of any arrangements necessary to complete the demerger;

• details of payments to be made to a member or director of the demerging company;

• details of any securities of the demerging company that are to be converted into securities of a demerged company;

• if the demerged company is to be a new company, the proposed memorandum and articles of association, the name and address of any directors and any other document that would be required under Part 2 of the Companies Law;

• if the demerging company is to be a survivor company, any amendments to the memorandum and articles of association and names and addresses of any director changes; and

• identify which part of the undertaking, property, rights and liabilities of the demerging company and is to become the undertaking, property, rights and liabilities of each demerged company, except that a liability attached to any property of a demerging company must not be separated from that property.

The information contained in this guide is necessarily brief and general in nature and does not constitute legal or taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.