New regulations aim to clarify and simplify merger procedures

Introduction
Flexible structuring
Consents required
Completion and effect of merger
Merger process
Notice to creditors and registrar consent

Introduction

The Companies (Jersey) Law 1991 has been amended by the Companies (Amendment 5) (Jersey) Regulations 2011, which came into force on February 23 2011. The regulations aim to:

• clarify and simplify certain merger procedures; and
• enable Jersey incorporated companies to merge directly with a wider range of corporate bodies, including companies incorporated elsewhere. In this respect, the law now allows mergers between a 'relevant' Jersey company and:
  • any other Jersey incorporated body permitted to merge with a company; and
  • any foreign incorporated body, provided that it is not an 'excluded body' and not prohibited from such a merger under the laws of its jurisdiction of incorporation.

A 'relevant' Jersey company is any Jersey company that is not a cell company or one with unlimited shares or guarantor members.

Flexible structuring

By operation of law in Jersey, all assets and liabilities of the merging companies are carried forward into the merger company. This may have advantages for clients when structuring deals. In particular, the changes to the law should enable Jersey companies to merge with companies incorporated in the British Virgin Islands, the Cayman Islands, Guernsey and India, among others. With regard to India, when a merger or amalgamation occurs between a Jersey company and an Indian company, the current Indian tax or accounting regime should not treat it as a transfer for the purposes of Indian capital gains tax. There may be similar tax advantages in merging other companies incorporated offshore or in onshore jurisdictions with Jersey companies. In addition, there may be advantages to using a merger procedure as opposed to other typically used M&A structuring tools, such as takeovers and schemes of arrangement.

For takeovers, the squeeze-out provisions under Jersey law, which are broadly similar to English law, require 90% shareholder approval. The approval percentage required for a merger can be as low as 66.66% (which is the minimum percentage required to pass a special resolution under Jersey law). Furthermore, there are no prescriptive requirements for the form of special resolution necessary or the information that must be sent to shareholders with the notice convening the EGM, apart from basic documentation related to the merger such as the merger agreement and the new memorandum and articles of association.

For schemes of arrangement, although they require a lower percentage approval (75%) than takeover offers, court approval of the scheme must be obtained. For the second limb of the test, a 'majority in number' must approve the scheme for it to be satisfied. This may make a merger a more attractive route, as unless the company is insolvent, court approval is not generally required for a merger. The merger agreement can contain any necessary terms for the merger or acquisition, including which will be the surviving entity.

In both cases, as a result of having no requirement to go to court or issue a prospectus or scheme document, there may also be time and cost savings.

Consents required

The consent of the registrar of companies in Jersey is required for any merger. Where any body other than a Jersey company is to be a party to a merger, the consent of the Jersey Financial Services Commission will also be required. When determining whether it should consent to a merger, the commission must consider all relevant circumstances, including the interests of creditors and the public, and the reputation of Jersey. It has a wide discretion pursuant to the law to request additional documentation to enable a decision to be made. Any of the merging bodies can appeal to the Royal Court of Jersey within one month of a decision of the commission on the grounds that such decision was unreasonable.

If one merging body is insolvent, the Royal Court must also approve the merger. If the Royal Court is satisfied that the merger would not be unfairly prejudicial to the interests of any creditor of any of the merging bodies, it will approve it.

Completion and effect of merger

Following the completion of a merger, in cases where the merged company continues as a Jersey incorporated entity, the registrar will issue a certificate of incorporation on the merger. By operation of law:

• the merging companies are merged and continue as one merged company, which may be either a new body or company (newco) or a survivor body or company (survivorco);
• all rights and property of each merging company before the merger become those of the merged company;
• the merged company becomes subject to all criminal and civil liabilities, contracts, debts and obligations of each merged company;
• all actions and other legal proceedings which were pending against each merged company continue; and
• each merged company, except for any survivorco, shall cease to be incorporated.

Merger process

Every merger which is not an internal group merger between subsidiaries, or between a subsidiary and its parent company, requires approval of a written merger agreement by the shareholders of each merging company. The merger agreement governs the terms of the merger. The directors of each merging company must resolve that, in their opinion, the merger is in the best interests of the company and must each sign a certificate confirming the solvency of such company. Where a company is insolvent and the directors cannot make the solvency certification, they are required to certify their belief that the Royal Court will permit the merger on the grounds that it would not be unfairly prejudicial to the interests of any creditor of any of the merging companies (as well as making an application to the Royal Court).

Merger agreements
There are no restrictions on the content of the merger agreement and it need not be very detailed, but it must include:

• confirmation of whether the merged body will be a newco or a survivorco;
• the memorandum and articles of association of a newco (or any amendments to those of a survivorco);
• details of proposed directors of the newco (or of any board changes of the survivorco);
• details of the arrangements necessary to complete the merger and provide for the management of the merged body;
• details of any payment to be made to a director or member of a merging company;
• if relevant, the manner in which the securities of each merging company will be converted into securities of the newly merged company or, alternatively, confirmation of what the holders will instead receive and how and when they will receive it; and
• the cancellation of any shares of a merging body held by or on behalf of another merging company.

The merger agreement may also provide for circumstances in which the merger may be terminated prior to its completion. Each member must also be informed it they may object to the merger within 28 days of the passing of the special resolution approving the merger agreement. Objection is by application to the Royal Court for an order that the merger would unfairly prejudice the member's interests (provided that such member has not previously voted in favour of the merger).

Parent-subsidiary mergers
In the case of any merger between parent and subsidiary:

• the shares of each merging subsidiary are cancelled without any repayment of capital;
• any changes to the memorandum and articles of association of the parent company to take effect on the merger should be specified in the special resolution approving the merger;
• no securities shall be issued and no assets distributed by the merged company in connection with the merger; and
• the capital accounts of each merging subsidiary are to be added to the capital accounts of the parent company.

Mergers of subsidiaries
In the case of any merger between subsidiaries of the same parent:

• the shares of all merging companies, except the survivorco, shall be cancelled without any repayment of capital;
• any changes to the memorandum and articles of association of the survivorco to take effect on the merger should be specified in the special resolution to approve the merger;
• the issued share capital of the non-continuing companies shall be added to that of the surviving company; and
• the directors of the survivorco should be stated in the special resolution.

The merging companies may elect which company will be the survivorco or whether the merged company will be an entirely new entity.

Notice to creditors and registrar consent

Within 28 days of the approval of a merger by its members, each merging company must also give written notice of the proposed merger to all creditors with claims exceeding £5,000 (of which the directors are aware after making reasonable enquiries), and also otherwise publish such notice as a newspaper advertisement. Where the merging company is solvent, the notice must state that a creditor has the right to object and may give notice that it objects to the merger to the company within 28 days of publication of the notice, and has a further 28 days following such objection to apply to the Royal Court for any order that the court thinks fit in the circumstances, including restraining the merger from proceeding (unless such creditor's claim has been discharged).

Following the expiration of such notice period, provided that the directors have complied with the relevant merger provisions of the law and no insolvent company is involved in the merger, the merging companies can make the application to merge to the registrar, who will usually take between five and 10 days to process the application.

For further information on this topic please contact Raulin Amy or James O'Grady at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (raulin.amy@ogier.com or james.ogrady@ogier.com).