Private equity – acquisition structures

Key structuring issues
Acquisition structure – debt and equity
Advantages
Jersey group holding companies and acquisition vehicles
Jersey EBTs

Key structuring issues

Complex tax, accounting and employment matters are among those which drive the choice of acquisition structure for private equity-funded transactions. Two of the most common types of private equity acquisition transaction are the leveraged buy-out (LBO) and the management buy-out (MBO).

Where an LBO or MBO transaction involves a domestic or international business with a UK-domiciled management team, the use of Jersey acquisition structures has gained traction with UK private equity advisers for a number of reasons.

This article explains why Jersey companies and management incentive plans (including employee benefit trusts (EBTs)) have become integral components of the LBO and MBO transaction planning process.

Acquisition structure – debt and equity

One such Jersey debt and equity acquisition structure is as follows.

The key Jersey-connected parts of the structure include:

• a Jersey group holding company and/or acquisition vehicle;
• a Jersey EBT; and
• The International Stock Exchange-quoted eurobond.(1)

Advantages

A tiered Jersey debt and equity holding structure:

• enables structural subordination of intra-group or acquisition financing (ie, splits debt and equity investment);
• facilitates the requirements of both the PE backer and target group management;
• provides UK-resident non-UK-domiciled target group management with remittance-based taxation options for future exit (eg, UK capital gains tax);
• allows for simplified dividend flows to PE investment vehicles and therefore ultimate PE investors; and
• should not be subject to tax or stamp duty in the United Kingdom on any future disposal; and
• the EBT (or another form of entity) facilitates the alignment of target management objectives with those of the PE shareholder.

Jersey group holding companies and acquisition vehicles

The principal advantage of using a Jersey holding company is the flexibility of Jersey company law in relation to returns to investors – whether by means of dividend, redemption of share capital or share buy-back.

A Jersey company may make a distribution from a wide range of sources, not merely from distributable profits.

A zero rate of income tax applies to almost all Jersey companies (unless they are a locally regulated company, which is not necessary for this type of holding structure).

Where a Jersey company is managed and controlled in a country where all or part of the company's income is taxed at a rate of 20% or more, the company is treated as tax resident in that other country (eg, the United Kingdom). The effect of this is that the Jersey company should not be dual resident for UK tax purposes.

On an exit, no stamp duty is payable on the transfer of shares in a Jersey company and there is no corporation or capital gains tax in Jersey.

As an alternative exit, Jersey companies are also suitable vehicles for initial public offerings and have been listed on all of the world's major exchanges.

Jersey EBTs

Rewarding, motivating and retaining senior employees and attracting new high-profile executives to portfolio companies requires a well-structured, tax-efficient and effectively administered remuneration package.

As part of the LBO and MBO process, it is usual for share-based incentive plans to be designed to align the activities of executives and senior employees with the requirements of the PE group investor.

While some senior executives may take shares directly in the Jersey holding company, share plans for the wider executive and employee base are typically operated in conjunction with a standalone entity such as an EBT or special purpose vehicle (SPV). An EBT is generally an offshore trust where the trustee's duty is to act in the interests of the employees (and certain qualifying former employees) who are beneficiaries under the EBT. An SPV is created for the sole purpose of acting as the nominee for management as well as share warehousing for leavers and joiners where this is deemed tax efficient.

Jersey EBTs and SPVs that form part of structured LBOs or MBOs fulfil a number of functions depending on the plan structure, the stage in its lifecycle and the target company structure.

EBTs and SPVs often allow for multiple share plans to be managed through a single arrangement for a group of companies.

Incentive plans for the PE management team are often more creative and can be tax efficient depending on their country of residence and domicile. Plans include the structuring of carried interest, share incentives, bonus deferral and partnership interest management.

For further information on this topic please contact Raulin Amy, Richard Daggett or Simon Dinning at Ogier's Jersey office by telephone (+44 1534 514 000) or email (raulin.amy@ogier.com, richard.daggett@ogier.com or simon.dinning@ogier.com). Alternatively, contact Nathan Powell at Ogier's Hong Kong Office by telephone (+852 3656 6000) or email (nathan.powell@ogier.com). The Ogier website can be accessed at www.ogier.com.

Endnotes

(1) Further information on quoted eurobonds is available here.

Donna Laverty, director, contributed to the preparation of this article.

Donna Laverty, director, contributed to the preparation of this article.