The Use of Jersey Companies in Cash Box Placings

The use of Jersey cash box companies is increasingly popular as a fast and efficient way of enabling a United Kingdom public company to raise equity capital for an acquisition or to reinforce balance sheets through a placing of its shares.

There are two types of cashbox structure: (i) a typical cash box structure, where a United Kingdom listed company (‘UK PLC‘) will receive the entire issued share capital of a Jersey special purpose vehicle, the only assets of which are its cash reserves by way of subscription for ordinary shares in the listed company; and (ii) a convertible bond cash box structure, where a Jersey company is established as a subsidiary of a UK PLC to issue bonds to investors.

How do cash box structures work?

A typical cash box transaction involves the incorporation of a Jersey special purpose vehicle (the ’cash box‘) as a subsidiary of a UK PLC. The cash box will usually be incorporated with ordinary and redeemable preference shares, and be managed and controlled in the United Kingdom (thus avoiding any need for HMRC consent). Additionally, if merger relief is required, it is common for the underwriters or placing agents to acquire not less than 10 per cent of the cash box ordinary shares.

Typically, various agreements set out the terms of subscription (and provide for a mechanism to unwind the transaction should the placing not proceed) for both ordinary shares and redeemable preference shares amongst UK PLC and the placing agents (net of expenses). The placing agents will subscribe for redeemable preference shares equal in value to the UK PLC shares to be placed by the placing agents. All the preference shares held by the placing agents will then be transferred to the UK PLC in consideration for the issue by UK PLC of its shares to the placing agents. At the same time the placing agents will transfer their ordinary shares in the cash box to UK PLC.

Since the shares will be issued to the placing agents prior to the placing of the UK PLC shares taking place, the shares in the cash box will usually be credited as fully paid against an undertaking to pay (usually at a certain time on the day of completion). The placing agents will satisfy the undertaking to pay out of the placing proceeds prior to transferring their shares in the cash box to the UK PLC.

The cash box is then owned 100 per cent by UK PLC, which may then extract the funds owned by the cash box by means of a redemption of the preference shares, an inter-company loan or a winding up of the cash box.

Transfer forms in respect of the ordinary shares and redeemable preference shares will be executed and completed in Jersey to mitigate stamp duty that would otherwise be payable. In practice this is usually done under a power of attorney.

Diagram A: A Typical Cash Box Structure

The convertible bond cash box structure

A convertible bond cash box transaction involves the incorporation of the cash box as a par or no par value public company. The cash box will be a subsidiary of a UK PLC. As with the typical cash box structure the convertible bond cash box will usually be incorporated with ordinary and redeemable preference shares, and be managed and controlled in the United Kingdom.

The ordinary shares are issued to the UK PLC and convertible bonds are created and issued to the public by the cash box. The convertible bonds will convert into redeemable preference shares subject to the terms of the bond conditions, articles of association and corporate authorisations of the cash box, the articles of association and corporate authorisation of the UK PLC and a paying and conversion agency agreement. The redeemable preference shares are upon issue exchanged for ordinary shares in UK PLC by the investors. The number of ordinary shares will be calculated by dividing the aggregate paid up value of the redeemable preference shares in the cash box that were issued on conversion by a pre-determined exchange price. The assets of the cash box issuing convertible bonds are typically its cash reserves only. The convertible bonds are usually guaranteed unconditionally and irrevocably by UK PLC.

Diagram B: Convertible Bond Cash Box Structure

The cash box would need the following regulatory approvals from the Jersey Registrar of Companies: Consent pursuant to Article 2 of the Control of Borrowing (Jersey) Order 1958, as amended (‘COBO’) to the issue of ordinary shares and redeemable preference shares by the Cash Box; Consent pursuant to Article 4 of COBO to the issue of securities (being the convertible bonds) by the Cash Box; and Consent under the Companies (Jersey) Law 1991, as amended (the ‘Law’) and the Companies (General Provisions) (Jersey) Order 2002 (the ‘2002 Order’) to the offer of the convertible bonds and the redeemable preference shares to the public and the circulation by the Company of a prospectus in relation to the same.

In addition UK PLC would need consent under Article 1 of COBO for the raising of money in Jersey by the issue by UK PLC of ordinary shares pursuant to the conversion and exchange of the convertible bonds and under Article 8 of COBO for the circulation in Jersey of an offer for the exchange of the redeemable preference shares for the UK PLC’s ordinary shares. In our experience, obtaining such consents will not have a detrimental impact on the offering timetable.

The conditions to the above Jersey regulatory consents would typically require that a copy of the final draft of the offering circular (on which the offer of the convertible bonds would be launched), signed by or on behalf of all the directors of the cash box, be filed with the Jersey registrar of companies prior to the consent to its circulation becoming effective, and that a copy of the final printed offering circular, signed by or on behalf of all the directors, be filed with the Jersey registrar of companies within 14 days of the date of its issue.

What documents are required for a convertible bond structure?

Typically, the following documents set out the terms of the transaction:

• a term sheet produced by the lead manager summarising the main terms of the convertible bonds;
• the offering circular relating to the issue of the convertible bonds, containing (inter alia) the proposed terms and conditions of the convertible bonds, a description of the cash box, UK PLC and the terms of the preference shares;
• a subscription agreement between the lead manager, the cash box and UK PLC, pursuant to which the lead manager agrees to subscribe for the aggregate principal amount of the convertible bonds;
• a trust deed between the cash box, UK PLC and the trustee pursuant to which the convertible bonds are constituted and UK PLC guarantees the obligations of the cash box (the trust deed will also contain covenants by the issuer in support of the specific investor protections provided);
• a paying, transfer, conversion and exchange agency agreement between the cash box, UK PLC and the trustee in relation to the convertible bonds which sets out the terms under which the paying agent acts as a conversion or exchange agent dealing with the mechanics of transferring the shares which arise on conversion or exchange to bondholders; and
• a loan agreement to be made between the cash box and UK PLC pursuant to which the cash box will lend the proceeds of the bond issue to UK PLC.

If the convertible bonds are to be listed it is likely the offering circular will constitute listing particulars for the relevant listing authority. The offering circular will contain a more detailed description of the business of the issuer in respect of a convertible bond offering than a straight bond offering. This is because more information needs to be disclosed to buyers of equity as opposed to debt securities, which are perceived to carry less investment risk. Convertible and exchangeable bonds are treated as quasi-equity securities for these purposes and so require fuller disclosure. An exchangeable bond will contain disclosure on the shares into which the bond is exchangeable. The level of disclosure as to such underlying business will depend on the listing rules of the exchange on which the bond is listed, but in the case of an exchangeable bond will normally be restricted to information derived from published sources.

Consent is commonly sought for the listing of the convertible bonds on the Official List of the FSA and admission of the convertible bonds to the Professional Securities Market of the London Stock Exchange. Additionally the UK PLC undertakes to apply to have the ordinary shares issueable upon conversion of the convertible bonds admitted to the Official List and admitted to trading on the EEA Regulated Market of the London Stock Exchange.

Benefits of a Jersey cash box structure

Pre-emption

As in both types of cash box structure the ordinary shares in the UK PLC are not issued for cash, but instead issued in exchange for the issued redeemable preference shares in the cash box. This will allow a UK PLC to allot new shares without having to allot them on a pre-emptive basis as required by section 561 of the United Kingdom Companies Act 2006 (the ’UK Act‘), or to deal with the practical complications of securing shareholder approval for the disapplication of the pre-emption provisions contained in the articles of association.

It should be noted that recently investor groups such as the Association of British Insurers and the National Association of Pension Funds have expressed concern about the use of cash boxes to avoid pre-emption rights and have issued guidance in this respect. Failure to follow such guidance may mean that the ABI could, for example, hold boards to account for breaches of the Pre-Emption Group guidelines and recommend members to vote against the re-election of directors at annual general meetings. It is understood that where a cash box is used to fund an acquisition fewer concerns are raised, as this is within the spirit of the UK pre-emption provisions. As a pure cash raising exercise however, the market response should be carefully considered.

Merger relief

Merger relief may also be available under section 612 of the UK Act, therefore, the cash box is often used to create a merger relief reserve for UK PLC. As a consequence, the premium over par value arising on the issue of the ordinary shares of UK PLC should be treated as a distributable reserve. In consequence, cash box structures are commonly used in conjunction with rights issues.

Listing Rules

There should be no need for UK PLC to issue listing particulars or a prospectus for the issue of new shares representing less than 10 per cent of its current issued share capital to institutional investors, thus saving on the time and expense involved in preparing listing particulars.

Why Jersey?

Flexible companies’ legislation

Jersey companies are able to redeem shares from any source of funds and in the event of redemption of the redeemable preference shares the directors will be required by the Companies (Jersey) Law 1991 (the ‘Law’) to make a solvency statement that the directors believe that the Cash Box can, once the redemption has taken place, pay its liabilities as they fall due and carry on business for the next 12 months or until it is wound up, whichever is the earlier.

Until recently, no par value shares were preferred as they gave greater flexibility than traditional par value structures. However, changes in Jersey law in 2008 have removed these differences and par value and no par value shares are redeemable on the same basis.

Tax neutrality

The Jersey cash box will be tax neutral, and the transfers of shares arising as a result of the use of the cash box structure will, if implemented correctly, be free of UK transfer taxes.