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International Company Formation - Offshore Companies Oiling the City's Engine

By Lowtax Editorial
24 April, 2012

With their flexible company laws and low levels of taxation, the United Kingdom Crown Dependencies of Guernsey, Jersey and the Isle of Man continue to provide a conduit for international companies intending to raise capital on the London Stock Exchange (LSE) and its junior markets despite the uncertain economic environment, demonstrating the importance of these offshore financial centres to the City of the London and the UK economy as a whole.

There has been a steady stream of initial public offerings on the LSE and other major bourses over the past year or so by companies registered in these jurisdictions, and recent figures suggest that using a corporate structure to float shares on London?s main market or its junior market, the AIM, is commonplace.

The distinction between ?offshore? and ?onshore? companies in these jurisdictions has been effectively swept away in the last 10 years as a result of the drive by onshore governments to ?clean up? the world of offshore, meaning that classic offshore corporate forms like exempt or international business companies are no longer available. However, governments in the Channel Islands and the Isle of Man have worked hard to ensure that their company laws remain attractive to international investors, and each has put in place highly competitive ?zero/ten? corporate tax systems to ensure that almost all registered companies will pay no more than 10% corporate tax, and in the majority of cases none at all.

In 2008 Guernsey consolidated much of the companies legislation enacted in the wake of the Companies (Guernsey) Law, 1994, and many of the former Act's provisions remain in the updated legislation. Protected Cell company legislation was also consolidated into the new Act. Two other additions to the new law are the reduction of regulatory requirements, and the introduction of a comprehensive system of corporate controls and governance. The most common business structures used by businesses in Guernsey are the Company Limited by Shares, the Company Limited by Guarantee, the Protected Cell Company (PCC) and the Incorporated Cell Company.

The Isle of Man has also recently overhauled its company laws, and five types of company are available under the Companies Act 2006, including Companies Limited by Shares, Companies Limited by Guarantee, Companies Limited by Shares and by Guarantee; and Unlimited Companies with or without Shares.

Companies incorporated in Jersey are governed by the Companies Law 1991 which is based largely on the English 1948 Companies Act. Jersey companies are limited by shares. However, there are no forms comparable to those of English companies limited by guarantee or unlimited companies. A private company is any company that is not a public company. In June 2006, the Jersey authorities published new proposals to amend the jurisdiction's Limited Partnership Law, in an effort to improve the competitiveness of the island's offshore financial services industry. The two new laws are the draft Separate Limited Partnerships (Jersey) Law 2011 and the draft Incorporated Limited Partnerships (Jersey) Law 2011. These provide respectively for the establishment of Separate Limited Partnerships (SLPs) and Incorporated Limited Partnerships (ILPs). Establishment of an SLP was made possible from April 20, 2011 and for an ILP from May 24, 2011.

The usual route that international groups take when floating their shares on the LSE is to form a holding company in one of the jurisdictions in question, although more specialized vehicles, such as a protected cell company or special purpose vehicle, are often used by groups in certain industries or targeting niche markets. Investment funds, for example, may use partnership or cell company structures rather than more conventional corporatations.

The most eye-catching listing on the LSE last year, that of commodities trader and marketer Glencore International, was carried out via a Jersey holding company, and was quite a coup for the island. Raising USD10bn at its initial public offering - London?s largest ever listing ? Glencore has a market capitalisation well in excess of USD50bn. Glencore was also the first company in 25 years to enter the FTSE 100 Index at admission. The Swiss-headquartered company also placed its shares on the Hong Kong Stock Exchange in a dual listing with the LSE. Nathan Powell, a partner based in Ogier's Hong Kong office, which acted as counsel to the Joint Global Co-ordinators on the listing said at the time that: "Our ability to offer Jersey law advice in both the London and Hong Kong time zones was a key factor in securing this instruction. We are also well placed to advise on the Hong Kong listing as we acted on the first listing of a Jersey company, United Company RUSAL Plc, on the Hong Kong Stock Exchange at the beginning of 2010. The fact that Glencore chose Jersey for its listing vehicle reflects Jersey's reputation as a well regulated jurisdiction, acceptable to investors globally, which offers robust but flexible corporate laws."

Jersey also served as the platform for the listing of shares on the LSE by Polymetal International, the largest silver and fourth-largest gold extraction company in Russia, and one of the top five primary silver extraction companies worldwide in its listing on the LSE last December, with a new holding company established in the jurisdiction for the purpose. Commenting on the move, Mike Jeffrey, a corporate partner at Carey Olson, which advised Polymetal International on the Jersey aspects of the listing, said: ?We are seeing increasing interest from international companies, particularly those based in emerging markets, who want to benefit from the advantages of listing on the London Stock Exchange. Jersey, as a leading and well regulated offshore financial centre with close ties to London, is a natural partner to assist in the listing process for international companies.?

Another notable listing by a company incorporated in Jersey also took place last year, when Vallares plc, a special purpose acquisition company, floated on the LSE, raising GBP1.35bn (USD2.2bn) ? the second-largest flotation of the year on the LSE. Backed by former BP chief executive Tony Hayward and financiers Nat Rothschild, Julian Metherell and Tom Daniel, Vallares intends to establish itself in the resources sector, by acquiring interests in one or more complementary companies, businesses or assets, focussing on oil and gas emerging-market enterprises. Jacqueline Richomme, partner at Mourant Ozannes who led the legal team on the Vallares transaction said: "We are delighted to have advised on another hugely significant IPO in the London market this year, following on from Glencore earlier this year and Vallar last year. [This] reiterates the attraction of Jersey for such sizeable listings."

Jersey is also playing a role in facilitating listings on other major stock exchanges. For example, in February this year, Delphi Automotive PLC has become the first Jersey company to have its shares directly listed on the New York Stock Exchange (NYSE). Shares in Delphi, a leading global vehicle components manufacturer, began trading on the NYSE on November 17, 2011 and the IPO, which was entirely a secondary offering by existing shareholders, raised USD530m. Carey Olsen Group partner, Alan Stevens, led the team that advised Delphi. He said: ?Jersey has an excellent reputation for companies looking to incorporate listing vehicles and this landmark listing reinforces the island?s position as a leading jurisdiction. We continue to see significant listing activity across a variety of other markets, including the Hong Kong Stock Exchange, the Channel Islands Stock Exchange and Euronext. At the same time, Jersey companies continue to be a popular choice for clients looking to list on the London Stock Exchange and AIM.?

Jersey companies are also being used for more specialised restructuring transactions between companies or groups of companies which already have a dual listing. One notable example was that of the mineral exploration for Centamin Egypt Limited, which successfully migrated its corporate headquarters to Jersey from Australia, through the establishment of a Jersey holding company. Centamin's redomiciliation was implemented by way of an Australian scheme of arrangement to effect the change to the corporate structure of Centamin and its subsidiaries by inserting Centamin plc (Centamin Jersey), a company incorporated in Jersey, as the holding company of the Centamin group. The transaction involved shareholders receiving one new share in Centamin Jersey in exchange for each share they held in Centamin. Raulin Amy, corporate partner at Ogier, which advised the Centamin on the Jersey aspects of the transaction, observed that: The dual listing of Centamin meant that there were some interesting issues that had to be resolved when they were looking to restructure. This particular transaction was novel as it involved an Australian company rather than an English one. The flexibility of the Companies Law in Jersey and Jersey tax neutrality, as well as the track record of Jersey as a jurisdiction were important considerations in determining the location for Centamin's redomicile."

While Guernsey may have been involved in some less-high profile listings in recent months, it has, however, established itself as the jurisdiction of choice for non-UK companies deciding to list their shares in the UK. Indeed, LSE data shows that at the end of December 2011 there were 108 Guernsey-incorporated entities listed on either the Main Market, the Alternative Investment Market (AIM), the Specialist Fund Market (SFM) or as ?Trading Only?. This is comfortably more than the major economic powers of the US (47), Russia (33), India (31), Australia (26), South Africa (11), Germany (7), China (5) and France (4). It was also well ahead of competitor centres Jersey (69), Ireland (57), the Isle of Man (53), Bermuda and the Cayman Islands (both 45) and the BVI (39). The figures also show that of its peer-group, Guernsey (60) has the most number of entities listed on the Main Market of the LSE, followed by Jersey (34), Ireland (28) and Bermuda (24). In addition, Guernsey is the clear market leader in terms of the number of ?Equity Investment Instruments? - the majority of investment funds listed on the LSE - where Guernsey has 68, followed by the Cayman Islands (15) and Jersey (11).

Guernsey companies also received approval to list on the Hong Kong Stock Exchange (HKEx) during last year, which added to the capability to list on stock exchanges in London, Amsterdam, Frankfurt, Australia and Toronto, among others, as well as the local Channel Islands Stock Exchange. ?This means that Guernsey provides a gateway to access the capital markets of both Europe and Asia, where the developing economies are accumulating increasing amounts of private and corporate wealth and looking for suitable investment opportunities,? observes Fiona Le Poidevin, Deputy Chief Executive at Guernsey Finance , the promotional agency for the island?s finance industry. ?We have already held discussions in Singapore and Shenzhen and we will be moving these forward during this year with a view to Guernsey companies listing on these exchanges in the future.?

One recent example of a non-UK company listing in London via Guernsey is Kolar Gold, which has been established as a Guernsey-registered company and aims to provide investors with access to opportunities for gold discoveries in the prospective Kolar Gold Belt in the Bangalore region of southern India. Fiona Fleming, corporate partner at Carey Olson, which advised Kolar Gold, said: ?Kolar Gold?s offering is something unique in the UK marketplace. It is the first Indian mine developer to list on AIM and shows the diversity of both this market and of Guernsey as a jurisdiction.?

Another first was created earlier this year when Better Capital Limited, an existing Guernsey closed-ended fund listed on the London Stock Exchange (LSE), converted into a uniquely-structured protected cell company. The conversion will facilitate the launch of a second fund, the Better Capital Fund II, with funding allocated under a 2012 cell, separate from the interests of the existing fund, and associated 2009 cell.

This was the first example of a closed-ended PCC with more than one cell having a full LSE listing. The innovative use of a PCC structure provides operational efficiencies and is also designed to separate the new portfolio of assets to be acquired by Fund II from the existing portfolio, thus providing enhanced shareholder benefits. The 2012 cell has raised GBP169.9m (USD266m) of new money to invest in Better Capital Fund II. The new money was raised under a placing and an open offer to existing shareholders. Like the 2009 cell, the 2012 cell will invest principally in UK and Irish turnaround opportunities. The use of a PCC in this way is also pioneering for private equity structuring as it provides the company with the scope to continue to raise further funds in distinct cells, as well as providing for the legal segregation of assets and their allocation to each shareholder vintage through a clear separation of listed share classes. From an operational stance, the unique aspects of the PCC structure reduce running expenses and enable strong corporate governance, as a single board of directors has oversight over the distinct fund vintages.

More recently, a Guernsey closed-ended investment company has been used by Blue Crest Capital Management in its Initial Public Offering (IPO) of a fund on the London Stock Exchange Main Market earlier this month. The IPO saw subscriptions worth GBP165m (USD266m) into the BlueCrest BlueTrend Limited fund, which uses a systematic approach to seek to achieve its investment objective of long-term capital appreciation. BlueCrest is a Guernsey-based alternative asset manager and invests across numerous asset classes globally.

Fewer international groups may be using the Isle of Man as a platform for a listing on the main London market, but the jurisdiction is currently the leader in terms of listings on AIM.

According to the research from Hemscott, more companies that feature in the top 100 on the AIM Exchange call the Isle of Man home than any other competing territory. The report shows that the Isle of Man's market share has increased to 18.6%, up from 16.3% in 2011. Bermuda and the British Virgin Islands hold second and third place respectively, the report says. In terms of total non-UK AIM companies, the Isle of Man has retained its market share over the last two years, leading overall with 50 companies, despite challenging market conditions. At the end of 2011, the market capital of non-UK AIM 100 companies registered in the Isle of Man was GBP1.14bn. Commenting on the report, the island's Minister for the Department of Economic Development, John Shimmin, stated: "This research shows the Isle of Man performing very well in the AIM market despite difficult market conditions and serves to illustrate that the island is the preferred gateway to London for international corporate capital raising requirements. This is another example of how the Isle of Man is a significant contributor to the City of London and why the Crown Dependencies are important to the UK economy as a whole.?

So despite the often negative headlines about offshore in the mainstream media, the fact is that these jurisdictions act as vital cogs in the engine of global finance, helping companies to raise capital in the world?s major stock exchanges. And as these jurisdictions evolve their company laws to stay one step ahead of the competition, they are likely to remain so for the foreseeable future.



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