Originally published in Contact Magazine, June 2008
Standing still is for statues......A brief overview from Andrew Boyce, Partner at Carey Olsen, of the key changes to Guernsey's Companies Legislation
The current Guernsey companies law came into force in 1994 and, while providing food for interesting debate on the interpretation and use of certain of its sections, has largely served its purpose well. The law as a whole of course never stands still, and since then there have been a number of amendments as well as the introduction of ancillary/complimentary legislation which has been introduced on a piecemeal basis in response to the ever changing and increasingly competitive international financial market place. In 2005 the States approved proposals to prepare a new companies law and following a comprehensive consultation process with Guernsey's business sector, the new law was passed in January and is expected to receive Royal assent and come into force on 1 July 2008.
The main aims of the introduction of a new law are to maintain, and where possible improve, Guernsey's attractiveness as a jurisdiction in which to conduct business by introducing areas of increased flexibility, while at the same time consolidating the existing "stable" of company related legislation and modernising certain parts of the law to reflect Guernsey's continuing application of and commitment to enhanced corporate governance.
As the new law is a complete revamp of the existing one the changes are far too numerous and varied to all be covered here but the key ones are discussed below.
Consolidation – The current law is made up of a number of separate pieces of legislation, which has at times challenged consistency of application. The new law will bring all these together ensuring more consistent interpretation and procedures in areas such as Members' meetings and resolutions for example.
The Incorporation Process – This will be significantly streamlined and modernised through the simultaneous introduction of the Guernsey Company Registry which will replace the role that the Greffe currently plays in the incorporation and record maintenance processes. The GFSC (save in the case of a Protected Cell Company or an Incorporated Cell Company), the Law Officers and Royal Court will no longer be involved in the process with all sign off responsibility lying with the Registrar of Companies. Incorporation application documentation will be filed electronically with the whole registration process being completed within hours of the application being made (with a 15 minute turn around special service also being available) rather than 2 to 3 days as currently. The introduction of an optional standardised set of articles of incorporation will assist with the speed of incorporation. The keeping of information by the Registry electronically will allow company searches to be conducted online. The online Registry, while not a novel idea, will put Guernsey years ahead of its competitors based on the type of system to be implemented.
Corporate Service Providers – the formation of companies will no longer be the exclusive domain of advocates. Under the new law, companies will only be able to be incorporated by "corporate service providers" (CSPs) but this can be any entity that is licensed and regulated by the GFSC under the Fiduciaries law. The CSP will be required to fulfil some of the "pre-vetting" functions currently carried out by the GFSC and the Law Officers in terms of anti-money laundering and due diligence checks and ensuring compliance with the requirements of the companies law prior to incorporation.
Beneficial Ownership – All Guernsey companies (except those whose shares are listed on a recognised stock exchange or companies which are open or closed ended investment companies) must have a "Resident Agent" in Guernsey. The Resident Agent, which must either be a CSP or a Guernsey resident director of the particular company, will have the ongoing responsibility to keep beneficial ownership information and ensure that such information is kept up to date. This information will not be in the public domain but will be available to specified regulatory or law enforcement agencies.
The Solvency Model – The new law moves to a solvency model (which is the New Zealand company law model) as opposed to the current capital protection model (which seeks to protect members' and creditors' rights by requiring the company to maintain capital reserves) which is outdated and which has become artificial in its application, cumbersome and inflexible. Under the solvency model the protection of members' and creditors' rights is achieved in a more practical way by requiring directors to consider and certify, prior to any distribution of the assets of the company, that the company will be solvent after the distribution has been made. For this purpose distributions will include such things as dividends, reductions in capital, share buybacks and redemptions.
Takeovers And Schemes Of Arrangement – Completely new to the law is the introduction of "squeeze-out" provisions whereby members with 90% of the share value are able to give notice to acquire the remaining 10%. This is a right that exists under English law and has always been dealt with in Guernsey by inclusion in the Articles of Association. As such this is more of a formalising of the current practice. UK style schemes of arrangement or reconstruction have also been introduced subject to a specific voting threshold and court sanction. Historically the UK Panel for Takeovers and Mergers supervised Guernsey takeovers on an informal basis. Going forward the States will confer functions on the Panel to permit it to supervise takeover and merger activity where appropriate.
Annual General Meetings – Currently all companies, irrespective of size or composition of their membership are required to hold an annual general meeting. The new law introduces a higher level of flexibility in that members (a threshold of 90%) will have the right to waive this requirement either over a specific period or on an indefinite basis. This will take an administrative burden off of special purpose vehicles or closely held companies where an element of protection afforded by the requirement for the members to meet at least annually may only be of academic importance.
Directors – The changes that concern directors aim to provide codification and clarification of appointments, eligibility, discontinuation of office and meetings. Additionally, companies will be precluded under the new regime from exempting from liability or indemnifying any of their directors in respect of any liability for negligence, default, breach of duty or breach of trust in relation to the company although companies will still be able to purchase insurance for their directors in respect of such liability. Indemnities in relation to claims against the directors by third parties remain largely unchanged. Power is given to companies to avoid transactions in which a director is interested unless the transaction is ratified by the members or fair value has been received by the company.
Corporate Governance – All of the changes under the new law will have the effect of enhancing good corporate governance which goes directly to protecting Guernsey's reputation as a financial services centre. There are changes to the overall practical application of corporate governance in order to allow flexibility (in how it is done) while ensuring compliance with the overriding principles. Emphasis is put on consideration (and certification of such consideration) of a company's position before action. The use of compliance and solvency certificates together with enhanced notification to the Registry of changes to the company are common themes in the new law. Any additional administrative requirements are, it is intended, counter-balanced by easier practical application through the new Registry. The "self regulation" by companies will be balanced by provisions relating to third party service providers. For example auditors have been given new rights to investigate companies, receive notice about company resolutions and meetings and rights to protest their removal as auditor.
Changing a 14 year old piece of legislation may seem an obvious move. But with the increasing success of Guernsey as a financial services jurisdiction over the last 10 years one could be forgiven for adopting the "if it ain't broke don't fix it" approach. But if nothing else evolution, the credit crunch and global warming illustrate that no scenario lasts forever. We must change and adapt to survive. The change to the Island's companies law is another example of Guernsey's adaptability and flexibility, essential in today's environment with increased competition from new "offshore" jurisdictions. Standing still is for statues.....not for successful financial services industries.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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