Jersey Cash Box and Convertible Bond Transactions

The use of cash box structures is becoming increasingly popular as a means of facilitating equity or bond issues. This note summarises the ways in which a UK public company listed on the London Stock Exchange or AIM may raise money using a Jersey company 'cash box' company, either by a placing of its shares or through the use of a convertible bond.

Why use a "cash box" company?

The main advantage of a cash box structure is that it allows a UK Plc to issue shares for a non-cash consideration. This means that the statutory pre-emption provisions set out in the UK Companies Act 2006 do not apply and the issue can proceed without the need to disapply the applicable pre-emption rights or undergo a rights issue.

UK Plc may also be able to create distributable reserves using the merger relief provisions of the Companies Act 2006.

The use of a Jersey company avoids the need for Plc to prepare listing particulars (provided that, where Plc is listed on the London Stock Exchange, the placing shares do not exceed 10% of Plc's issued share capital).

How does a cash box transaction work?

There are two main ways in which Jersey cash box companies can be used, the first involving a placing of shares by a UK Plc and the second involving the issue by a Jersey company of bonds which are convertible into shares in a UK Plc.

Issue of shares or bonds by UK plc

A UK public company ("Plc") incorporates a Jersey company ("JerseyCo") as a wholly-owned subsidiary. JerseyCo issues redeemable preference shares to a manager, usually an investment or commercial bank (the "Manager") in return for the payment of a subscription amount (the "Subscription Monies"). Where UK merger relief is being utilised, the Manager will also subscribe for a small number of ordinary shares in JerseyCo, with the remainder being retained by Plc.          

The Manager transfers its redeemable preference shares in JerseyCo to Plc in consideration for the issue by Plc of either placing shares or convertible bonds to investors identified by the Manager. There is no cash consideration for the issue of these shares or convertible bonds by Plc.

Plc can then either redeem its preference shares for an amount equal to the Subscription Monies (less certain commissions and expenses), or JerseyCo can be wound up. Alternatively, JerseyCo may lend an amount equivalent to the net Subscription Monies to Plc on terms whereby the rate of interest payable by Plc to JerseyCo allows it to meet its dividend obligations in respect of the redeemable preference shares.

Issue of convertible bond by JerseyCo

Plc incorporates JerseyCo as a public company. JerseyCo issues bond which are convertible into exchangeable redeemable preference shares in JerseyCo and which, upon conversion, are the automatically exchanged for ordinary shares in Plc.  The proceeds of the bond issue are lent by JerseyCo to Pic on terms whereby the rate of interest payable by Plc allows JerseyCo to service its interest payments under the bonds. Once all of the bonds have been converted, or at maturity, Plc can redeem its preference shares or JerseyCo can be wound up.

Why use a Jersey Cash Box Company?

Jersey is a well-established jurisdiction within the same time zone as the UK. Jersey company law is based on English company law and provides a quick and easy mechanism for extraction of funds from JerseyCo, either by redemption, dividend or on a winding up.

JerseyCo can be incorporated on a same day basis if required and there is no requirement for Jersey directors to be appointed. No material regulatory consents are required where Plc issues shares or bonds, and the consents required where JerseyCo issues convertible bonds are standard and can generally be obtained quickly and without difficulty.

JerseyCo will usually be managed and controlled in the UK and therefore resident for tax purposes in the UK, and not Jersey - a Jersey cash box structure is therefore tax neutral from a Jersey perspective. There is no corporation tax, capital gains tax, stamp duty, VAT or withholding tax payable in Jersey in respect of the issue, transfer or redemption of shares in JerseyCo.

The register of members of JerseyCo will be situated in Jersey and, where the Plc issuer structure is used, the relevant stock transfer forms are executed in Jersey. There should therefore be no UK stamp duty payable in respect of the transfer of the JerseyCo shares from the Manager to Plc