As a well-regulated international finance centre, Jersey continues to deliver innovative and high-quality downstream acquisition and investment fund structuring solutions to global private equity and sector-focused institutional sponsors.
Strong top sponsor appetite remains for infrastructure opportunities that attract greater potential for value creation over the life of an asset. Such transactions may involve more upfront cost and complexity. One key attraction for maintaining a stable of infrastructure assets is the "best in class" investor return prospects they have the potential to achieve.
An increasing number of sponsors are putting investor capital to hard work through innovative minority (GP) stakes deals. In these deals, a larger sponsor acquires economic rights in smaller scale private equity operators. Drivers behind these types of investments include the optimisation of GP/manager and performance-related income streams and a need for permanent capital among mid-market buyout groups.
The mid-market landscape has been the most competitive and possibly overcrowded segment of the global private equity market in recent years, with the considerable pressure on increasing investor returns continuing unabated. As a result, the constant pace and number of participants involved in pre-emptive bid and conventional auction processes persists.
This chapter provides an overview of the key trends and features of private equity transactions in Jersey and those involving Jersey-registered vehicles – ie, an acquisition (or disposal) where the buyer (or seller) is a special purpose vehicle owned and controlled by a private equity fund.
Domestic market activity in Jersey is dominated by private equity involvement in financial services sector businesses, such as professional corporate services and trust company businesses, which are the target of primary, secondary or tertiary private equity investment. 2021 and 2022 have also seen reasonable levels of trade sale M&A, with certain standout transactions triggering significant consolidation in the trust and corporate services industry. Global banking businesses with a Jersey footprint also provide non-core business carve-out opportunities for private equity sponsors in the local financial services sector.
Separately, a sustained use of Jersey vehicles by leading private equity sponsors investing in larger scale primary cross-border deals across 2020 and 2021 saw the most significant sector growth in infrastructure, and in the following asset sub-classes in particular:
Jersey Funds Regimes for Private Equity Funds
The Jersey Private Funds (JPF) regime that was introduced by the Jersey Financial Services Commission (JFSC) in 2017 has become an increasingly popular regulatory regime for structuring private equity funds in Jersey. More than 550 JPFs had been established by the middle of 2022, with particular application for funds with up to 50 investors.
The JPF regime is streamlined and flexible, with a 48-hour online authorisation procedure, and is subject to a light regulatory touch but without compromising investor protection. JPFs are aimed at professional investors, high net worth investors or investors committing at least GBP250,000 (or equivalent). For more widely marketed private equity funds, the Jersey Expert Fund regime also remains popular – it has no upper limit on number of investors, and a commitment level of at least USD100,000.
As private equity funds are typically closed-ended funds, the attraction of the JPF and expert funds for speed of establishment, together with appropriate and proportionate regulation for the sophistication of the investor base, continues to position Jersey favourably for fund establishment by both existing and new sponsors. The total net asset value of regulated funds administered in Jersey rose by almost a fifth in 2021, reaching a record level of just over GBP459 billion. At the start of 2022, the alternative asset classes, which now represent 89% of total funds business in Jersey, continued to see new activity, with private equity and venture capital in particular increasing by 27% over the year.
The continuing effect of the pandemic and other economic factors on fundraising by sponsors has been mixed – larger, well-known sponsors and mid-sized groups with strong existing platforms (and investor bases) have continued to fundraise. Although conditions have been more challenging for new and smaller investment groups, there has been evidence of those with strong investor bases being able to proceed with the raising of successful, small first funds and club deals, which correlates to the continued growth in the number of JPFs.
Limited Partnership Amendments
Jersey limited partnerships (LPs), which are governed by the Limited Partnerships (Jersey) Law 1994 (the "LP Law"), have long been popular with both fund managers and lenders to fund structures, and are the most common legal form used for private equity funds. The Limited Partnerships (Amendment No. 2) (Jersey) Law 2022 came into force on 12 August 2022 (the "2022 Amendments"). Broadly, the 2022 Amendments provide for the following, among other things:
In addition, there is express recognition that rights can be granted to a third party in a limited partnership agreement (LPA) (such as an investment manager) and are directly enforceable by that third party, which is an exception to the usual rule regarding privity of contract.
Third party rights
The 2022 Amendments have put the ability for third parties to benefit from and enforce rights in LPAs without being a party to the LPA on a statutory footing. They also restrict any amendments being made to such third party rights without the consent of the relevant third party. This will give useful comfort to lenders seeking to include negative controls in an LPA.
The 2022 Amendments enhance the rights to recall from limited partners distributions of returned contributions. Prior to the 2022 Amendments, there was a six-month limit under the LP Law for clawing back payments made to limited partners, which ran from the date of payment, if the Jersey LP was insolvent when the payment was made. Now, the 2022 Amendments permit LPAs to include longer claw-back periods, overriding the statutory time limit and potentially increasing amounts available to creditors of insolvent Jersey LPs.
The 2022 Amendments modernise the winding-up, termination and dissolution of Jersey LPs, and introduce a more certain and simple process.
Expanded safe harbours
The statutory "safe harbour" provisions (decisions that can be made by limited partners without losing limited liability) of the LP Law are augmented by the 2022 Amendments, both by expanding current safe harbours and including additional provisions. These amendments should make it easier for limited partners to approve actions being taken in respect of a Jersey LP.
These changes further clarify and enhance the use of Jersey LPs as part of Jersey’s fund offering.
Following the adoption of the Taxation (Companies – Economic Substance) (Jersey) Law 2019 ("ES Law") with effect from 1 January 2019, the economic substance regime has been further amended to extend to self-managed funds and limited partnerships (and certain other types of partnership).
The ES Law applies to a company that is incorporated or tax resident in Jersey and generates income from a "relevant activity", such as fund management business, holding company business or financing and leasing business.
In the context of private equity, some downstream private equity acquisition vehicles are subject to the ES Law and have to meet the economic substance test in Jersey, depending on the activities which they conduct (for example, holding company business or intra-group financing).
As Jersey tax resident companies are generally fully administered and managed companies, certain activities conducted by the Jersey administrator in Jersey will assist the company to meet the economic substance test under the ES Law with limited additional impact or burden.
It is also worth noting that any amendments made in the UK to the City Code on Takeovers and Mergers (the "Takeover Code") will be applicable in Jersey (see 3.1 Primary Regulators and Regulatory Issues).
Private Equity Fund Regulation
The principal legislation governing the regulation of private equity funds in Jersey is the Collective Investment Funds (Jersey) Law 1988 and, for private funds, the Control of Borrowing (Jersey) Order 1958. Funds that are marketed into Europe are also subject to the Alternative Investment Funds (Jersey) Regulations 2012 (the "AIF Regulations"). Funds that are marketed in the EU are subject to the code of practice for alternative investment funds and AIF services business (the "AIF Code").
In addition, all funds are subject to the requirements of Jersey's anti-money laundering regime, which applies anti-money laundering rules to all financial services businesses in Jersey. Jersey-based service providers to funds are generally subject to regulation under the Financial Services (Jersey) Law 1998 (the "FS Law"), unless an exemption applies. Providers of fund services business must be registered and regulated by the JFSC, pursuant to the FS Law.
Relevant sanctions and the usual AML/KYC rules apply to private equity transactions; there are no Jersey-specific restrictions.
The Takeover Code applies to certain transactions involving Jersey companies. Takeover Code compliance is implemented by the UK Takeover Panel, as the designated authority under primary Jersey legislation.
A Jersey company is subject to the Takeover Code if any of its securities are listed on a regulated market or multilateral trading facility in the UK or on any stock exchange in the Channel Islands or the Isle of Man. This includes being listed on the main board of the London Stock Exchange (LSE) and on the Alternative Investment Market. A Jersey company that has shares listed on other exchanges, such as NYSE and NASDAQ, may also be subject to the Takeover Code if the Panel considers that the company's management and control are in the UK, the Channel Islands or the Isle of Man.
Domestic competition and antitrust regulation applies where merging businesses meet relevant thresholds. Where applicable, the approval of the Jersey Competition Regulatory Authority may be required.
The focus of due diligence in Jersey is on verifying corporate existence, maintaining solvency and other corporate governance-related matters. Typically, buy-side legal due diligence involves utilising publicly available information and any information made available by the seller as part of the tender/auction process. Where a target is prepared to support the offer, bidders may also present separate requests in respect of matters on which they require further information. Such legal due diligence is usually secondary to financial (including taxation) due diligence.
With a hostile bid, legal due diligence is generally limited to information in the public domain (see below). However, a bidder may be able to obtain information from the target that has been provided to a competing bidder if the Takeover Code applies. This is because the target has a duty to provide equal information to rival bidders in a competitive situation.
Public information available to bidders in Jersey includes:
Vendor due diligence (VDD), as part of private equity transactions, depends almost entirely upon the shape of the target group structure and the target asset or business.
VDD is often not comprehensive and, in Jersey, it is not generally considered a substitute for a buyer's own due diligence. A VDD report may provide a helpful start to the due diligence process. An obvious advantage is where a vendor is prepared to make representations and warranties, or provide indemnities, in the transaction documents in relation to information contained in the VDD report.
It is not common in Jersey for advisers to permit reliance on buy-side diligence reports in Jersey to financiers or warranty and indemnity (W&I) insurers. However, it is typical for buy-side advisers to liaise with both financiers and insurers on behalf of bidders to address and provide comfort around specific legal issues that may arise as part of a financing or writing a buyer's W&I policy.
Most private equity acquisitions in Jersey are structured as private treaty sales with purchase agreements negotiated between the parties. However, there has been an increase in the use of the Jersey statutory merger procedure to effect both private and public acquisitions in recent years. Competitive auction processes are common in the infrastructure space, where prime assets are coveted.
Larger transactions involving a Jersey target company or listed targets may proceed by way of a court-sanctioned scheme of arrangement or a process governed by the Takeover Code. The Takeover Code and the appointment of the Takeover Panel to administer provisions of the Code have been adopted in Jersey through the enactment of domestic legislation. Other acquisition types include statutory mergers and business asset transfers, although these are less frequently encountered.
Straight line Jersey private company acquisition structures are preferred by private equity sponsors and co-investors.
Tiered Jersey debt and equity acquisition structures involving a topco (top holding company), midco (intermediate financing vehicle) and bidco (bid vehicle) are typical. Such structures have the following attributes:
In addition, the use of Jersey management incentive planning (MIP) vehicles for manager incentivisation aligns target management objectives with those of the private equity sponsor.
Generally, private equity transactions are financed via a mix of equity contributions sourced from investing private equity funds and external debt/leverage provided by syndicate banks, institutional financiers and a range of alternate credit providers. For larger transactions, accessing funding from the debt capital markets (ie, bridge to bond) is attractive from a cost of funds perspective. Unitranche financing, which involves a hybrid loan structure combining senior and subordinated debt into one loan facility at a blended interest rate, has also proved attractive to private equity sponsors.
Most private equity deals in Jersey (or those involving Jersey acquisition structures) target majority private equity fund ownership. Co-investment structures are an increasingly popular way to syndicate the sponsor equity contribution to be made. However, it is not uncommon to see primary investment opportunities initially involve private equity sponsors acquiring minority interests in target groups pending enterprise valuation adjustments and similar.
Both fund level and leverage financing options feature significantly in downstream private equity transactions involving Jersey vehicles. Market conditions have fuelled the attractiveness for private equity sponsors of participating in leverage financing solutions as alternate credit providers. The place for subscription line, NAV and hybrid fund financing facilities (used to finance short-term settlement disparities between GP calls on investors of committed capital and the need for available capital at the bid or portfolio company acquisition stage) has only continued to grow in recent years.
Both joint venture and syndicated consortium investor transactions are common in Jersey, particularly in infrastructure asset deals. While not entirely "commonplace", the steady rise in pre or post-closing co-investments involving multiple private equity sponsors or sponsors and their most valued limited partners is starting to represent an increased proportion of overall private equity deals. GP stakes deals are an alternate way of structuring a co-invest across a particular private equity strategy. In these, a cornerstone limited partner may be invited to participate in an economic stake of the sponsor operation in return for a permanent capital investment.
There is generally no restriction on the type of consideration that can be offered on a private treaty sale or negotiated offer. Consideration can therefore include, among other things, cash, loan notes and shares. In a Takeover Code-governed transaction, for a mandatory offer, the consideration must be cash, or be accompanied by a cash alternative, and must comply with minimum consideration requirements.
The nature of the underlying asset, sponsor approach/appetite and certain transaction-specific requirements are all factors that contribute to the form of consideration structure used in Jersey private equity deals. No predominant form of consideration structure is used in these types of transactions: fixed price, locked-box and completion accounts mechanisms are variously seen on Jersey private equity transactions.
Protection afforded by private equity buyers and sellers in relation to the consideration mechanism is generally the same in terms of the protection provided by corporate buyers/sellers. This would include earn-outs, deferred consideration, anti-embarrassment mechanisms and (less frequently) consideration collateral or security.
The use of locked-box consideration structures in Jersey private equity transactions is not predominant. The specific features and uniqueness of each separate transaction generally drives whether completion accounts or a locked-box consideration mechanic is employed. Levying interest charges on any value leakage that is not permitted leakage is not common or market standard in Jersey.
In many private equity transactions, locked-box consideration structures do not usually have specific dispute resolution mechanisms. In deals where completion accounts are required, specific dispute resolution mechanisms are more common, where either party may refer a dispute for determination by an independent auditor. General dispute resolution provisions under a share sale and purchase agreement often refer to arbitration proceedings as agreed between the parties.
Conditionality is standard in private equity transactions and would include any necessary shareholder and regulatory (including competition or antitrust) approvals and other matters that are not within the bidder's control or dependent solely on the bidder's subjective judgement. Conditionality for financing and other kinds of third-party consents are less frequent.
Takeover Code-governed offers must include a condition that the offer will lapse if the bidder does not acquire (or contract to acquire) more than 50% of the voting share capital of the target. In Jersey, acquiring or contracting to acquire 90% of the target share capital will enable the bidder to engage in the compulsory acquisition procedure available under Jersey company law.
Material adverse change/effect (MAC) provisions are common, and have been a focus during the COVID-19 pandemic. The acceptance of generic MAC provisions in the current climate is unlikely, but a MAC provision that addresses a specific risk or issue may be acceptable.
It is not common for a private equity-backed buyer agree to "hell or high water" provisions in transactions that are subject to regulatory approvals (including competition and antitrust). Agreements to absolute obligations of this kind, which may result in divestitures or require certain outcomes in the context of pending litigation, are more common in a public M&A context.
Deal protection measures like break fees have not featured in Jersey transactions involving private equity-backed buyers. In larger cross-border transactions with a Jersey element, break fees were more common prior to their abolition, as a result of changes to the Takeover Code in September 2011.
Reverse break fees are not customary in Jersey transactions involving private equity-backed buyers. However, as they are not prohibited by the Takeover Code, they are permissible subject to Jersey law rules on excessive penalties, which are, broadly speaking, similar to those that apply under English common law.
Deal execution and completion risk remains high on the agenda for private equity transaction participants, so parties (and private equity-backed buyers in particular) will typically only permit the termination of an acquisition agreement in Jersey in very specific (and narrow) circumstances. Termination rights are, in general, limited to mandatory conditions (outside of the control of each party) that are not satisfied by a certain long stop or "sunset" date. Otherwise, MAC provisions, as discussed in 6.4 Conditionality in Acquisition Documentation, potentially allow a party to terminate or adjust its obligations in the event of a change in circumstances that significantly affects the value of the target. Automatic termination triggered by a contractual provision in an acquisition agreement is rare.
In Jersey, market practice is a more powerful driver in respect of the allocation of risk between parties to a private equity acquisition transaction than the type or nature of the parties involved. For example, numerous trust company and corporate services businesses in Jersey have been the subject of primary private equity investment as well as secondary and tertiary management buy-outs (MBOs) and management buy-ins (MBIs). In the majority of these deals, it is common for risk to be shared between the parties, although, on balance, private equity sellers prioritise minimising their exposure to liability in the sale of a portfolio company.
The impact is that the extent to which private equity sellers assume ongoing liability in a divestment is very limited. On buyer-insured transactions, nominally capping seller liability will result in only theoretical risk for private equity sellers.
The main ways a private equity seller will look to limit liability include negotiating:
Warranty coverage in private equity transactions in Jersey is generally limited to title of target shares or assets, capacity and authorisation to enter into the transaction, solvency and accuracy and completeness of information provided to the buyer. Warranties are usually limited in duration to a 12–24 month claim period. While most primary private equity investment transactions in Jersey involve a management team standing behind the deal terms and providing certain limited warranties, other deal protection measures such as earn-outs and lock-ins provide more comfort to private equity-backed buyers.
Full disclosure of the data room is typically allowed against the warranties. See 6.8 Allocation of Risk regarding customary limitations on liability for warranties in Jersey.
Indemnities from a private equity seller and/or management team are not common in an MBO context. Earn-outs, lock-ins and price adjustment provisions are often negotiated as part of the management-specific terms of an acquisition agreement. A tax covenant and deed of indemnity is also a relatively common feature and further allows the allocation of risk between buyer and seller. Dollar-for-dollar recovery for unexpected tax liabilities arising from pre-completion profits or events occurring prior to completion provides buyer protection.
Buyer (W&I) insured deals are increasingly common following the trend in the UK and elsewhere. W&I coverage increases the relatively low level of protection management teams are able to provide, which private equity sellers are not prepared to consider. The additional diligence and input from a seller on an insured deal is often accepted as being necessary from a buyer’s perspective. The cost of insuring known risks is generally prohibitive, so is less common.
Escrows and retentions are rarely used in Jersey private equity transactions to back the obligations of private equity sellers. An exception may be a financial services business that is subject to regulatory examination, given that, in 2019, the financial services regulator in Jersey levied its first civil penalty against a registered FS business; this trend continued into 2020 and 2021. Extension of the financial services regulator's enforcement powers (including the power to levy financial penalties) is the subject of a current industry consultation. Another form of exception to an escrow retention arrangement may be where there is a known risk or prospect of settling pending or threatened litigation against the target.
Litigation is not common in connection with private equity transactions in Jersey or those involving Jersey entities. The limited contractual liability of private equity sellers means that the appetite for transaction counterparties to look to litigate disputes is limited. Alternative dispute resolution pathways often mean that disputes in relation to earn-outs, consideration calculation and related matters are resolved at an early stage. Expert determination on completion account disputes is generally provided in acquisition agreements to be binding and conclusive.
Public-to-private transactions (also known as take-privates) are not common in Jersey from a domestic utility or infrastructure asset point of view. However, as many Jersey companies are listed on stock exchanges throughout the world, including the main board of the LSE and increasingly North American stock markets, including NYSE, NASDAQ and TSX, a number of those listed companies have become targets in take-private transactions. Take-privates have certainly become more popular in recent years, while private equity interest in UK listed businesses peaked particularly in H2 2021 and H1 2022. This trend is expected to continue for the rest of 2022, with private equity houses continuing to participate strongly in public M&A throughout the year.
The following kinds of transactions are common in a private equity acquisition context.
If the Takeover Code applies prior to the announcement of a bid or a possible bid, all persons privy to confidential information concerning the bid or possible bid, particularly price-sensitive information, must treat that information as secret and may only pass it to another person if it is necessary to do so and if that person is made aware of the need for secrecy. All such persons must conduct themselves in such a manner as to minimise the chances of any leak of information (Rule 2.1 of the Takeover Code).
If the Takeover Code does not apply, Jersey law does not otherwise specify any secrecy or material shareholding disclosure obligations. However, it may be prudent to maintain secrecy for commercial and/or other reasons. In addition, the laws and regulations of other jurisdictions (for example, the rules of the stock exchange on which the target company is admitted to trading) might impose secrecy or disclosure obligations on the bidder and/or target company.
Where the Takeover Code applies, a mandatory offer to acquire the entire issued share capital of a target must be made when the bidder (or parties acting in concert) achieves one of the following (Rule 9 of the Takeover Code):
Cash consideration is common in Jersey, but there are no restrictions on the form or type of consideration in a voluntary offer. Consideration can therefore include cash, loan notes and shares, among other things.
If the Takeover Code applies, the consideration for a mandatory offer must be in cash, or must be accompanied by a cash alternative and comply with the applicable minimum consideration requirements.
If the Takeover Code does not apply, Jersey law does not specify any particular obligations or duties in relation to conditions or pre-conditions. However, financing conditions are generally not accepted in private equity-backed takeover offers.
If the Takeover Code applies, a voluntary bid can be made subject to the satisfaction of pre-conditions. In such cases, the Panel must be consulted in advance about any proposal to include in an announcement any pre-condition to which the bid will be subject. As a general rule, the Panel will not consent to the inclusion of a pre-condition if it depends solely on subjective judgements by the directors of the bidder or the target.
Except with the consent of the Panel, a bid must not be announced subject to a pre-condition unless the pre-condition relates to a decision that there will be no reference to the competition authority or initiation of proceedings by the European Commission, or it involves another material official authorisation or regulatory clearance relating to the bid. No conditions are permitted in the case of a mandatory bid, except with the consent of the Panel (other than that the bidder obtains acceptances that give it more than 50% of the voting rights of the target company).
Jersey company law gives private equity bidders the legal right to compulsorily acquire shares in a target that it does not seek or ultimately obtain as a part of its offer (known as a "squeeze-out right"). In a takeover offer, if the bidder has acquired or contracted to acquire 90% in nominal value of the shares to which the offer relates, the bidder can acquire the remaining 10% by giving notice to the relevant shareholders.
No compulsory acquisition notice can be given unless a bidder has acquired or contracted to acquire 90% of the target's shares within four months of an offer. The shareholder notice must be served within two months of the bidder acquiring or contracting to acquire the 90%. A copy of the notice must be sent to the target. Bidders are bound to acquire the remaining shares on the terms of the original offer.
Six weeks after the date of the notice, a bidder must pay the target for the remaining shares it wishes to compulsorily acquire. A share transfer form executed on behalf of the non-selling shareholder by the bidder must be sent to the company with payment; upon receipt, the company must register the bidder as shareholder. Inverted rights of non-selling (minority) shareholders also exist to require their shares to be acquired by a bidder who has acquired (or contracted to acquire) 90%. The Jersey court has general jurisdiction to hear relevant applications about compulsory acquisition matters.
In situations where an offer is recommended by the board of directors of the target, it is common for a private equity bidder to obtain irrevocable undertakings or commitments from the main shareholder(s). Irrevocable undertakings/commitments and letters of intent are permitted by the Takeover Code, and must comply with rules therein. Achieving a certain level of irrevocable commitments in the pre-bid stage is often key to the private equity bidders advancing offers. Irrevocable commitments customarily oblige a shareholder making such a commitment to accept the private equity bidder's offer by a certain time.
Hostile takeover offers are permitted but are not common in Jersey, as they carry significant additional deal execution risk and complexity. For example, less information will be available than on a recommended bid. The Takeover Code requires target board directors to act in the best interests of the target (ie, its shareholders as a whole) and not to deny shareholders the opportunity to decide on the merits of a bid (General Principle 3). However, in practice, a range of defence tactics may be available in the context of an approach by an unwelcome bidder.
Downstream private equity acquisition activity (MBOs and MBIs in particular) is predicated on co-operation from both the founders and any management team rolling over, who sponsors look to partner with to implement post-deal development and growth plans. A hostile takeover process is not generally aligned with the approved investment strategy of a private equity sponsor.
Unsurprisingly, the incentivisation of management teams is a key feature of private equity transactions in Jersey and those that involve Jersey-registered vehicles. Different drivers and expectations from both the private equity sponsors and the management team come into focus where the market is moving to a more "patient capital" model, compared to shorter hold periods typically associated with private equity – ie, in the seller-friendly landscape of the last five or six years. Up to 10% of equity participation by management is common, but certain more entrepreneurial management teams have been able to command a higher proportionate equity ownership share. On primary investment transactions, founders generally retain more substantial equity ownership interests.
There are a number of different ways of structuring management participation in private equity transactions in Jersey. It is common for managers to subscribe for sweet equity on primary investments and for part of the institutional strip on secondary buyouts where managers roll over on the same terms (and equity to debt ratio) as the private equity sponsor. Preference shares (disenfranchised as to voting/any blocking trigger) are also used as the following arrangements where incentivisation is planned for a larger number of managers/executives:
If managers leave the portfolio business before a certain date, they will normally forfeit their sweet equity. Good and bad leaver provisions are typical, with preferential terms applying to individuals who leave for "good" reasons. Generally, this includes managers who leave due to illness, death, disability and retirement. Four or five years are typical vesting periods; otherwise, an exit is the most common. Full vesting on an exit event that takes place earlier than anticipated generally means that everyone benefits.
The alignment of management and private equity sponsors on exit timing is critical. Where sponsors seek to exit early, there is often little value in management's sweet equity, which can damage an otherwise good relationship. Management increasingly look to secure certainty regarding exit timing. Where an exit takes place outside of this timeframe, one option is that management are compensated for the lost "opportunity"; however, this approach is not favoured by sponsors.
Customary restrictive covenants agreed to by management in private equity transactions in Jersey include non-compete, non-solicitation and non-disparagement. Such covenants are unenforceable unless they are reasonable as between the parties and in respect of the public interest.
In practical terms, enforcement of these types of covenants is not straightforward. Where former manager shareholders, with specific knowledge of the operations of a Jersey target business, are free of restrictive covenants, it is not uncommon to see prospective bidders in secondary and tertiary transactions engaged by the appointed financial advisory team to provide specialist consultancy input on the process.
Management shareholders in private equity transactions are not afforded greater or different rights than minority shareholders in other situations under Jersey company law. The standard legal protections that exist include claims in relation to minority oppression and unfair prejudice, etc.
It is usual for contractual pre-emption rights in favour of management to exist in relation to sweet equity. Such rights are intended to offer some kind of anti-dilution protection to management. However, if significant additional equity funding is obtained or if a larger number of new or existing management are offered and take up sweet equity, limited pre-emption may not fully or effectively operate as anti-dilution protection. Limited rights of veto may exist in relation to a narrow range of matters specifically concerning the portfolio business.
Management would not typically have any right to control or influence the time, form and mode of exit a private equity sponsor may wish to adopt in relation to a portfolio asset.
Where private equity sponsors hold a majority ownership position in a portfolio company asset, they normally enjoy significant veto rights over major corporate, commercial and financial matters pertaining to the portfolio company business, although thresholds are commonly set to ensure that day-to-day decisions can be taken by management. In other words, management will have operational control of the business whereas private equity sponsors will have oversight and ultimate influence over management by being able to control the board of the holding company of the portfolio business.
Management business operation and private equity sponsor control rights are regulated in a shareholders' agreement that governs their relations as shareholders in the portfolio company. This will likely include the following, among other provisions:
In addition, the constitutional documents may include governance arrangements, particularly with regard to the transfer of shares. The extensive veto rights in favour of private equity sponsors will typically be split between director veto rights and shareholder veto rights. Such veto rights (or reserved matters) would include amendments to the capital structure, constitutional documents, entering into, amending or terminating material contracts, changing the nature of the business or entering into new business lines, and commencing or settling litigation.
In a minority private equity investment, given that the private equity sponsor is unlikely to have board control, it is usually much more focused on veto controls to the extent that, in certain cases, a minority investment may result in more veto control than might be the case in a majority investment.
Jersey company law contains the concepts of separate legal personality and limited liability. It recognises that the legal personality of a company is separate to that of its shareholders and that, fundamentally, a shareholder's liability is limited to the amount invested in a company.
A corollary of this is that, in exceptional circumstances, a Jersey court might be prepared to "lift the corporate veil", which may result in a private equity sponsor being liable for the actions of its portfolio company. In order to pierce or lift the veil, there needs to be a deliberate evasion of an existing legal obligation or liability by the shareholder concerned. The remedy of piercing the corporate veil, so as to impute liability to a private equity sponsor (majority portfolio company shareholder), is unlikely to be capable of being successfully engaged as a matter of Jersey law, based on customary private equity transaction structuring as discussed above.
The same concept of limited liability applies to limited partners of Jersey limited partnerships where limited partners will generally only be liable for debts of the partnership if they have participated in the management of the partnership (excluding a number of specific safe harbour activities), thereby jeopardising the limited liability inherent in such structures.
The strategy and makeup of the private equity fund shareholder (including specific investment criteria and the mandate to invest) will drive any decision by a sponsor to impose its own ESG policies on a portfolio company business in which it has invested.
Portfolio asset holding periods stretch from three to eight years, depending on the nature of the asset and other prevailing market conditions. Also, the seller-friendly nature of the market in Jersey over the last five or so years has meant that competitive auction processes (including with pre-emptive offers) have become very common.
As most private equity transactions in Jersey are of financial services sector/regulated businesses, auction sales to strategic trade buyers and other private equity sponsors (in secondary or tertiary transactions) are all normal. In 2021, given the COVID-19-induced volatility in the capital markets and in relation to FX currency trading, an IPO has been the least attractive form of exit strategy. Dual track processes (IPO and private sale) running concurrently have, become more common in Jersey in the last four to six years. However, it is interesting to note that, during this time, only three Jersey private equity-owned portfolio companies have conducted successful IPOs, implying that a higher rate of success has been achieved with private sale processes. Reinvestment by private equity sponsors (save for an IPO exit scenario) is not typical. It is expected that a number of Jersey listed businesses that have been exited via IPO will be the subject of take-private acquisition activity in the next 12 to 18 months.
Drag-along rights (ie, the right of a private equity sponsor to force other shareholders, including management, to sell their shares in a portfolio company) are usual in the equity capital structuring arrangements for private equity-sponsored transactions. There is no typical drag-along threshold in Jersey. It is rare for drag-along rights to be exercised; however, where there is a large number of non-institutional sellers (eg, management shareholders), a drag provision might be relied upon for administrative convenience and to avoid needing to convene a large number of parties to a sale and purchase agreement.
Management shareholders typically enjoy tag-along rights in the event of a private equity sponsor selling some or all of its strategic stake in a portfolio company asset. As with drag rights, there is no usual or market threshold in Jersey.
Appetite for IPO exits by private equity sponsors will be dictated by equity capital market conditions, and it is envisaged that COVID-19-induced volatility will reduce the attractiveness of an IPO exit from a portfolio company asset in the medium term.
In a successful IPO exit, a private equity sponsor (as selling shareholder) will be "locked up" for up to six months, with management locked up for a somewhat longer time – eg, 12 months. Relationship agreements covering lock-up and other management and transitional matters are generally entered into between the private equity sponsor seller and the listed company.