On 1 September 2022, the Limited Liability Companies (Jersey) Act 2018 (“LLC Act”) came into force, allowing the establishment of Limited Liability Companies (“LLCs”) in Jersey. Jersey introduced the LLC to attract American investment by creating a vehicle familiar to American customers. In October 2021, Jersey Finance published a study showing that assets managed by US-based promoters have increased by 230% over the past five years. Appleby’s experience suggests that number has been growing steadily since then.
We anticipate that Jersey LLC will become an increasingly common part of the fund landscape (and, therefore, fund finance). We outline some of the key features of Jersey LLC below so that lenders can familiarize themselves with these new vehicles.
Why use a Jersey LLC?
Vehicles currently available in Jersey have tended to align with English tax treatment and are not compatible with the “tick box” electoral system seen in the United States. As discussed in more detail below, LLCs combine the limited liability protection of a corporation with the constitutional flexibility and confidentiality of a partnership, while providing flexibility in its management structure and tax treatment. Readers will know that LLCs in other jurisdictions are common vehicles in fund structures.
A Jersey LLC should be treated the same as any other non-US LLC, and we expect the Jersey LLC to become an increasingly common part of the fund landscape (and, therefore, fundraising). funds).
Jersey is not part of the European Union and therefore the full scope of the Alternative Investment Fund Managers Directive does not apply. This means that a Jersey-based manager may not be required to comply with certain more onerous elements, such as compensation reporting and disclosure. To the extent that a US-based fund manager has investors based in Europe or the UK, then Jersey offers easy and relatively inexpensive access to the EEA through national private placement regimes (a model well recognized).
Jersey enjoys an excellent reputation as a well-regulated and transparent international financial centre. In addition, Jersey has a world-class professional infrastructure, with numerous law and accountancy firms and business service providers. Managers will find that they receive solid and timely advice based on a high degree of expertise and deep and extensive experience.
Presentation of the LLC
The main characteristics of an LLC are:
- it has legal personality (it can therefore contract and hold assets in its own name);
- it must have at least one member;
- it has limited liability for its members;
- an LLC can have managers to manage it (similar to a general partner in a limited partnership but need not be a member of the LLC) or members can manage the LLC themselves (like partners in a general partnership);
- the LLC Agreement (the main governance/constitutional document of the LLC) will remain a private agreement and will not be publicly available;
- treatment of Jersey LLCs will follow the US-style ‘tick box’, allowing a Jersey LLC to choose how it should be treated for tax and accounting purposes, based on the underlying tax analysis and advice. Jersey LLCs will be treated as tax transparent for Jersey tax purposes;
- Jersey LLCs may create separate series of members, managers, interests or assets, each with separate legal personality, although as noted above such provisions are not currently in effect. Such a concept is similar to that already available in relation to Jersey cellular companies (or Irish ICAV or Luxembourg sub-funds);
- a manager of a Jersey LLC shall have no fiduciary duty to the LLC or any other member in the exercise of its rights or the performance of its obligations other than to act in good faith with respect to the management of the LLC (similar to the Delaware and Cayman LLCs). LLC law also permits this duty of good faith to be extended or restricted by the express terms of the LLC agreement (i.e., the parties may agree to the relevant obligations in the LLC agreement rather than have these obligations imposed by law);
- there is no legal requirement for a member or manager to reside in Jersey, but Jersey LLCs will fall within the scope of the economic substance regime and should carefully consider that regime;
- the accounts of a Jersey LLC should not be audited unless:
- the LLC Agreement requires it; Where
- the LLC is issuing or has issued a prospectus inviting members of the public to become a member of the LLC (there are certain exemptions to this to allow an LLC to fit into the Jersey fund regime without a prospectus being issued);
- and similar provisions applicable to Jersey companies will also apply to Jersey LLCs (such as the ability to merge and split and the ability to continue overseas, and a foreign entity may continue in Jersey as an LLC of Jersey).
Under the current state of LLC law, a Jersey LLC will not be a corporation. We are expecting an amendment to the LLC Act shortly that will allow an LLC to choose whether or not to be a corporation – giving even more flexibility.
Additionally, the provisions of the LLC Act relating to Series LLCs are not currently in effect and will become effective at a later date to be determined.
Considerations for Lenders
For lenders, generally speaking there are no legal or regulatory impediments to lending funds in Jersey, and this would also apply where the fund vehicle is an LLC.
The due diligence a lender will need to undertake on a Jersey LLC will be mostly similar to that of a limited partnership (and as such we won’t bother to repeat it here).
In addition, the Security Interests (Jersey) Act 2012 creates a straightforward security regime to create a security interest in present and future intangible assets situated in Jersey. Security can easily be taken from an LLC, by way of a security agreement under Jersey law over (among other things), the following assets of a Jersey LLC:
- bank accounts maintained in Jersey;
- the appeal rights a party has under an LLC agreement (and the enforcement rights related to those appeal rights);
- shares in a Jersey company (or interests in a Jersey LLC); and
- contractual rights under an agreement governed by Jersey law.
The above list is not exhaustive, but rather the most common security we see in fundraising agreements. There are some third-party perfection requirements, but for the most part third-party perfection of the security will be obtained by means of the registration of a “funding statement” on the public security rights registry (which incurs a fee of GBP 150 per record).
In relation to security in call rights, as is currently the case when taking security in call rights in a limited partnership or a Jersey company, there is no need to give notice of the security to the members of the LLC to perfect the security. However, we would expect that the common practice in Jersey of giving such notice to investors would also apply to giving notice to members of an LLC, as this can provide lenders with protections that go to the beyond perfection.
The introduction of the LLC in Jersey is an exciting new development. Jersey will now seek to build on Jersey’s growing attractiveness to US funds, fund managers and investors or fund managers from outside the US to attract US investment.
For fund financing arrangements, given familiarities with other LLCs around the world, lenders should not be concerned about using a Jersey LLC in a fund structure.
*Appleby (Jersey) LLP