Consultation on Limited Liability Companies (Jersey) Law 201-
Summary:
The Chief Minister’s Department is exploring the proposal to enact a law enabling the creation of limited liability companies (“LLCs”). The aim of this consultation is to invite comments on a draft of the proposed new Limited Liability Companies (Jersey) Law 201-.
Date published: Closing date:
Supporting documents attached:
Limited Liability Companies (Jersey) Law 201- (the “Draft Law”)
How we will use your information
The information you provide will be processed for the purpose of consultation. The Department of the Chief Minister will use your information in accordance with the Data Protection (Jersey) Law 2005 and the Freedom of Information Jersey) Law 2011.
Please note that we may quote or publish responses to this consultation but we will not publish the names and addresses of individuals. If you do not want any of your response to be published, you should clearly mark it as confidential. Confidential responses will be included in any summary of statistical information received and views expressed.
Outline of consultation
The US LLC (noting variations between US states) is an entity historically based on mainland-European equivalents (GmbH and S.à r.l). Since the first US LLC legislation was passed in 1977 (and the subsequent confirmation of treatment by the US Internal Revenue Service) it has grown into a predominant business form, now accounting for over two-thirds of new formation choices for transparent vehicles in the US each year.
The appeal of the US LLC is largely due to its flexibility, with it being used for a variety of purposes, from simple businesses undertaken by one or more persons to being used as the ultimate holding vehicle of Fortune 500 companies. It is also popular as a special purpose vehicle in finance and fund structures. Since its introduction, Isle of Man, Bermuda and Cayman Islands have also introduced versions of the LLC into their domestic legislation, with reports suggesting the latter (both introduced in 2016) are proving popular in financial and investment transactions.
The Draft Law is therefore intended to permit and govern the creation and use of LLCs in Jersey. It is envisaged the introduction of a US-familiar vehicle would contribute to Jersey being an increasingly attractive jurisdiction for US (and equivalent European) business, as well as catering to our growing US market generally (North American assets and funds administered in Jersey in 2016 totalled approximately £169bn). The addition of LLCs to Jersey (which would innovatively combine various features of Jersey limited companies and statutory partnerships) would also provide a new corporate tool for the finance industry, an objective consistent with the general principles of Government’s published Jersey Financial Services Policy Framework.
Respondents should note that, in preparing the Draft Law (and as outlined in the Notes throughout this consultation), specific regard has been had to LLC laws in other jurisdictions and the features of existing Jersey entities with a view to ensuring that Jersey LLCs would fit within our existing statutory and regulatory frameworks and in order to be consistent with our status as a leading and regulatory compliant international finance centre. Responses (and the final form of the Draft Law) will be considered on the same basis.
Summary of the Jersey LLC
The proposed Jersey LLC would combine elements of both Jersey limited companies and statutory partnerships, resulting in it having a separate legal personality without being a “body corporate” (a distinction explained in more detail at Note 2 below). It would also be a transparent entity for tax purposes (i.e. the profits would be allocated to the members of the LLC, who would be required to pay income tax in the jurisdiction(s) in which they are tax resident) although it would have the ability to elect to be treated as a company instead (please note this election is not addressed within the Draft Law and is instead envisaged to be a “tick-box” election made in a registration document to be filed with the Jersey Taxes Office).
We would suggest the closest jurisdictional equivalent in Jersey, where the vehicles available have been historically closer to those in the UK, is (depending on election and the drafting of the LLC agreement) most likely to be the limited liability partnership (“LLP”). However, as the Jersey LLP was designed more strictly in line with partnership (and UK) law, it can be considered a more prescriptive vehicle than the LLC. Furthermore, US law has also evolved so that some LLCs may create “series” in a similar manner to which a Jersey protected cell company (“PCC”) may create cells (although this feature is not available in all LLC jurisdictions).
In terms of basic structure, an LLC consists of one or more members (which sound similar to shareholders in a company, but in substance are more akin to partners in an LLP) and, if appointed, one or more managers (which sound similar to managing or general partners of a partnership, but in substance are more akin to directors in a company) who may or may not also be members (similar to a Jersey company).
The structure of the proposed Jersey LLC is described more fully in this consultation paper, however, its characteristics (and how they would compare to a Jersey company limited by shares (“LTD”) and a Jersey LLP) can be summarised as follows:
(a) it would have separate legal personality but not be a body corporate (akin to a Jersey LLP) and therefore has the ability to hold assets and enter into contracts in its own name (akin to both an LTD and an LLP);
(b) where the Draft Law does not require otherwise, it would be governed by the terms of a private "LLC agreement" (akin to a partnership agreement in an LLP), which would be binding on the LLC, each member and each manager (if applicable) regardless of whether they are party to it (akin to articles of association of an LTD);
(c) subject to the LLC agreement, all management powers would vest in its members (akin to partners in an LLP) unless managers are appointed, who may but need not be members (akin to directors in an LTD);
(d) managers are under a duty to act in good faith in the performance of their management duties (akin to directors in an LTD) although the LLC agreement may expand or restrict that duty and, subject to the law and the LLC agreement (akin to an LLP), a manager would not owe any other fiduciary duties to the LLC, any member or any other person;
(e) subject to the LLC agreement, a member would not owe any fiduciary duties to the LLC or any other member in exercising its rights or in performing any of its obligations (akin to shareholders in an LTD);
(f) subject to the LLC agreement, members (and managers) may be divided into classes for the purposes of voting and entitlement to distributions/payments and may hold meetings (or prove written consent) on LLC matters (akin to shareholders (and directors) in an LTD) with each member (and/or manager) having the authority to bind the LLC (akin to partners in an LLP/directors in an LTD depending on the drafting of the LLC agreement);
(g) it would be formed by the filing of a declaration (akin to an LLP) and may be formed for any lawful purpose (akin to an LTD) by one or more members (akin to an LTD) who, subject to the LLC agreement (optionality being an innovate feature), may be required to contribute cash, property or services (or promise of the same) to the LLC with capital accounts credited for such contributions (akin to partners in an LLP);
(h) subject to the LLC agreement (optionality being an innovative feature) each member would have an "LLC interest" in the profits (and losses) of the LLC and a right to receive distributions of LLC property (akin to an LLP) but the assets (and liabilities) of the LLC would belong to the LLC (akin to both an LLP and an LTD);
(i) it would have the ability to create series (akin to cells in a PCC and therefore an innovate feature in an LLP-like context) with each having its own legal identity separate from that of the LLC and therefore the ability to contract and hold assets in its own name; and
(j) it could elect to be treated for tax purposes as a company rather than a partnership (election being an innovative feature; although please note this is not directly addressed in the Draft Law and is instead envisaged to be a “tick-box” election made in a registration document to be filed with the Jersey Taxes Office).
As briefly explained above, Jersey has to date (and in following the UK) sought to rely on the LLP as the jurisdictional equivalent to an LLC (i.e. a transparent entity with limited liability). This is predominantly because the LLP is believed to be more likely (following recent reforms) to be recognised by the English courts and HMRC as a transparent entity for tax purposes (there have been recent developments to suggest that LLCs may be treated as transparent for tax purposes on a case-by-case basis in the UK, but HMRC has stated that its starting position is to treat an LLC as a company). For that reason, it is envisaged that the Jersey LLC would not be an entity that would (currently) be recommended for use in a structure that sees it directly involved with the UK, where we expect the use of LLPs to prevail. Instead, the introduction of LLCs to Jersey is predominantly aimed at catering to our growing US market by providing a familiar vehicle for US funds into Jersey and recommended only for direct onward use when dealing with a jurisdiction where the use and treatment of LLCs as a transparent tax entity is both recognised and familiar (including the US itself).
Regulation
In November 2016, Jersey published a Beneficial Ownership of Jersey Corporate and Legal Entities and a Register of Directors Policy Document (available via the gov.je website). Respondents should note that Jersey’s disclosure requirements in respect of ultimate beneficial owners and controllers would equally apply to the proposed model of LLCs. In addition, and for the avoidance of doubt, as the LLC would require registration at the Companies Registry, the Sound Business Practice Policy (published November 2014 and available on the JFSC website) would apply.
Whilst the COBO policy is in place, it is anticipated that LLCs would require COBO consents in a similar manner to LLPs and that the Control of Borrowing (Jersey) Order 1958 would require amendments accordingly, most likely by the insertion of an equivalent to Article 11 (Limited liability partnerships) therein.
It is also envisaged that LLCs would be required to engage a local financial services provider and therefore Jersey’s AML/CFT regime would apply, with the provision by way of business in or from within Jersey in respect of formation services (or arranging for someone to do the same), manager services (or arranging for someone to do the same), registered office or business address services, nominee services in respect of LLC interests and the provision of accommodation, correspondence or administrative address for an LLC each falling under trust company business for the purposes of the Financial Services (Jersey) Law 1998. That law will therefore need to be amended to reflect the policy position and it would be Government intention that there be no legislative gap, with regulations passed concurrently with the Draft Law.
As to an LLC conducting any form of regulated financial services business itself, this question is still under review and will be subject to further policy and development questions but it is anticipated that LLCs would likely follow the same course as LLPs. For example (in the first instance at least) it is anticipated that LLCs would not be permitted to be authorised as Collective Investment Funds with the JFSC licensing policy needing to be amended with respect to including LLCs as, for example, fund services business.
Respondents are, of course, welcome to provide comments in respect of all prospective regulation.
Ways to respond
Respondents are invited to comment generally on the draft law as follows:
Write to: Kristin Holmes
Financial Services Unit, Chief Minster’s Department
7th Floor, Cyril Le Marquand House
The Parade, St Helier,
Jersey JE4 8UL
Telephone: +44 (0) 1534 440 427
Email: k.holmes@gov.je
Responses from the finance industry may be sent to Jersey Finance at the address below:
Write to: Helen De La Cour
Jersey Finance Limited
4th Floor, Sir Walter Raleigh House
48-50 Esplanade
St Helier
Jersey JE2 3QB
Telephone: +44 (0) 1534 836 010
Email: helen.delacour@jerseyfinance.je
Please note that responses sent to Jersey Finance will be shared with Government unless the respondent indicates that they wish to remain anonymous. Please indicate clearly on your response if this is the case.
Feedback on this consultation
We value your feedback on how well we consult or seek evidence. If you have any comments on the process of this consultation (as opposed to the issues raised) please contact Communications.Unit@gov.je
Consultation on the Draft Law
Introduction
- The Chief Minister invites responses on the text of the Draft Law, a copy of which is attached to this consultation paper.
- With regard to the source material for the Draft Law, respondents should note that each US state has authorised the formation of LLCs in its jurisdiction. As one might expect, their laws are not uniform. They do, however, share many of the same basic principles and, whilst attempts have been made at creating a uniform LLC law, the most popular legislative source for LLCs (certainly in large value private equity circles) appears to be the Limited Liability Company Act (Title 6 – Commerce and Trade, Subtitle II Other Laws Relating to Commerce and Trade, Chapter 18) of Delaware. Indeed, Bermuda and the Cayman Islands both appear to have used it as their basis for their own versions. There are various reasons for this popularity, not least the apparent business expertise of its courts, case law and swiftness to amend legislation to reflect decisions, but also its policy to give maximum effect to the principle of freedom of contract and enforceability of the LLC agreement. As the perceived business standard, we have therefore used that legislation as the starting point for the Draft Law and refer to it in this consultation for convenience as the “US Law”. However (as outlined in the summary above and in the Notes throughout this paper), other sources have been considered with a view to ensuring that Jersey LLCs fit within our existing Jersey law framework and compliance with international regulation standards (for example, with regard to the formation/registration process and the discussions around series and solvency requirements). We therefore ask that such standards are equally borne in mind when responding.
- The Draft Law does, of course, reflect Jersey as the relevant jurisdiction of formation with regards to terminology but, for consistency with the objective outlined above (i.e. to ensure familiarity to the US market), the language of US LLCs (including its name) has been retained wherever possible. Respondents should therefore be aware that there is a clear intention here to mirror the language of the US LLC in both terminology and effect unless Jersey-specific amendments are considered absolutely necessary.
Part 1 - Preliminary
Part 1 comprises Article 1, which sets out definitions of the terms used in the Draft Law.
Note 1: The definitions take their lead from their US Law equivalents with Jersey-specific definitions added as applicable. We have not listed them here in full as their use is primarily discussed in context below the appropriate Article, but respondents should note for comparison with the US Law that: (a) the definition of a “certificate of formation” (with formation taking effect upon filing) in the US Law has been replaced with the filing of a “declaration” and the issuance of a “certificate of formation” by the registrar (with formation to take effect upon registration) as discussed in Note 4 below; (b) the definition of “contribution” reflects the US Law version with the addition of “does not include any moneys lent or agreed to be lent to an LLC”, for the purposes of distinguishing contributions from loans made by a member (a concept permitted by Article 2 and an amendment also made by the Cayman Islands); (c) the definition of an LLC in the US Law refers to a “domestic limited liability company” for the purposes of distinguishing it from a “foreign limited liability company” (with provisions regarding registration), concepts which are not (currently) included in this Draft Law (if desirable future Regulations may provide); (d) the definition of “LLC agreement” is restricted to the description and form elements of the definition in the US Law (the other provisions in that US Law definition are addressed instead by Article 3) with the addition of “and any amendments or additions thereto” to ensure such are covered (an amendment also made by the Cayman Islands); (e) the definition of “LLC interest” reflects the US Law (which refers to a member’s share of the profits and losses of the LLC and right to receive distributions) with the addition of “any other rights, benefits and obligations to which the member is entitled or subject pursuant to the LLC agreement or the Draft Law” to ensure such are covered (an amendment also made by the Cayman Islands); (f) the definition of “manager” reflects the US Law with the addition of “a member in whom the management of a limited liability company is vested”, to cover the scenario of a member engaged in the management of the LLC throughout (a drafting approach also taken by Bermuda and the Cayman Islands); and (g) the definition (and concept) of a “registered agent” in the US Law has not been included for the reasons given in Note 5. |
Part 2 – Formation, registration etc. of limited liability company
Part 2 comprises Articles 2 to 10 and set out the essential elements of an LLC.
Article 2 – Limited liability company
- This Article outlines the legal status of the LLC (having legal personality separate from its members) and that: it may be formed for any lawful purpose (whether or not for profit); shall be dissolved and have its affairs wound up only pursuant to the LLC agreement or the Draft Law; subject to the LLC agreement, it has unlimited capacity; it must consist of one or more members and may appoint one or more managers (with body corporates permitted as both and managers and members); and it may contract with its members and managers (and indemnify them).
Note 2: This Article predominantly take its influence from sections 18-106 to 18-108, 18-201 of the US Law. By comparison, respondents will note that LLPs, for example, require two or more persons carrying on a business with a view to a profit, which is intended to satisfy Jersey customary law and the English law criteria for a partnership so that transparency for tax purposes can be achieved. The Draft Law has no such requirement (although practitioners have the freedom to draft the LLC agreement otherwise) as the LLC is to simply have the ability to elect for transparency or company-like tax status. This means that an LLC could be formed to directly or indirectly acquire, hold or dispose of property in any jurisdiction (including Jersey), engage in commercial trading or be formed for charitable and non-charitable purposes or social, educational and recreational activities which are not run in order to create profits for the individual members. Respondents should note that the US does not share our exact concept of a “body corporate” or “separate legal personality”. Instead, a “legal entity” (which can include partnerships as well as corporates). Therefore, for the purposes of our jurisdiction, the Draft Law follows the approach taken by our suggested closest equivalent, the Jersey LLP, which provides for separate legal personality without being a body corporate. Whilst the LLC is not an entity (currently) aimed at the UK, this is also considered to be a sensible position for anticipating potential future use in that jurisdiction (by comparison the English LLP is designated by statute as a body corporate but this circumvents English partnership law in a manner that is unavailable to foreign jurisdictions) as well as maintaining consistency with LLPs (we anticipate future legislation and regulation for LLCs will also follow this approach). By way of further comparison, the Cayman LLC is specifically designed as a body corporate (as is the Guernsey LLP) whereas Bermuda mirrors the US Law approach of simply designating as a legal entity with status governed by its laws. For similar reasons, an LLC is not stated as having perpetual succession. Instead the Draft Law provides that an LLC shall be dissolved and have its affairs wound up only pursuant to the LLC agreement (which can provide that an LLC is intended to have perpetual succession or cease upon the happening of certain events) or the Draft Law. |
Question 1: (a) Do you agree that there is market for LLCs in Jersey for the purposes of targeting US (and EU equivalent) business notwithstanding that certain jurisdictions (e.g. England and Wales) may not recognise them as transparent entities for the purposes of taxation and they are therefore unlikely to be used (at least directly) in transactions involving such jurisdictions? If so, what do you envisage a Jersey LLC being used for (e.g. within an investment fund structure)? Please be as specific as possible. (b) Do you agree that Jersey should have an LLC law in place in order to market to the UK if the English law (and HMRC) position changes so as to readily recognise LLCs as transparent entities (if so elected)? (c) Based on current drafting, do you believe that a Jersey LLC would give rise to any actual or potential risks to Jersey? If so, please explain such risks. (d) Do you agree with the approach that a Jersey LLC should be designated as an entity with separate legal personality rather than a body corporate? If not, please explain your reasoning. (e) Do you agree that an LLC should have the right to elect to be treated for tax purposes as either a company or as a partnership? If so, do you believe there should be a default position under law (and if so, do you agree that the default position should be to be treated as a partnership i.e. transparent as per the US Law)? (f) Do you agree with an LLC agreement being able to provide for perpetual succession? Please explain the reasons for your response. (g) Do you agree that it is not necessary for the Draft Law to require that an LLC must “carry on a business” with “a view to a profit” (noting that the LLC agreement may provide otherwise)? |
Article 3 – LLC agreement generally
- This Article outlines the requirement for and general content of the LLC agreement including that: the timing of entry into the LLC agreement may be before, upon or after the filing of the declaration for registration and formation; the LLC agreement will take effect either upon the issue of the certificate of formation or at such other date specified in the LLC agreement; its governing law shall be Jersey; its binding nature on the LLC, the members and managers (and assignees) without any need for them to be a party; it may give rights to a third party (who may enforce without being a party); its method of amendment (i.e. as specified therein or with unanimous member consent); and it may specify remedies, sanctions, penalties and consequences, which shall not be unenforceable solely on the basis they are in nature a penalty or forfeiture.
Note 3: This Article takes its influence from the definition of LLC agreement in and sections 18-201, 18-302, 18-306, 18-405, 18-502, 18-901 and 18-1101 of the US Law. Respondents will note that the LLC agreement is akin to an LLP agreement in the sense that it is private (i.e. it does not need to be filed with the registrar along with the declaration) but akin to articles of association in that it does not require the LLC, members and managers to be a party to it in order to be bound by its terms. Respondents should further note that the Draft Law provides for default positions should there be no LLC agreement provisions made (or in force). |
Question 2: (a) Should the time at which the LLC agreement is deemed effective be: (a) as drafted i.e. as at the date of the certificate of formation or at another date specified in the LLC agreement (which reflects the US Law); or (b) simply “upon formation” being the time that the registrar issues a certificate of formation which therefore removes the option to specify another date in the LLC agreement? It should be noted that Bermuda has adopted the former whilst Cayman Islands state LLC agreements entered into before filing only take effect upon registration (both permitting entry “before, after or at the time of filing”). (b) Do you envisage any issues with the concept that the LLC agreement may give rights to a third party (noting contractual concepts of privity)? (c) Do you believe there are any areas in the Draft Law where a default position should be but is not specified (i.e. in cases where an LLC agreement is either silent or for any reason not in force)? If so, please confirm which areas and what position you believe should be made the default and why. |
Article 4 – Registration of limited liability company
- This Article outlines the process for forming an LLC in Jersey, being in summary by the filing of a declaration (the form of which is to be agreed with the registrar in due course) confirming: the intended name of the LLC (which can be reserved in advance as for other Jersey entities); its intended registered office in Jersey; the name and address of each member (although it is not intended that this information be public); confirmation that the person signing is authorised to do so by all such members; and such other particulars as may be prescribed. If the declaration is complete and the registrar is satisfied, the registrar will register the LLC and issue a certificate of formation. Formation (and registration) is stated to take effect upon the issue of that certificate of formation, which shall specify the date on which it is issued and provide a registration number (we also expect an LLC to be issued with a COBO consent upon formation, the standard form of which is to be determined in due course together with all other regulatory requirements).
Article 5 – Amendment of declaration
- This Article outlines the requirement and process for amending the declaration (other than a change of registered office) whether due to an error or change in details; being in summary the filing of an amendment statement within 21 days of the change or members/managers becoming aware of the error.
Article 6 – Cancellation of registration
- This Article provides for the cancellation of the registration of an LLC by the registrar where a winding up or en désastre has been completed (with subordinate regulations pertaining thereto to be made separately, rather than included as part of this Draft Law together with (it is anticipated) amendments to Article 36 of the Bankruptcy (Désastre) Jersey Law 1990).
Note 4: Respondents should note that the Draft Law mirrors much of the process for registering an LLP and that, in this respect, the Jersey LLC is specifically intended to differ from the US Law. The US Law permits an LLC to be formed simply upon the filing of a certificate of formation whereas the Draft Law refers to that document instead as a declaration with the registrar issuing a certificate of formation if satisfied that the requirements of the Draft Law are met. Therefore, under the Draft Law, the LLC is formed at the time the certificate of formation is issued and not beforehand. The certificate of formation is therefore intended as conclusive evidence that a declaration has been delivered to the registrar, the LLC is formed and the requirements of registration have been complied with, which is in keeping with the processes for other Jersey entities. Respondents should also note that the Draft Law mirrors the registrar’s actions in terms of a Jersey company, being that it shall maintain both a register of declarations and a register of LLCs. The Chief Minister’s Department considers that the above approach is appropriate, bringing it in line with the registration processes for other Jersey entities. It provides the registrar with the usual discretions to refuse, whilst not causing any significant delays. It also give certainty as to the date an LLC comes into existence. By comparison, it should be noted that Bermuda and Cayman Islands have adopted the US Law approach. Whilst cancellation of an LLC is also addressed in this Article, the intention is that (as for LLPs) provisions regarding the dissolution and winding-up (and other related processes) are to be legislated separately (and the Draft Law provides for regulation making powers to address this point; we anticipate that Article 36 of the Bankruptcy (Désastre) Jersey Law 1990 will also need amending). However, as drafted, it should be noted that, as for Jersey LLPs, a “certificate of cancellation” is to be deemed as conclusive evidence of the cancellation of an LLC. |
Question 3: (a) Do you agree with the approach taken above to align the registration process with that of other entities in Jersey or believe it should follow the US Law instead? (b) Do you agree that provisions regarding the dissolution and winding-up (and any other related processes) should be legislated separately? (c) Do you envisage any issues with the classification of LLCs with regards to any insolvency or similar processes? If so, please provide your reasoning. |
Article 7 – Name of limited liability company
- This Article outlines, amongst other requirements: the naming requirements (must end with “Limited Liability Company”, “L.L.C.” or “LLC”); the process for reserving names and the registrar’s discretion to reject (or require the LLC to change) such name if felt misleading or undesirable; that a change of name takes effect upon an amended certificate of formation being issued by the registrar; and a requirement that the LLC clearly state on its documentation its name, number and status as an LLC (with failure to comply being an offence).
Article 8 – Registered office
- This Article outlines the requirement of a registered office in Jersey; the ability to change the registered office by giving notice to the registrar (made effective upon such notice being registered by the registrar but with service valid on the previous address for 14 days), the discretion of the registrar to refuse to register a change of registered office if for any reason the registrar believes the occupier of the premises has not authorised such use; a requirement that the LLC keep (and keep up to date) at its registered office certain records relating to the LLC and its members and managers including registers thereof (in alphabetical order); the LLC formation documents, the LLC agreement (and each amendment thereto); all contributions (including agreements to contribute) and LLC interests; with a provision that those records are to be treated as prima facie evidence of the information therein and available for inspection by all members and managers and (upon request) the registrar (within 14 days and failure to comply being an offence).
Article 9 – Service of documents on limited liability company
- This Article simply provides that service may be effected by post or delivery to the registered office of the LLC.
Note 5: As for registration, the naming, registered office and service provisions above are intended to follow established Jersey practices here rather than the US Law. As mentioned in Note 1, respondents should note that the US Law has a definition (and concept) of a “registered agent”, which has not been included in the Draft Law. The role is not the same as a company secretary or administrator (the requirements to maintain, for example, the registers of managers and members, falls on the LLC itself, not the registered agent); rather it is the method by which the US Law seeks to ensure a genuine registered office and presence in the jurisdiction (by requiring a regulated person/entity to provide a registered office and be responsible for service of process on the LLC and communications between the managers and members). By comparison: Bermuda requires a Bermuda resident for service of process (and maintaining financial statements) if the registered office of the LLC is not that of a licensed corporate service provider; and the Cayman Islands require that a person providing a registered office to an LLC must consent and hold an appropriate license. With regards to other Jersey vehicles: LLPs (under the new 2017 legislation) must appoint a secretary, who must be an LLP partner with a registered office in Jersey or a person licensed to act; Jersey limited companies must appoint a company secretary; and Jersey incorporated limited partnerships ("ILPs") have no requirement for such a registered agent or secretary, however each is required under their respective Jersey statute to have a registered office in Jersey. For the moment, the position adopted in the Draft Law therefore mirrors that of Jersey ILPs (a requirement for a Jersey registered office with no separate secretary/registered agent) with service of process to simply be effected by delivery to that registered office. Respondents should note it is intended that the requirement for an LLC to use a licensed Jersey financial services business (including with regards to the provision of registered office and other services) will not be addressed through this consultation and that there are ongoing discussions with the Jersey Financial Services Commission concerning appropriate amendments to the Financial Services (Jersey) Law 1998. |
Question 4: (a) Do you agree with the omission of the requirement for a US-style registered agent in favour of mirroring established Jersey practices? (b) Do you have any comments with regards to the Draft Law (or proposed future regulations/orders) providing for a regulated entity to be appointed to provide a registered office or any other services (for example, as a manager)? (c) Do you agree that the records of the LLC should be open to all members and managers of an LLC or do you believe this (for example) should be subject to the LLC agreement? |
Article 10 – Series of members, managers, LLC interests or assets
- This Article allows for the establishment of one or more designated “series” of members, managers, LLC interests or assets which may have separate legal personality, rights, powers or duties with respect to specified property or liabilities of the LLC, or profits and losses associated with specified property or liabilities, and that any such series may have a separate business purpose or investment objective and hold property in its own name (i.e. the creation of a series is essentially a ring-fencing exercise performed by the LLC which benefits from the protections of these provisions if done correctly).
- This Article is also currently drafted without the need for the separate, distinct registration of a series. However, respondents should note this is not to be mistaken for Government position: the current drafting is simply intended to demonstrate the US Law position as a starting point for consultation on a potential registration process for a Jersey series (if series are desired at all); and that, despite such questions concerning registration, the Government’s Policy on beneficial ownership of corporate entities and legal entities would apply to any series of an LLC as it would to the LLC itself.
Note 6: These provisions are some of the most innovative (and therefore still developing) features of LLCs. Indeed, whilst they are based on section 18-215 of the US law (specific Jersey additions have been made regarding status, name and registered office), we note that they are subject to much commentary in the US. Respondents should also note that Bermuda and Cayman Islands chose not to include series in their respective LLC laws. The advantages of the ability to create series mirror those for creating cells in Jersey cell companies: an LLC is able to ring-fence groups of assets and liabilities from each other without needing to create a completely separate LLC to achieve the same result (and therefore avoid the cost and time associated). However, the US Law provisions (and as explained above, the current version of the Draft Law) permit the LLC to create and administer series without needing to individually register them. As outlined above, as a matter of Jersey policy (and in light of international regulatory standards), we have specifically raised the question of registration below and welcome responses accordingly. Respondents will also note that the questions below focus more on the creation of series rather than its governance provisions. This is because the latter largely mirror those for the LLC itself (and are therefore covered elsewhere in this consultation) but respondents are welcome to comment. Respondents should also note a series is stated as having its own separate legal personality without being specified as a body corporate for the same reasons as for the LLC itself in Note 2. |
Question 5: (a) Do you agree with the concept that LLCs should be permitted to create series? Please explain your reasoning. (b) Do you agree that LLCs should not be permitted to create series without being required to individually register them (and obtain a separate certificate of formation / appropriate regulatory consents)? If so, do you have any views / preferences on that registration process (for example, should it mirror that of the LLC itself / Jersey cell companies)? (c) Do you agree that, as for the LLC, a series should be stated as having separate legal personality without being a body corporate? (d) Do you believe the naming provisions to provide sufficient notice to third parties (including creditors) that they are dealing with a ring-fenced element of the LLC? If not, what would you suggest instead or in addition to those provisions? (e) What (if any) market purposes do you believe the ability to create series would benefit and therefore should be considered when legislating for them (for example, do you believe the ability to create separate series for separate funds would be desirable and therefore the legislation take into account any specific fund law related requirements)? |
Part 3 – Members
Part 3 comprises Articles 11 to 18 and deals with matters relating to members.
Article 11 – Admission of members and LLC interests
- This Article provides that initial members shall be admitted upon the later of the issuance of the certificate of formation and the time provided in the LLC agreement (or if no time is provided, when the admission is reflected in the records of the LLC); and thereafter that members shall be admitted in the manner specified in the LLC agreement (or, if that is not specified, with the consent of all members and at the time the records of the LLC are updated to reflect), with admitted members bound by the LLC agreement without any need to execute it.
- This Article further provides that a member: may be admitted as a member and receive an LLC interest (or be granted other rights) without making a contribution (or being liable to do so); be admitted as a member without acquiring an LLC interest; may be admitted as a sole member without making a contribution (or being liable to do so) or acquiring an LLC interest; shall, subject to the LLC agreement, not have any pre-emptive right to subscribe for any issue of LLC interests; and may have their LLC interests evidenced by a certificate, which shall be proof of that LLC interest but such certificate shall not be a bearer certificate capable of transferring title (and any attempt to do shall be void). LLC interests are also confirmed as movable property with each member having no interest in any specific LLC property.
Note 7: These provisions take their influence from sections 18-301, 18-302, 18-701 and 18-702 of the US Law. By comparison, respondents will note that it is a key requirement for LLPs that the partners contribute “something of value”, which is intended to satisfy Jersey customary law and the English law criteria for a partnership so that transparency can be achieved. As per Note 2, this approach is not taken with LLCs, members of which may therefore have the status of a member without contributing or indeed having an LLC interest (although practitioners are free to draft the LLC agreement to require otherwise). |
Question 6: Other than the issues already identified with respect to satisfying transparency criteria in certain jurisdictions, do you envisage any issues with the concept that members may be admitted without either a requirement to contribute or receiving an LLC interest (noting contractual concepts of consideration)? |
Article 12 - Classes of members
- This Article permits the LLC agreement to provide for classes or groups of members and for them to have such relative rights, powers and duties as it may provide; and to make provision for the future creation of such (including rights, powers and duties senior to existing classes and groups of members).
Article 13 – Meetings of members
- This Article permits an LLC agreement to determine the notice, timing, place and purpose of any meeting at which any matter is to be voted on by any members, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote.
Article 14 – Voting of members
- This Article permits an LLC agreement to provide for the taking of an action, including the amendment of the LLC agreement, without the vote or approval of any member or class of LLC interest or group of members; provide any member or class or group of members to have no voting rights; grant to all or certain identified members or a specified class of LLC interest or group of members the right to vote separately or with all or any class of LLC interest or group of members or managers, on any matter; and for voting to be on a per capita, number, financial interest, class, group or any other basis.
- This Article further provides that, subject to an LLC agreement or except as otherwise provided in the Law, any vote of members shall be passed if passed by a simple majority in number of the members entitled to vote on the matter in proportion to the then current percentage or other interest of members in the profit of the limited liability company owned by all of the members, but where that results in no members with a right to vote or provide consent, the members may vote or consent by a simple majority. Written resolutions are also, subject to the LLC agreement, permitted and may be passed by the same majority, as are proxies and electronic transmission of consent.
Note 8: These provisions take their influence from section 18-302 of the US Law. By comparison, respondents will note that: the Jersey LLP law has no equivalent provision with regards to a default voting position; companies pass resolutions by a simple majority and special resolutions by a two-thirds majority basis (unless the articles of association specify otherwise); and that Cayman Islands provide for votes of LLC members to be passed by a simple majority of their number. |
Question 7: Do you agree that the default voting position for members should be in proportion to their interest in the profits of the LLC as per the US Law (and for written resolutions to be passed by that same majority) rather than by other method (and noting that the LLC agreement may provide otherwise)? |
Article 15 – Ceasing to be a member on insolvency or death
- This Article provides for a member, subject to the LLC agreement or with the consent of all members, to cease be a member on insolvency; and (in case of death or incompetence or a company) a personal representative to be able to exercise that member’s rights.
Article 16 – Liability to third parties
- This Article provides that, except as otherwise provided by the Draft Law, the debts and other liabilities of an LLC, whether arising in contract, tort or otherwise, shall be solely the debts and other liabilities of the LLC, and neither a member nor a manager of an LLC shall be personally liable for any such debt or other liability of the LLC solely by reason of being a member or acting as a manager of the limited liability company; although notwithstanding, a member or manager may, in accordance with the LLC agreement or otherwise, agree to be liable personally.
Article 17 – Member may bind limited liability company
- This Article provides that, subject to the LLC agreement, a member shall have the authority to bind the LLC.
Article 18 – Resignation of member
- This Article permits a member to resign from and cease to be a member only at the time or upon the happening of events specified in an LLC agreement and in accordance with the LLC agreement, as otherwise provided in the Draft Law or with the consent of all of the other members.
Note 9: These provisions take their influence from sections 18-303, 18-304 and 18-603 of the US Law with the addition of, if the LLC agreement is silent, the consent of all other members (an approach also taken by the Cayman Islands). Articles 16 and 17 each reflect a key feature of the LLC: that the LLC is a separate entity distinct from its members (with separate legal personality) but that (subject to the LLC agreement) each of its members may bind the LLC (akin to partners) |
Question 8: Do you agree (or envisage any issues with the drafting) that subject to the LLC agreement: (a) insolvency should trigger the cessation of membership; and (b) each member should have the authority to bind the LLC (noting below that the management of the LLC may vest in managers (where appointed) or with a specified group of members if so specified in the LLC agreement)? |
Part 4 – Managers
Part 4 comprises Articles 19 to 26 and makes provision for matters relating to the management of LLCs.
Article 19 – Management of limited liability company
- This Article provides that the LLC agreement may permit for the management of the LLC to be by a manager (or managers); that if a manager is appointed, the management of the LLC shall vest in that manager to the extent provided (and otherwise in its members); that, subject to the LLC agreement, each manager appointed shall have the authority to bind the LLC; and that, subject to the Draft Law, a manager ceases to be a manager only as provided in the LLC agreement.
Question 9: Given that the definition of “manager” includes “a member in whom the management of a limited liability company is vested”, are there any activities that you believe should be specifically excluded as “management business” so as to avoid a member being classified as a manager simply by partaking in such tasks? If so, do you believe the Draft Law to be the proper place for such activities are do you believe that should be housed in activity specific regulation? No such exclusions exist in the US Law but, for example, we note section 6A of The Legislative Reform (Limited Partnerships) Order 2015 of England and Wales provides that a limited partner in a private fund limited partnership is not to be regarded as taking part in the management of the partnership business merely because the limited partner does anything that is under subsection (2) therein a permitted activity, which in turn includes taking part in decisions about the variation of the partnership agreement and certain investment decisions. |
Article 20 – Contributions by manager
- This Article provides that a manager may also participate in the LLC as a member.
Note 10: These provisions take their influence from sections 18-401, 18-402 and 18-403 of the US Law. Respondents will note they provide for an LLC to decide whether it is managed by its members (each potentially having LLC interests and therefore akin to partners/shareholders) or manager(s) (being more akin to directors), with a person (including a corporate entity) permitted to be both. |
Article 21 – Classes of managers
- This Article permits the LLC agreement to provide for classes or groups of managers and for them to have such relative rights, powers and duties as it may provide; and to make provision for the future creation of such (including rights, powers and duties senior to existing classes and groups of managers).
Article 22 – Meetings of managers
- This Article permits an LLC agreement to determine the notice, timing, place and purpose of any meeting at which any matter is to be voted on by any managers, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote.
Article 23 – Voting of managers
- This Article permits an LLC agreement to provide for the taking of an action, including the amendment of the LLC agreement, without the vote or approval of any manager or class or group of managers; grant to all or certain identified managers or a specified class or group of managers the right to vote separately or with all or any class or group of members or managers, on any matter; and for voting to be on a per capita, number, financial interest, class, group or any other basis.
- This Article further provides that, subject to an LLC agreement or except as otherwise provided in the Law, any vote of members shall be passed if passed by a simple majority in number of the members entitled to vote on the matter in proportion to the then current percentage or other interest of members in the profit of the limited liability company owned by all of the members, but where that results in no members with a right to vote or provide consent, the members may vote or consent by a simple majority. Written resolutions are also, subject to the LLC agreement, permitted and may be passed by the same majority, as are proxies and electronic transmission of consent.
Note 11: These provisions take their influence from sections 18-404 and 18-405 of the US Law with the addition that, if the LLC agreement is silent on the issue, votes shall be decided on a simple majority of votes (an addition also adopted by Bermuda). Respondents will note these mirror the equivalent provisions for members (and in turn those for those of managers of series). |
Article 24 – Reliance on information, reports etc. by member, manager or liquidator
- This Article provides for a member, manager or liquidator to be protected in relying in good faith upon the records of the LLC and upon information, opinions, reports or statements presented by another manager, member or liquidator, an officer or employee of the limited liability company, or committees of the limited liability company, members or managers, or by any other person as to matters the member, manager or liquidator reasonably believes are within such other person's professional or expert competence.
Article 25 – Delegation of rights and powers to manage
- This Article provides that, subject to the LLC agreement, a member or a manager has the power to delegate their rights and powers to manage and control the business and affairs of the LLC.
Article 26 – Resignation of manager
- This Article provides: for the resignation of a manager of an LLC at the time or upon the happening of events specified in the LLC agreement and in accordance with the LLC agreement; that an LLC agreement may provide that a manager shall not have the right to resign as a manager; that, notwithstanding any such prohibition, a manager may still resign at any time by giving written notice to the members and other managers but (in addition to any remedies otherwise available under applicable law) an LLC may recover damages for breach of the LLC agreement and offset those against the amount that may otherwise be distributable to the resigning manager (if any).
Note 12: These provisions take their influence from sections 18-406, 18-407 and 18-601 of the US Law. Respondents will note that the Draft Law ensures that the LLC agreement may be drafted with significant flexibility. |
Part 5 - Finance
Part 5 comprises Articles 27 to 30 and makes provisions for financial matters.
Article 27 – Form of contribution
- This Article permits the contribution of a member to an LLC to be in the form of cash, property or services rendered, or a promissory note or other obligation to contribute cash or property or to perform services.
Article 28 – Liability for contribution
- This Article provides that: subject to the LLC agreement, a member is liable to the LLC to perform any promise to contribute cash or property or to perform services, even if unable because of death, disability or any other reason; that the LLC may require cash equal to the agreed value of the property or services that have not been provided; and that such obligation to contribute may only be comprised by the consent of all members (subject to the LLC agreement) but that, notwithstanding any such compromise, a creditor of the LLC who extends credit before that compromise may enforce the original obligation to the extent that the creditor can be said to have reasonably relied on that member being obligated to contribute. A conditional obligation to contribute is also stated as not being enforceable until the relevant conditions have been met.
Note 13: These provisions reflect sections 18-501 and 18-502 of the US Law. Respondents will note that, in addition to contributions not being an absolute requirement (again, the LLC agreement can provide differently), where a contribution is required from a member it is permitted to take the form of cash, property or services (or the promise to provide the same) with LLPs by comparison requiring “skill and effort” as an alternative to capital. It should also be noted that, whilst Bermuda reflects the US Law provision regarding creditors being permitted to enforce original obligations where they have extended credit on the basis of those obligations, whereas Cayman Islands has chosen not to include equivalent wording in their LLC legislation. |
Question 10: (a) Other than the issues already identified with respect to satisfying transparency criteria in certain jurisdictions, do you envisage any difficulties in the terminology used with respect to contributions? If so, please explain. (b) Do you believe the Draft Law should include the ability of creditors to enforce original obligations (or that it should be subject to any specific limitations)? If not, please provide your reasoning. |
Article 29 – Allocation of profit and losses
- This Article provides for the profits and losses of an LLC to be allocated among the members and among classes or groups of members in the manner provided by the LLC agreement or, if the LLC agreement does not provide, on the basis of the agreed value (as stated in the records of the LLC) of the contributions made by each member to the extent received and not returned by the LLC.
Article 30 – Allocation of distributions
- This Article provides for the allocation of distributions of cash or other assets of an LLC among the members and among classes or groups of members in the manner provided by the LLC agreement or, if the LLC agreement does not provide, on the basis of the agreed value (as stated in the records of the LLC) of the contributions made by each member to the extent received and not returned by the LLC.
Note 14: These provisions reflect sections 18-503 and 18-504 of the US Law with profits and losses and distributions to be divided as per the LLC agreement or otherwise in proportion to contributions. Respondents will note that the LLP law similarly provides for profits to be divided but does not give a default position (and does not have a separate provision regarding distributions). |
Part 6 – Distributions
Part 6 comprises Articles 31 to 35 and makes provisions for distributions.
Article 31 - Payment of distributions
- This Article allows for the LLC agreement to provide for payment of distributions in such manner, time and form, including distributions in cash and in kind and for the establishment of a record date with respect to distributions by an LLC.
Article 32 – Distributions upon resignation
- This Article entitles a member upon resignation to receive any distribution to which such member is entitled pursuant to the LLC agreement and, subject to the LLC agreement (and within a reasonable time after resignation), the fair value of such member's LLC interest as of the date of resignation based on their right to share in distributions.
Article 33 – Distribution in kind
- This Article provides that, subject to the LLC agreement: a member, regardless of the nature of their contribution, has no right to demand and receive any distribution from an LLC in any form other than cash; and that a member may not be compelled to accept a distribution of any asset in kind from an LLC to the extent that the percentage of the asset distributed exceeds (although they may be compelled to the extent that the percentage of the asset distributed is equal) a percentage of that asset which is equal to the percentage in which the member shares in distributions from the LLC.
Article 34 – Right to distribution
- This Article provides for a member to have (subject to the Draft Law and the LLC agreement) the status of, and be entitled to all remedies available to, a creditor of an LLC with respect to the distribution at the time a member becomes entitled to receive a distribution.
Article 35 – Limitation on distribution
- This Article prohibits an LLC from making a distribution to a member if, at the time when and immediately after payment is made, the LLC is insolvent, with a member receiving such a distribution and having actual knowledge of it being in contravention of this provision being liable for it.
Note 15: These provisions reflect sections 18-604 to 18-607 of the US Law. Respondents will note, in particular, Article 35, which requires that LLCs simply be solvent at the time a distribution is made for it to be permissible. By comparison, ILPs have a similar wording but LLPs require partners to sign a formal solvency statement on a 12-month-look-forward basis (to be later filed with the registrar). Companies also have a similar process to LLPs under article 115 of the Companies (Jersey) Law 1991. Furthermore, in order for an LLC member to be liable to return a distribution where the LLC is in fact insolvent, “actual” knowledge is a pre-requisite of such liability; whereas for partners in an LLP, the liability to return a distribution arises where a specified solvency statement was not made or where one was made without reasonable grounds for giving it. |
Question 11: Do you envisage any issues with adopting the US Law position with regards to distributions as drafted i.e. that the LLC is simply required to be solvent at the time of the distribution and for members to be liable to return distributions only where those members had actual knowledge that the LLC was insolvent at the time? |
Part 7 Assignment of LLC interest
Part 7 comprises Articles 36 to 43 and makes provision for the assignment of an LLC interest.
Article 36 – Assignment of LLC interest
- This Article provides for an LLC interest to be assignable in whole or in part, subject to the LLC agreement (which may provide that an LLC interest may not be assigned at all prior to the dissolution and winding up of the LLC).
Note 16: These provisions reflect sections 18-603 and 18-702 of the US Law. Respondents will note by comparison that partners of an LLP may not assign, transfer or otherwise dispose of the whole or part of their interests other than in accordance with the LLP agreement. |
Article 37 – Assignee right to participate in management of a limited liability company
- This Article provides that the assignee of an LLC interest not admitted as a member shall have no right to participate in the management of the LLC except as provided by the LLC agreement or otherwise by the consent of all members.
Article 38 – Assignee right to exercise rights and powers of a member
- This Article provides that subject to the LLC agreement an assignment of an LLC interest does not entitle the assignee to become or to exercise any rights or powers of a member but does entitle the assignee to share in such profits and losses, receive such distribution or distributions, and receive such allocation of income, gain, loss, deduction, or credit or similar item to which the assignor was entitled, to the extent assigned.
Article 39 – No liability solely as a result of the assignment
- This Article provides that, subject to the LLC agreement and except to the extent assumed by agreement, until an assignee of an LLC interest becomes a member, the assignee has no liability as a member solely as a result of the assignment.
Article 40 – Ceasing of rights of member on assignment
- This Article provides that (subject to the LLC agreement) a member ceases to be a member (and ceases to have any rights or powers as such) upon the assignment of their entire LLC interest. However: the granting of security in respect of an LLC interest does not qualify as such an assignment; and, whether or not an assignee becomes a member, the assignor is not released from their liability to the LLC for their contribution or for their liability to return a distribution received with knowledge that the LLC was insolvent.
Article 41 – Right of assignee to become member
- This Article gives an assignee the right to become a member in respect of the assigned LLC interest if permitted in the LLC agreement and in accordance with the terms of the LLC agreement or otherwise with the approval of all members of the LLC.
Article 42 – Rights, powers and liabilities of assignee upon becoming a member
- This Article provides that an assignee who has become a member has, to the extent assigned and transferred, the rights, powers, restrictions and liabilities of a member contained in the LLC agreement, the Draft Law and any other enactment. Notwithstanding, unless the LLC agreement specifies otherwise, such an assignee is to be liable for the obligations of the assignor to make contributions (unless they were unknown to the assignee at the time and could not be ascertained from the LLC agreement) but is not liable for any other obligations of the assignor with regard to distributions.
Article 43 – Acquisition by limited liability company of interest of member of manager
- This Article provides (subject to the LLC agreement) for the acquisition by an LLC of an LLC interest by purchase, redemption or otherwise, if immediately following the acquisition, the LLC would be able to pay its debts as they fall due; and that any such LLC interest would be deemed cancelled upon acquisition.
Note 17: These provisions reflect sections 18-702 (and 18-607), 18-704 and 18-705 of the US Law. With regards to the acquisition of LLC interests by the LLC, respondents will note by comparison that LLPs have no equivalent provision though limited companies may purchase their own shares under Part 11 of the Companies (Jersey) Law 1991 (generally permitted and authorised by special resolution). Respondents should also note that the US law has no requirement for the LLC to be able to pay its debts as they fall due, rather it is a condition that was inserted by both Bermuda and Cayman Islands in their respective laws and (when drafting) felt appropriate from a policy perspective to include here, particularly given the solvency requirement for distributions. |
Question 12: Do you agree that the requirement of the LLC to be solvent at the time it intends to acquire an LLC interest should be included or do you believe the Draft Law should instead reflect the US Law (which has no such requirement)? |
Part 8 – Miscellaneous and final provisions
Part 8 comprises Articles 44 to 61 which deal with customary law, duties and miscellaneous provisions relevant to the Draft Law.
Article 44 - Rules of customary law
- This Article provides for the rules of customary law applicable to partnerships to apply to LLCs except insofar as they are inconsistent with the express provisions of the Draft Law or the nature of an LLC including that the liability of its members is limited to their contributions and that it is managed by it may be managed by one or managers who may or may not be members.
Note 18: Whilst it may appear counter-intuitive to apply the customary law of partnerships to an entity referred to as a limited liability company, this is in fact consistent with the approach taken to follow the closest jurisdictional equivalent of the LLP elsewhere in the Draft Law (for example, by providing the LLC with separate legal personality without it being a body corporate). As explained in Note 2, this “quirk” results from the US not sharing our meaning of “company”, which can be thought of as more of a term (like “business”) that can in certain circumstances equally apply to incorporations (what we would generally think of as companies), partnerships and LLCs (which are considered as hybrids) alike. This Article therefore seeks to echo the approach of the customary law provision of the LLP law i.e. to confirm the intention that LLCs are to be treated as partnerships except as expressly provided by the Draft Law. By comparison, the Cayman Islands (which as stated in Note 2, takes the approach of designating the LLC as a body corporate) has an equivalent provision of applying its common and equity law as applicable to companies to LLCs except insofar as inconsistent with the express provisions of their LLC law. |
Question 13: Do you believe there are any material issues with LLCs being said to be treated as a partnerships except as prescribed in the Draft Law (or related legislation) notwithstanding their name refers to them as companies? If so, please provide details. |
Article 45 - Fiduciary and other duties not owed
- This Article provides that, subject to the LLC agreement, a manager shall not owe any duty (fiduciary or otherwise) to the LLC or any member of the LLC (or any other person) in respect of the LLC other than a duty to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager is subject in connection with the management of the LLC provided that such duty of good faith may be expanded or restricted by the express provisions of the LLC agreement.
- This Article further provides that, subject to the LLC agreement (and this Article) a member shall not owe any duty (fiduciary or otherwise) to the LLC or any member in exercising any of its rights or authorities in respect of the LLC or in performing any of its obligations pursuant to the LLC agreement to the LLC or any member, and where such member is exercising any vote, consent or approval right in respect of its LLC interest it may exercise such vote, consent or approval in its own best interests as it sees fit even though it may not be in the best interest of the LLC.
Note 19: These provisions reflect 18-1101 of the US Law. Whilst care needs to be taken when comparing the US application of good faith and fiduciary duties with our own, the US Law clearly specifies that the intention is to give maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements. |
Question 14: (a) Do you believe it agreeable that the LLC agreement should have the freedom to determine all duties (fiduciary or otherwise) of managers (which includes managing members) other than a general duty to act in good faith (which may be restricted or expanded); or (for example) should duties be mandatorily included via legislation (for example, aligning to the position for directors in Articles 74-76 of the Companies Law and customary law)? If the latter, which duties do you believe should be included? (b) Do you believe it otherwise agreeable that members (when not engaging in management) may similarly owe no duties and may vote contrary to the interests of the LLC, subject to the LLC agreement? |
Note 20: The following provisions have been drafted for (amongst other objectives): the appointment of the registrar and role of the Commission; the collection of annual fees (to be confirmed but for comparison, the US Law specifies USD300 p.a.); the prescription of forms of documents to be provided or kept in accordance with the Draft Law; for subordinate legislation to be passed (including for the winding up of an LLC); offences; penalties; and commencement. We have not raised specific questions in respect of them as they should be self-evident Jersey provisions but none-the-less outline their content here and welcome any comments respondents may have generally. |
Article 46 – Appointment and functions of registrar
- This Article confirms that the registrar of companies appointed pursuant to Article 196 of the Companies (Jersey) Law 1991 is the registrar of LLCs; requires the registrar to maintain a register of LLCs and record in it any declaration, return, statement or copy delivered to the registrar and the issue of any certificate by the registrar pursuant to the Law; that any certificate issued by the registrar under the Law must be signed by the registrar and sealed with the registrar’s seal (if any); permits the Commission to direct a seal or seals to be prepared for the authentication of documents required for or in connection with the registration of LLCs; that any functions of the registrar under the Draft Law may, to the extent authorised by the registrar, be exercised by an officer on the staff of the Commission; that the registrar has the power to remove from the register material of a description specified in the Regulations that derives from anything invalid or ineffective or that was done without the authority of the LLC or is inaccurate, or is derived from something that is inaccurate or forged; and that before exercising its power to remove material from the register, the registrar must publish its policy as to who may make an application and what is to be included in the application, any notice to be given and any period allowed for the making of objections, how an application may be determined and the appeal process that will apply where a person is aggrieved by the registrar’s decision to remove material.
Article 47 – Annual administration fee
- This Article gives the Commission the power to require the payment to it by an LLC of an annual administration fee; that the annual administration fee is payable if it has been published and is in effect in accordance with Article 15 of the Financial Services Commission (Jersey) Law 1998. The States is also empowered by Regulations to provide that, in addition to the annual administration fee, an LLC must pay to the Commission annually such amount as the States determines in the Regulations.
Article 48 – Fees, charges and forms
- This Article provides that the Commission may require the payment to it of fees in respect of the performance by the registrar of his or her functions under the Draft Law or a charge for the provision by the registrar of any service, advice, or assistance, or a document or information; that a fee is payable if it has been published and is in effect in accordance with Article 15 of the Financial Services Commission (Jersey) Law 1998; that where a fee is payable in respect of the performance of a function by the registrar, the registrar does not need take any action until the fee is paid; that where the fee is payable on the receipt by the registrar of a document required to be delivered to the registrar, the registrar would be taken not to have received the document until the fee is paid; and that the Commission may publish forms and other documents to be used for any of the purposes of the Law, together with details of the manner in which any such document to be delivered to the registrar is to be delivered or authenticated.
Article 49 – Form of documents to be delivered to registrar
- This Article makes provision for the form and manner in which documents are to be delivered to registrar.
Article 50 – Inspection and production of documents kept by registrar
- This Article provides for the inspection and production of documents kept by registrar
Article 51 – Destruction of old records
- This Article provides for the destruction by the registrar of records of an LLC that has been dissolved, at any time after 10 years from the date of the dissolution; and that after 10 years from the dissolution of an LLC no responsibility rests on a member, manager or a person to whom custody of the records has been committed, by reason of any record not being forthcoming to a person claiming to be interested in it.
Article 52 – Form of LLC’s records
- This Article makes provision for the form in which records of the LLC may be kept; that an LLC is required to take reasonable precautions to prevent loss or destruction of, to prevent falsification of entries in and to facilitate detection and correction of inaccuracies in, the records required to be kept; and that an LLC that fails to comply with any the requirements is guilty of an offence and liable to a fine of level 4 on the standard scale.
Article 53 – Registration in the Public Registry
- This Article requires the Judicial Greffier to register in the Public Registry all Acts and orders affecting immovable property made under the Law.
Article 54 – Offences of giving false or misleading etc. information
- This Article creates an offence for giving false or misleading information.
Article 55 – Criminal liability of partners, directors and other offices
- This Article makes provision for the criminal liability of partners, directors and other officers of partnerships with separate legal personality and bodies corporate.
Article 56 – Limitation of liability
- This Article provides for the limitation of liability of the States; the Minister or any person who is, or is acting as, an officer, employee or agent in an administration of the States for which the Minister is assigned responsibility; the Commission, any Commissioner or any person who is, or is acting as, an officer, employee or agent of the Commission; and the registrar, the deputy registrar, an assistant registrar or any person who is, or is acting as, an officer, employee or agent of the registrar, and that the limitation of liability does not apply so as to prevent an award of damages made in respect of an act on the ground that the act was unlawful as a result of Article 7(1) of the Human Rights (Jersey) Law 2000.
Article 57 – Penalties
- This Article provides general penalties for certain offences under the Law (with the penalties under the Criminal Justice (Standard Scale of Fines) (Jersey) Law 1993 being level 1 £200, level 2 £1000 and level 3 £10,000).
Article 58 – Regulations
- This Article gives the States the power by Regulations to make such provision as the States thinks fit for the purposes of carrying the Law into effect; and that the Regulations may provide for various matters including the creation of offences, mergers of LLCs and the winding up and dissolution of solvent and insolvent LLCs or a series established under Article 10.
Article 59 – Orders
- This Article gives the Chief Minister the power by Order make provision prescribing any matter that is to be prescribed under the Draft Law; and that an Order may contain such incidental provisions as the Minister may consider to be necessary or expedient and the Minister must consult the Commission before making any Order.
Article 60 – Rules of Court
- This Article provides that the power to make Rules of Court under the Royal Court (Jersey) Law 1948 includes a power to make Rules for the purposes of the Law.
Article 61 – Citation and commencement
- This Article provides for the Draft Law to be cited as the “Limited Liability Companies (Jersey) Law 201-“ and provides for it to come into force on such day or days as the States may by Act appoint.
Questions
In summary, the questions raised on the Draft Law are as follows:
Question 1: (a) Do you agree that there is market for LLCs in Jersey for the purposes of targeting US (and EU equivalent) business notwithstanding that certain jurisdictions (e.g. England and Wales) may not recognise them as transparent entities for the purposes of taxation and they are therefore unlikely to be used (at least directly) in transactions involving such jurisdictions? If so, what do you envisage a Jersey LLC being used for (e.g. within an investment fund structure)? Please be as specific as possible. (b) Do you agree that Jersey should have an LLC law in place in order to market to the UK if the English law (and HMRC) position changes so as to readily recognise LLCs as transparent entities (if so elected)? (c) Based on current drafting, do you believe that a Jersey LLC would give rise to any actual or potential risks to Jersey? If so, please explain such risks. (d) Do you agree with the approach that a Jersey LLC should be designated as an entity with separate legal personality rather than a body corporate? If not, please explain your reasoning. (e) Do you agree that an LLC should have the right to elect to be treated for tax purposes as either a company or as a partnership? If so, do you believe there should be a default position under law (and if so, do you agree that the default position should be to be treated as a partnership i.e. transparent as per the US Law)? (f) Do you agree with an LLC agreement being able to provide for perpetual succession? Please explain the reasons for your response. (g) Do you agree that it is not necessary for the Draft Law to require that an LLC must “carry on a business” with “a view to a profit” (noting that the LLC agreement may provide otherwise)? |
Question 2: (a) Should the time at which the LLC agreement is deemed effective be: (a) as drafted i.e. as at the date of the certificate of formation or at another date specified in the LLC agreement (which reflects the US Law); or (b) simply “upon formation” being the time that the registrar issues a certificate of formation which therefore removes the option to specify another date in the LLC agreement? It should be noted that Bermuda has adopted the former whilst Cayman Islands state LLC agreements entered into before filing only take effect upon registration (both permitting entry “before, after or at the time of filing”). (b) Do you envisage any issues with the concept that the LLC agreement may give rights to a third party (noting contractual concepts of privity)? (c) Do you believe there are any areas in the Draft Law where a default position should be but is not specified (i.e. in cases where an LLC agreement is either silent or for any reason not in force)? If so, please confirm which areas and what position you believe should be made the default and why. |
Question 3: (a) Do you agree with the approach taken above to align the registration process with that of other entities in Jersey or believe it should follow the US Law instead? (b) Do you agree that provisions regarding the dissolution and winding-up (and any other related processes) should be legislated separately? (c) Do you envisage any issues with the classification of LLCs with regards to any insolvency or similar processes? If so, please provide your reasoning. |
Question 4: (a) Do you agree with the omission of the requirement for a US-style registered agent in favour of mirroring established Jersey practices? (b) Do you have any comments with regards to the Draft Law (or proposed future regulations/orders) providing for a regulated entity to be appointed to provide a registered office or any other services (for example, as a manager)? (c) Do you agree that the records of the LLC should be open to all members and managers of an LLC or do you believe this (for example) should be subject to the LLC agreement? |
Question 5: (a) Do you agree with the concept that LLCs should be permitted to create series? Please explain your reasoning. (b) Do you agree that LLCs should not be permitted to create series without being required to individually register them (and obtain a separate certificate of formation / appropriate regulatory consents)? If so, do you have any views / preferences on that registration process (for example, should it mirror that of the LLC itself / Jersey cell companies)? (c) Do you agree that, as for the LLC, a series should be stated as having separate legal personality without being a body corporate? (d) Do you believe the naming provisions to provide sufficient notice to third parties (including creditors) that they are dealing with a ring-fenced element of the LLC? If not, what would you suggest instead or in addition to those provisions? (e) What (if any) market purposes do you believe the ability to create series would benefit and therefore should be considered when legislating for them (for example, do you believe the ability to create separate series for separate funds would be desirable and therefore the legislation take into account any specific fund law related requirements)? |
Question 6: Other than the issues already identified with respect to satisfying transparency criteria in certain jurisdictions, do you envisage any issues with the concept that members may be admitted without either a requirement to contribute or receiving an LLC interest (noting contractual concepts of consideration)? |
Question 7: Do you agree that the default voting position for members should be in proportion to their interest in the profits of the LLC as per the US Law (and for written resolutions to be passed by that same majority) rather than by other method (and noting that the LLC agreement may provide otherwise)? |
Question 8: Do you agree (or envisage any issues with the drafting) that subject to the LLC agreement: (a) insolvency should trigger the cessation of membership; and (b) each member should have the authority to bind the LLC (noting below that the management of the LLC may vest in managers (where appointed) or with a specified group of members if so specified in the LLC agreement)? |
Question 9: Given that the definition of “manager” includes “a member in whom the management of a limited liability company is vested”, are there any activities that you believe should be specifically excluded as “management business” so as to avoid a member being classified as a manager simply by partaking in such tasks? If so, do you believe the Draft Law to be the proper place for such activities are do you believe that should be housed in activity specific regulation? No such exclusions exist in the US Law but, for example, we note section 6A of The Legislative Reform (Limited Partnerships) Order 2015 of England and Wales provides that a limited partner in a private fund limited partnership is not to be regarded as taking part in the management of the partnership business merely because the limited partner does anything that is under subsection (2) therein a permitted activity, which in turn includes taking part in decisions about the variation of the partnership agreement and certain investment decisions. |
Question 10: (a) Other than the issues already identified with respect to satisfying transparency criteria in certain jurisdictions, do you envisage any difficulties in the terminology used with respect to contributions? If so, please explain. (b) Do you believe the Draft Law should include the ability of creditors to enforce original obligations (or that it should be subject to any specific limitations)? If not, please provide your reasoning. |
Question 11: Do you envisage any issues with adopting the US Law position with regards to distributions as drafted i.e. that the LLC is simply required to be solvent at the time of the distribution and for members to be liable to return distributions only where those members had actual knowledge that the LLC was insolvent at the time? |
Question 12: Do you agree that the requirement of the LLC to be solvent at the time it intends to acquire an LLC interest should be included or do you believe the Draft Law should instead reflect the US Law (which has no such requirement)? |
Question 13: Do you believe there are any material issues with LLCs being said to be treated as a partnerships except as prescribed in the Draft Law (or related legislation) notwithstanding their name refers to them as companies? If so, please provide details. |
Question 14: (a) Do you believe it agreeable that the LLC agreement should have the freedom to determine all duties (fiduciary or otherwise) of managers (which includes managing members) other than a general duty to act in good faith (which may be restricted or expanded); or (for example) should duties be mandatorily included via legislation (for example, aligning to the position for directors in Articles 74-76 of the Companies Law and customary law)? If the latter, which duties do you believe should be included? (b) Do you believe it otherwise agreeable that members (when not engaging in management) may similarly owe no duties and may vote contrary to the interests of the LLC, subject to the LLC agreement? |
We invite any comments respondents may have on the Draft Law generally, including in respect of the regulation points identified in the outline of this consultation.
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