PRACTICE UPDATE

OFFSHOREQ1 2015

FINANCE

CONTENTS2 SOLVENCY II – BERMUDA’S REGULATORY FRAMEWORK4 PREMIUM FINANCING – A LOAN FOR LIFE (INSURANCE)6 GUERNSEY LIMITED LIABILITY PARTNERSHIPS8 FINANCING OF CAYMAN TAKE PRIVATES10 JERSEY COURT EXAMINES DIRECTORS’ DUTIES AND RELIEF FROM LIABILITY

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STRUCTURE Solvency II will introduce a new regulatory and supervisory framework for Europe’s insurance industry. This framework is divided into three pillars: Pillar 1 - Quantitative Requirements (Capital Requirements); Pillar 2 - Governance & Supervision; and Pillar 3 - Disclosure & Transparency.

BENEFIT OF THIRD-COUNTRY EQUIVALENCY The Solvency II Directive adopted on 25 November 2009 (Solvency II Directive), as amended by the Omnibus II Directive adopted on 11 March 2014 (Omnibus II Directive and together with the Solvency II Directive, Directive) is applicable to the European Union’s insurance industry. However, non-European jurisdictions may choose to achieve an equivalency status under Solvency II. Such jurisdictions will be assessed on three levels of equivalence with Solvency II:

(a) Insurance considerations - treatment of third country insurance (specifically the need to collateralize insurance arrangements with assessments within the European Economic Area);

(b) Group solvency calculation - ability to use local regulatory capital amounts in the Solvency II capital calculation; and

(c) Group supervision - reliance on third-country for

SOLVENCY II – BERMUDA’S REGULATORY FRAMEWORKTim Faries

group supervision (i.e. European supervisors need only to consider individual entities within their jurisdictions on a stand-alone basis).

As Europe is the world’s largest insurance market, with 35% of the global market, non-equivalence with Solvency II would have a dramatic impact on the Bermuda insurance market and, in particular, insurance companies based in Bermuda with subsidiaries or parents in Europe for which compliance with Solvency II is mandatory. Under Solvency II, it is expected that Bermuda companies will have to be consolidated with any European affiliates and the entire group of companies will have to comply with the Solvency II’s group requirements.

Equivalence under Solvency II has long been considered by the Bermuda Monetary Authority (BMA) as a priority to keep Bermuda as a key jurisdiction in the global insurance industry. In particular, the BMA, with the support of the Bermuda government and the Bermuda insurance industry, has actively sought to ensure that the Bermuda regulatory regime for commercial insurers obtains third-country equivalency under Solvency II. Bermuda, Switzerland and Japan were the first countries to seek equivalency under Solvency II.

BIFURCATED EQUIVALENCY

In 2010, the European Commission (EC) tasked the European Insurance and Occupational Pensions Authority (EIOPA) to provide a preliminary assessment of the BMA’s supervisory regime to determine whether it satisfied the general criteria for third-country equivalence under Solvency II. On 26 October 2011, EIOPA published its report, advising that Bermuda’s regulatory framework for commercial insurers is broadly equivalent with the Directive.EIOPA’s report did, however, make a distinction between the supervisory regime for Bermuda’s commercial sector and the BMA’s supervision of the captive sector. This distinction is based on Bermuda’s two-tiered approach to regulation of the industry (i.e. “bifurcated equivalency”). In the context of the Bermuda insurance regulatory regime, “bifurcated

Solvency II, the European initiative to overhaul the capital adequacy regime of the European insurance industry and create an agreed set of capital and risk management requirements, was expected to be in place by January 2013. However, after several delays, Solvency II is now back on the front-burner and is scheduled to come into effect on 1 January 2016.

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“Equivalence under Solvency II has long been considered by the Bermuda Monetary Authority (BMA) as a priority to keep Bermuda as a key jurisdiction in the global insurance industry.”

CONTACT

BermudaTim FariesPartnerGroup Head, Bermuda | CorporateGroup Team Leader | Insurance+1 441 298 3216tfaries@applebyglobal.com

equivalency” means that Solvency II equivalent standards will apply to commercial insurers but not to captive insurers. This is an application of the principle of proportionality, where the weight of regulation applicable to a particular class of regulated entity is proportional to the risks that such entity or class represents.

EIOPA’s assessment of Bermuda regulatory framework was consistent with the BMA’s position that the principle of proportionality should be taken into account when considering the implementation of Solvency II. This position was further confirmed by Karel Van Hulle, Head of Unit for Insurance and Pensions at the European Commission, who indicated that Bermuda will be able to gain third-country equivalency with Solvency II for regulation of its major commercial insurance market without having to apply the more stringent supervision standards to the island’s captive insurance companies. It is also intended that the Bermuda regulatory framework will have less constraining (but risk-appropriate) requirements for special purpose insurers (SPI) and captives writing affiliated business with group-owned entities, (collectively, limited purpose insurers).

The implementation of Solvency II pursuant to the concept of bifurcated equivalency is intended to preserve the unique component of the Bermuda insurance market as the oldest and largest captive market place, and the premier jurisdiction for the issuance of insurance linked securities by locally domiciled SPIs.

ENHANCEMENT OF BERMUDA’S REGULATORY FRAMEWORK

As a consequence of the implementation of Solvency II, the BMA embarked on a programme of regulatory change to enhance Bermuda’s regulatory framework for commercial insurers to reflect a progressive risk-based approach to regulation. The key elements of the enhancements to Bermuda’s regulatory framework include group supervision and prudential rules, more detailed solvency and financial models framework, and disclosure and transparency requirements for commercial insurers registered in Bermuda. This process was implemented by spreading the enhanced supervisory regimes to all classes of commercial insurers who conduct general and long-term insurance business.

The BMA has spared no effort in changing the Bermuda regulatory environment to a regime that meets the criteria necessary to achieve equivalence with Solvency II which should normally end with EC equivalence decision.

On 19 December 2014, EIOPA published a consultation paper on EIOPA Advice to EC – Equivalence assessment of the Bermuda supervisory system in relation to articles 172, 227 and 260 of the Solvency II Directive, inviting the (re)insurance market participants and (re)insurance stakeholders to provide their comments by 23 January 2015, on the draft Advice to EC regarding the full equivalence assessments of Bermuda. The EIOPA’s Advice is expected to allow EC to make an informed decision in 2015 on whether solvency and prudential regime in Bermuda is equivalent to the Solvency II framework. EIOPA’s assessment is an important signal in the upcoming full equivalence determinations that need to be made by EC in the coming weeks.

Co-written by and Nicolas Champ, an associate in the corporate practice group of Bermuda.

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The basics of premium financing are:

■ a HNWI may settle an irrevocable life insurance trust (ILIT) or may utilise an investment holding company - to act as borrower, policy owner and policy beneficiary (Borrower);

■ a lender bank (Bank) provides premium loan financing to the Borrower;

■ the Borrower utilises the loan to purchase a life insurance policy (Policy) from a life insurance carrier (Insurer);

■ there may be an arrangement between the Insurer and the Bank whereby the policy premium may be held by the Bank and utilised by the Insurer for making investments. The Insurer and the Bank may enter into a discretionary management agreement in relation to these premiums; and

■ as security, at the very least, the Bank will require an assignment from the Borrower to its rights under the Policy in favour of the Bank.

WHICH BANKS, WHICH INSURERS & WHAT LIFE INSURANCE PRODUCTS?

Our recent experience has shown that premium financing is an exponentially growing financial technique. In the Asian market, which is undergoing a boom in the number of HNWIs, we have seen the largest growth. We work with a host of private banks based and operating in Asia that offer premium financing.

The Insurer issuing the Policy is often a Bermuda domiciled life Insurer underwriting business through its Asia-based offices. Ordinarily, the Policy will be Bermuda law governed and as a result the assignment will be Bermuda law governed. There are certain requirements under the various Bermuda insurance laws (in addition to any requirements stipulated in the Policy) that must be complied with for the assignment to be valid. These legislative requirements include that the Insurer must be provided with notice of the assignment and that any irrevocable named beneficiary in the Policy must consent to the assignment. Bermuda statues provide that the priority of security interests granted under any assignment of a life insurance contract is subject to the Life Insurance legislation, which determines priority by the order in which written notice of the assignment to the Insurer.

The Bermuda Insurer may be incorporated as a segregated accounts company (SAC) and that specific Policy products or tranches of life insurance business are held within individual segregated accounts. Such companies are not unique to Bermuda, but they are not as common as regular incorporated companies. SACs allow for separate segregated accounts to be created, where each account will hold a separate set of assets and liabilities, which are legally separated from the assets and liabilities of another segregated account. This segregation is a statutory creature, and does create separate bodies corporate. The assets and liabilities of one segregated

PREMIUM FINANCING - A LOAN FOR LIFE (INSURANCE)Jeffrey Kirk

What is premium financing? Premium insurance financing enables high net worth individuals (HNWI) to obtain life insurance at minimal cost by arranging financing from a lender to cover the policy premiums. HNWIs are unlikely to want to liquidate assets to pay for such premiums and therefore opt for premium financing. The underlying need for the life insurance may vary, for instance, it may be due to estate planning purposes, a corporate buyout or the need for key person insurance.

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CONTACT

British Virgin Islands Jeffrey KirkManaging PartnerGroup Head, BVI | Corporate+1 284 393 5318jkirk@applebyglobal.com

Co-written by Rupen Shah, a senior associate in the corporate practice group of Hong Kong.

“Our recent experience has shown that premium financing is an exponentially growing financial technique.”

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account only relate to that segregated account. Therefore a creditor of a segregated account, only has a claim to that segregated account and no other segregated accounts of the SAC.

Whilst the segregated account concept has been tested and upheld in the Bermuda courts, the assistance of local legal counsel would be necessary to determine whether such other jurisdictions would recognise this concept.

INVESTMENT OPTIONS AND OPPORTUNITIES FOR THE HNWIS AND PROTECTING THE BANK’S INTERESTS In our experience a HWNI will often use an investment holding company to act as Borrower, and often such a company is incorporated in the British Virgin Islands (BVI).

Assuming that the Policy is an investment-linked policy with no stipulated absolute death benefit, than the advantage of using a BVI company or an ILIT is that the HNWI may have a direct involvement in the decision as to which underlying assets and investments that the Policy will invest into. Assuming the Insurer is agreeable and, for instance, has entered into a discretionary management agreement with the Bank, the HNWI is then in a position to direct how the premiums are invested.

Where a BVI company acts as Borrower, the assignment can be registered as a charge in the BVI against its assets. BVI companies are required to register any charges created over its assets in a register of charges (Private Register). The Bank should insist that it is provided with a certified copy

of the Private Register showing the particulars of registration of the assignment. Further, an application may be made to the BVI Registrar of Corporate Affairs (Registrar) to register details of the assignment in the Register of Registered Charges (Public Register). There is no time limit when the particulars of the assignment must be entered into the Private or Public Register and failure to enter the particulars will not affect the validity of the assignment. However, registering the assignment at the Public Register does determine priority of the security interest created by the assignment. Either the Bank (through its BVI legal counsel) or the BVI company borrower (through its registered agent) can register the assignment in the Public Register. As this registration may affect the Bank’s priority, we would recommend that its BVI legal counsel attends to this registration.

THE FUTURE OF PREMIUM FINANCING

With the continuing growth of premium financing there is a good likelihood that substantially more focus will fall on these transactions in the future and their deployment will increase. This is likely to translate into greater competition between lender Banks in the future and corresponding pressure on interest rates and fees levied. Similarly, long-term insurers globally are aware of the attraction of having their life products being utilised in premium financing arrangements and are therefore likely to want to be able to expand their future product offering.

It has been our experience that the Banks and the Insurers are increasingly seeking the advice and services of offshore counsel and other professionals in protecting their interests in their specialised premium financing platforms and products, including both the Bermuda and BVI aspects.

LLPs have been introduced in several other jurisdictions, including the UK (from 2000) and a number of offshore jurisdictions, including; Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Mauritius and the Seychelles. In drafting the Limited Liability Partnerships (Guernsey) Law, 2013 (the Law) Guernsey has had the advantage of being able to learn from those other regimes to develop an alternative business structure that will be attractive to a wide variety of users, both domestic and international.

The principal concept of an LLP is that it combines the most advantageous features from a traditional partnership and a company. This gives the flexibility of operation of a partnership with reduced regulation compared to a company, combined with the benefit of its being a body corporate that can contract in its own right (rather than as a collective of partners), with limited liability for its members (in contrast to the unlimited liability of partners in a general partnership).

KEY FEATURES OF THE GUERNSEY LLP

Any lawful activityIt may be formed for the carrying on within Guernsey or elsewhere of any lawful business with a view to profit, or any other lawful activity. The latter limb was added to clarify that the Guernsey LLP can be used for an activity which is not necessarily trade or business (for example, acting as a holding entity), whereas there is uncertainty in UK law on this point.

GUERNSEY LIMITED LIABILITY PARTNERSHIPS Kate Storey

Guernsey introduced its form of limited liability partnership with effect from 13 May 2014 in response to increasing demand for this type of structure in Guernsey, with all the benefits and advantages that Guernsey offers generally as a jurisdiction in which to do business.

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Membership

It shall have two or more members who are admitted to the LLP in accordance with the members’ agreement. A member may be a natural person or a body corporate.

Body corporateIt is a body corporate (unlike, for example, the Jersey LLP) and has legal personality separate from that of its members; it therefore has continuous existence regardless of a change in its members, unless provided otherwise in the members’ agreement.

Limited liability of membersA member is not liable for any debt of the LLP, or of any other member, by virtue solely of his membership of the LLP (subject to any provision to the contrary in the members’ agreement or any other agreement). Consequently, a member’s liability will be limited to whatever the member has agreed with the other members or with the LLP to contribute (subject to the provisions of the Law regarding liability for fraudulent and wrongful trading).

No capital contribution or financial resources requirementsThere is no initial capital contribution requirement in order to become a member of the LLP and (unless provided in the members’ agreement) no obligation to contribute capital to the LLP at all.

There are no bond or minimum professional indemnity insurance requirements (unless imposed by the LLP’s professional or regulatory body or specific regulatory laws to which it may be subject).

Capacity of LLP and power of members to bind itIt has unlimited capacity and every member of an LLP is its agent with power to bind it.

Written members’ agreementIt must have a written members’ agreement (unlike in the UK), but the members’ agreement is not publicly filed and is confidential to its members. The members’ agreement is an agreement of the members

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“… the LLP is suitable to any business where there is joint management …”

as to the affairs of the LLP and the conduct of its business, but there is complete flexibility as to its content and how the LLP will be managed, save that unless the members’ agreement otherwise provides:

(a) all the members of an LLP are entitled to share equally in the profits of the LLP as and when those profits arise;(b) every member may take part in the conduct and management of the LLP; and (c) each member must render true accounts and full information of all things affecting the LLP to any member or his legal representative.

It is believed that (a) and (b) above are key criteria to ensure that the Guernsey LLP will be considered to be tax transparent for the purposes of Guernsey law and elsewhere (see below).

There is no concept of designated members with particular compliance functions (unlike in the UK and Jersey).

Tax transparencyGuernsey’s Income Tax legislation has been amended to ensure that domestically a Guernsey LLP will be treated as tax transparent in the same way as general partnerships, i.e. the LLP is not liable for tax, rather the members themselves are liable to be taxed on their share of the LLP profits. Incorporation processFormation of an LLP is straightforward and is conducted through the Guernsey Companies Registry; same day incorporation is available.

AccountsOngoing reporting requirements are relatively low. The LLP’s accounts are not publicly filed and there is no requirement under the Law for the accounts to be audited. The LLP is free to choose the applicable

accounting standards and is not tied to UK GAAP or IFRS.

Conversion and migration proceduresThe Law provides procedures for general partnerships to convert to LLP status and for migration of LLPs (together with their assets and liabilities) into and out of Guernsey, from/to other jurisdictions, as continuing legal entities.

USES OF GUERNSEY LLPS

In the short time since the Law has been in force, Guernsey LLPs have been registered for a variety of purposes.

A Guernsey LLP has been used to act as general partner of a UK limited partnership to ensure that the UK limited partnership is not subject to the accounting standards and public filing requirements of the UK Partnerships (Accounts) Regulations 2008.

Its use to house investment management firms is something we are likely to see much more of in the wake of the EU Alternative Investment Fund Managers Directive, due to which many EU based fund managers are looking to relocate their operations outside of the EU; the ability to migrate existing LLPs into Guernsey will be attractive in this regard.

As every member may take part in the conduct and management of the LLP, the LLP is suitable to any business where there is joint management, or as a joint venture vehicle; for example it could be used for an investment fund or club deal where investors wish to participate in the management of the assets whilst preserving their limited liability status.

Given a Guernsey LLP can be incorporated for any lawful activity, without the requirement that it be “with a view to profit,” it would also serve well as a vehicle for charities.

And of course the Guernsey LLP will be of interest to businesses traditionally carried out as partnerships, such as professional services firms, or employee owned businesses.

CONTACT

GuernseyKate StoreyCounsel | Corporate+44 (0)1481 755 620kstorey@applebyglobal.com

The Registrar will issue a certificate of merger (Merger Certificate) and this will be date the merger is effective (unless parties have agreed in advance to set a subsequent effective date, which is no later than90 days after the date the Plan is registered with the Registrar) (Effective Date). On the Effective Date the MergerCo will be struck off the Cayman companies register, although it is not deemed to be wound-up. All rights, obligations, assets and liabilities of each constituent company continue with the Target, as the surviving entity.

LENDER ROLE To successfully achieve a take private, all the shares in the Target will need to be purchased and the cost can often be considerable. For a listed company with a large share capital, this may require financing from lenders. In many respects providing loan financing in relation to a take private is similar to other forms of secured lending transactions, but providing financing for a merger does raise several unique considerations. In the first instance the lenders should review the merger documents before they are signed and filed with the Registry so the lenders are familiar with the terms of the merger. In addition, if lenders are taking security pre merger, they will need to consent to the merger pursuant to the requirements of the Companies Law.

In a take private financing there are normally several layers of companies on top of the MergerCo, who may act as guarantors, security providers and borrowers. Often these companies are also Cayman incorporated, and sometimes companies incorporated in the British Virgin Islands (BVI). Lenders will enter into a loan agreement with MergerCo and its associated companies. Cayman Islands and BVI are beneficial in such structures as there are no exchange control, tax or financial assistance issues.

FINANCING OF CAYMAN TAKE PRIVATESRupen Shah

Recently there have been an increasing number of companies listed in the USA with their main operations in China been taken private by their founders. Invariably these listed companies are incorporated in the Cayman Islands.

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CONTACT Hong Kong Rupen ShahSenior Associate | Corporate+852 2905 5748rshah@applebyglobal.com

“Under the Companies Law certain key documents are required and certain procedures need to be carried out to achieve a statutory merger.”

The terms of the loan agreement will have to deal directly with the merger and especially how and when security will be provided both pre and post merger.

SECURITY As with any secured lending, parties will need to provide security for their loan obligations. It is common for lenders to take security over the shares in MergerCo. Another form of security will be for the MergerCo to assign its rights in the merger agreement. Lenders should make sure any registration requirements are attended to upon signing of any security documents. As the majority value in the merger will lie with the Target, lenders will want to obtain security at Target level, including share security over the Target and other security in relation to any of its subsidiaries. However this can only occur post merger, however often these security documents are drafted and agreed in advance of the merger as part of the conditions precedent to the loan agreement.

DRAWDOWN V TAKING OVER There will be a time difference between when the lenders will allow the MergerCo group to drawdown on the loan facilities and when the selling shareholders of the Target will be paid and the Merger Certificate is issued. During these periods lenders are naturally concerned as to whether they are protected. The borrower group will require the monies to effect the merger. Each transaction will follow its own patterns, but possible solution is for parties to enter into escrow arrangements so the loan proceeds are held with an escrow agent to be released directly to the selling shareholders upon the issuance of the Merger

Certificate. The lenders and borrower groups will need to liaise closely to discuss and agree logistics in advance.

POST MERGER Upon the Merger Certificate being issued, the merger will be effective. From this date onwards the Target is the surviving company. As the surviving company it will take on the liabilities of the MergerCo in the loan agreement. Sometimes lenders may require the Target (as surviving company) to accede the loan agreement. Corporate records, such as registers of members and directors will need to be updated promptly and lenders will require certified copies. Often these documents can be prepared in advance and provided to lenders to be held in escrow until the merger is effective. If any security is taken in relation to the Target and its subsidiaries, such security should be registered promptly.

OTHER CONSIDERATIONS As it is likely the Target is a listed company, there will be local listing requirements to comply with and lenders will want to ensure the Target attends to these promptly. After the merger, the Target (as surviving company) will no longer have public shareholders and will therefore needs to be delisted, again there may be specific requirements in relation to this.

OFFSHORE LAWYER ROLE FOR LENDERS MergerCo and Target will appoint offshore counsel and likewise lenders will require their own offshore counsel. Offshore counsel for the lenders will assist in reviewing all the merger documents and drafting any offshore law governed security documents. They will liaise closely with offshore counsel of MergerCo and Target to ensure drawdown and the merger proceeds smoothly. In addition offshore counsel will need to issue legal opinions on the financing and the merger. Appleby has acted for lenders in several take privates, including in relation to NASDAQ listed Shanda Interactive Entertainment Limited, NYSE listed Giant Interactive Group Inc and NASDAQ listed China Hydroelectric Corporation.

Parties are taking advantage of amendments to the Cayman Companies Law (as amended) (Companies Law) in 2009 which allowed for mergers or consolidations under certain circumstances involving Cayman companies without the need for court approval, which can have significant cost and timing implications.

A typical “take private” will utilise the Companies Law to effect a statutory merger by the founders of the listed company setting up a new Cayman company (MergerCo) which will merge with the listed company (Target), the Target being the “surviving company”.

CAYMAN MERGERS – IN A NUTSHELL Under the Companies Law certain key documents are required and certain procedures need to be carried out to achieve a statutory merger. Both constituent companies need to prepare a plan of merger (Plan), which is typically in short form and governed by Cayman law and is normally scheduled to a more detailed merger agreement. The Plan must be approved by the shareholders and directors of both constituent companies. Shareholder approval must be by way of special resolution (normally a two thirds majority) and any other special requirements in the constitutional documents of the companies. In addition all existing secured creditors of the constituent companies must also agree to the Plan, or the companies may seek a waiver for this requirement from the Cayman courts.

Once all consents have been obtained, the Plan will be filed with the Registrar of Companies in the Cayman Islands (Registrar) along with certain other documents are required by the Companies Law. In most cases these documents will be reviewed and signed off by the Registrar in advance of formal submission.

■ The general duty of directors to “act honestly and in good faith with a view to the best interests of the company” is a subjective duty; it is for the directors to decide what is in the best interests of the company (acting honestly), not the court. However, the directors must act in the best interests of the company for a proper purpose. This on the other hand is an objective standard, not built on the honesty of the directors.

THE VILSMEIER JUDGMENT

The Vilsmeier claim was brought for unpaid overtime fees and security costs incurred by the plaintiff personally; the companies denied liability and brought a counterclaim for security costs paid by them. The main feature of the companies’ argument was that Mr Vilsmeier had incurred the security costs at their expense in breach of his duty to act in the best interests of each company. The claim was partially successful, and the counterclaim failed. In reaching its conclusions, the Court formed the view that Mr Vilsmeier was not in breach of his duties for most of the period in which he incurred the security costs (although he was in breach for some of the period). In the course of its judgment, the Court reiterated the findings in Pirrwitz regarding the duties of directors, and re-visited the meaning of ‘proper purpose’.

The Court went on to examine whether, had it been necessary, it would have granted relief to Mr Vilsmeier under Article 212 of the Companies Law. In its examination of Article 212 the Court noted that it is modelled on Section 727 of the UK Companies Act 1985 save that whereas Article 212 only requires that the director act “honestly”, Section 727 requires that

the director act “honestly and reasonably”. The Court therefore drew a distinction between the Jersey and English law positions, concluding that the exclusion of “reasonably” from Article 212 must indicate the intention of the Jersey legislature to depart from the English position and require honesty only. In other words, the test to be applied to a Jersey director does not include the objective element of reasonableness applied to an English director.

In carrying out its examination of Article 212 the Court also examined the nature of ‘honesty’, quoting heavily from the English case of Royal Brunei Airlines v Philip Tan Kok Ming [1995] 2 AC 378. To paraphrase, honesty has a connotation of subjectivity which describes the type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated, and honesty is mostly concerned with advertent conduct, not inadvertent. However, despite its subjective characteristics honesty maintains an objective standard because individuals are not free to set their own standards of honesty; a finding of dishonesty for misappropriating property cannot be avoided on the basis that an individual sees nothing wrong with such behaviour.

While Mr Vilsmeier was successful with the Article 212 argument this did not allow him to claim back the security costs paid by him in the period in which he was in breach of his fiduciary duties. The Court stated: “It is one thing to relieve him of liability for breach of duty under Article 212 but it is a step too far to accept his claim for reimbursement despite that breach of duty.” In other words, Article 212 is a shield and not a sword.

CONCLUSION

Vilsmeier, like Pirrwitz, increases our understanding of Jersey law on directors’ duties and Article 212 relief, and is informative to advisors and directors alike. On the other hand, these cases also emphasise the value of the shareholder authorisation procedure set out in Article 74(2) of the Companies Law.

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“… the test to be applied to a Jersey director does not include the objective element of reasonableness applied to an English director.”

The judgment in Vilsmeier makes fascinating reading, not only for legal issues it discusses, but also for its Hollywood fact pattern involving Kazakh “specialists” allegedly dispatched by an Austrian bank to the plaintiff’s home in Switzerland to deal with “the Vilsmeier problem”, perceived kidnap attempts on the plaintiff’s 11-year-old daughter, and spies on the companies’ boards (apparently). As a result, the plaintiff, the former chairman of the two defendant companies, incurred hundreds of thousands of euros of security costs to hire bodyguards, upgrade his house and rent an armoured Audi A6, at the expense of the companies.

This article however focuses on the two legal topics considered: (i) directors’ fiduciary duties under Article 74 of the Companies (Jersey) Law 1991 (Companies Law); and (ii) the Court’s discretion to grant relief from liability for breach of duty under Article 212 of the Companies Law.

THE LAW

Article 74(1) of the Companies Law sets out the general duties of directors, being to:

(a) act honestly and in good faith with a view to the best interests of the company; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

While Article 74(1) broadly mirrors the common law position, it does not codify it. Therefore, common

law considerations remain relevant when considering potential breaches of directors’ duties. Article 212 of the Companies Law provides that the Court may grant relief to a director from liability for breach of duty in connection with the office of director if it appears to the Court that the director acted honestly and that having regard to all the circumstances of the case the director ought fairly to be excused for such breach.

BACKGROUND TO THE LITIGATION

Vilsmeier concerned what the Court called the “Group 2 issues”; a reference to proceedings having previously been brought against the companies by another director, Bjorn Pirrwitz (AI Airports International Limited and PI Power International Limited v Pirrwitz [2013] JCA 177). The defendant companies in both Vilsmeier and Pirrwitz were public companies incorporated in Jersey as investment funds. Investors subsequently lost confidence in the companies’ shares and their share prices fell making them attractive to certain hedge funds. Those hedge funds began purchasing stock with a view to replacing the directors with their own nominees and cutting ties with the other group entities.

It was against this backdrop that Mr Pirrwitz and Mr Vilsmeier were appointed to the boards of the companies. The appointments proved to be difficult; relations with both employees and the hedge fund investors became increasingly strained until both directors resigned. The Pirrwitz claim was brought in respect of unpaid exit payments.

Pirrwitz itself provided an illuminating judgment which in brief made the following findings:

■ In relation to directors’ remuneration the general rule is that a director is not entitled to remuneration out of the company’s funds save as authorised by the articles of association of the company or by the company in general meeting.

JERSEY COURT EXAMINES DIRECTORS’ DUTIES AND RELIEF FROM LIABILITY Tom Fothergill

The Royal Court has recently examined directors’ duties in Jersey law in the case of Vilsmeier v AI Airports International Limited and PI Power International Limited [2014] JRC 257.

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CONTACT Jersey Tom FothergillAssociate | Corporate+44 (0)1534 818 014tfothergill@applebyglobal.com

GlobalCameron AdderleyGlobal Group Head+1 441 298 3229cadderley@applebyglobal.com

BermudaTim FariesGroup Head, Bermuda+1 441 298 3216tfaries@applebyglobal.com

GuernseyJeremy BerchemGroup Head, Guernsey+44 (0)1481 755 601jberchem@applebyglobal.com

JerseyWendy BenjaminGroup Head, Jersey+44 (0)1534 818 057wbenjamin@applebyglobal.com

British Virgin IslandsJeffrey KirkGroup Head, British Virgin Islands+1 284393 5318jkirk@applebyglobal.com

Hong KongJohn MeliaGroup Head, Hong Kong+852 2905 5764jmelia@applebyglobal.com

London/ZurichStephen JamesGroup Head, London/Zurich+44 (0)20 7469 0527ssjames@applebyglobal.com

Cayman Islands Bryan HunterGroup Head, Cayman Islands+1 345 814 2052 bhunter@applebyglobal.com

Isle of ManFaye MoffettGroup Head, Isle of Man+44 (0)1624 647 631fmoffett@applebyglobal.com

Mauritius/Seychelles/ShanghaiMalcolm MollerGroup Head, Mauritius/Seychelles/ Shanghai+230 203 4301 (Mauritius)+248 429 5283 (Seychelles)mmoller@applebyglobal.com

The articles in this newsletter are for information only. They should not be acted upon and are no substitute for specific legal advice. In the event that any clarification or advice is required, please contact the editor, Wendy Benjamin (wbenjamin@applebyglobal.com)

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