Key takeaways
- Limited Liability Companies ("LLCs") offer flexibility and familiarity to investment fund, corporate and finance industry participants, particularly those in the US market.
- US federal tax 'check-the-box' treatment is possible.
- LLCs are expected to become more common in fund finance transactions over time.
Jersey's position as a sophisticated leading international financial centre is underpinned by its flexibility to adapt and evolve to reflect the needs of industry participants. Limited liability companies ("LLCs") are a clear example of such flexibility, having been adopted into the Jersey corporate landscape in September 2022.
LLCs will be familiar to many in the US market, where Delaware and Cayman equivalents are prevalent. The availability of LLCs in Jersey is anticipated to enhance Jersey's appeal in the US, most notably to fund managers. In turn, it is anticipated that fund finance transactions will steadily see an increase in fund structures containing Jersey LLCs.
This guide provides a brief overview of Jersey LLCs, including highlighting key considerations in fund finance transactions (which, in many cases, will be equally applicable if an LLC is present in a borrower's corporate structure regardless of how the financing is categorised).
This guide covers:
- The basics of an LLC
- LLC flexibility
- Appeal to US market participants and LLC use in fund and corporate structures
- What lenders should be thinking about when lending to Jersey LLCs
LLC basics
For those new to LLCs, in Jersey the following headline points apply:
- An LLC can be established quickly (including pursuant to an expedited formation process available at the Jersey Companies Registry) with a single member
- Separate legal personality, with member liability limited to obligations specified in the LLC Agreement (such as to contribute capital or fulfil other performance obligations)
- Jersey LLCs will need to appoint a Jersey corporate services provider to provide a registered office and often other ancillary services (such as provision of a company secretary)
- Participants in the LLC are referred to simply as members and not shareholders, each holding an 'LLC interest'
- LLC interests may be structured in different ways, according to manager/investor preference
- Day to day management of the LLC may be delegated to one or more managers, or the LLC can be managed by the members collectively
- The constitution of the LLC is set out in an LLC Agreement, which must be in writing but is not a public document
- Distributions typically made on the basis of a member's proportional contributions to the LLC, with profits and losses similarly allocated
- There are no distributable reserve pre-requisites, only a cash flow solvency test to satisfy
LLC flexibility
Jersey LLCs have characteristics that provide their users with a high degree of flexibility in a number of areas, including:
1. Ability to elect to be a 'body corporate', such that its tax treatment can be tailored to resemble either a company or a partnership
2. Tailoring the LLC agreement to accommodate bespoke decision-making provisions, such as:
- Administrative mechanics to suit manager/investor preference (i.e. when, where and on what notice member meetings are held)
- Specifying the economic and voting rights of different members, individually or by class
- Determining weighted voting rights by various criteria, such as capital contribution, proportionate LLC interest held or any other specified method
3. Optional appointment of a manager
4. Prescribing what duties the manager owes to the LLC, with a minimum threshold of acting in good faith (therefore allowing for a lower threshold than that imposed on company directors) and a ratification 'cure' for any/all breaches of duty
Appeal to US fund market participants and LLC use in fund and corporate structures
The focus of the Jersey LLC is on financial services: for use as a carried interest vehicle or feeder vehicle; to act as a general partner or manager; or for use by corporates as Special Purpose Vehicles (SPVs) for financing purposes, joint venture vehicles or as the ultimate holding company for large public company structures.
The Jersey LLC provides US managers and other fund market participants with a corporate vehicle with which they will be familiar, given the prevalence of equivalent vehicles in the North American market (both onshore in Delaware and offshore in Cayman). Jersey LLCs operate under similar rules and have similar advantages to the Delaware and Cayman models.
Whilst a Jersey LLC cannot be used as a collective investment fund, it can be authorised as a Jersey Private Fund and an Alternative Investment Fund ("AIF"), allowing US managers to market to EU investors under the Alternative Investment Fund Managers Directive's ("AIFMD") third country private placement rules. This can have significant administrative and financial benefits. Jersey LLCs can also be authorised to act as an Alternative Investment Fund Manager ("AIFM") to an AIF under Jersey's AIFMD legislation.
In addition, Jersey LLCs offer flexible US tax treatment by having the 'check-the-box' option available to them such that they can elect how they are treated for US tax purposes (broadly, either as a company on the basis the LLC will then be tax liable or as a partnership on the basis the members of the LLC will be tax liable or, in other words, the LLC will be tax transparent).
Lender considerations
Lending is not a regulated activity in Jersey and there is therefore no Jersey regulatory overlay for lenders to consider when Jersey vehicles appear in a borrower structure, including LLCs. Instead, the key considerations are:
1. Where the LLC is positioned in the fund structure, which will determine the nature of the security interests the lender would typically want to take
2. How the LLC Agreement is drafted, including provisions concerning:
- Power to borrow and grant security
- How LLC interests are structured
- Voting rights and decision making
- Rights to call capital contributions from members
- Obligations of the manager when calling capital
3. Whether a manager has been appointed and what rights have been delegated to the manager (including whether the delegation is itself effective)
The Security Interests (Jersey) Law 2012 accommodates security interests over the typical collateral lenders would expect to be subject to security, particularly in fund finance transactions. That collateral includes:
1. Contract rights, notably;
- The manager (or managing member's) call rights in respect of capital contributions
- Enforcement rights in respect of capital contributions
2. The bank account into which capital contributions are made.
3. LLC interests (akin to shares or partnership interests).
The regime in Jersey for the creation, perfection and priority of security interests is well established and, generally, does not give rise to any notable negotiation points in fund finance transactions or financings more broadly. As such, once the security package is settled, the Jersey security interests regime is conducive to facilitating a relatively quick and smooth transaction. One point of note is the practice of delivering a notice to investors informing them that a security interest has been granted over capital call rights, but the position is no different for a Jersey LLC as it would be for any other type of Jersey fund vehicle (in short, notice is not required for perfection or priority purposes but is nonetheless generally a lender pre-requisite).
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