Overcoming Barriers to Completion of Transactions amidst COVID-19 Challenges
13 March 2020
The spread of Coronavirus (COVID-19) has had a significant impact on – and sparked uncertainty in – the global economy. With containment measures, including quarantine and travel restrictions increasingly prevalent, clients with Jersey or Guernsey companies have been asking us how to overcome barriers to closing transactions during these disrupted times. The concerns we have faced on closing transactions are largely practical and there are some simple measures which can be taken to address these..
How can I hold board meetings or shareholder meetings if we cannot meet face-to-face?
Under Jersey and Guernsey law, subject to a company's memorandum and articles of association/incorporation (the Constitutional Documents), there are no restrictions on where a meeting of the board or shareholders can be held. With current travel restrictions and imposed remote working becoming more prevalent, having face-to-face meetings may not always be possible and a great benefit of Jersey and Guernsey law is that both can permit meetings of directors or shareholders to be held by telephone or by other electronic means – so long as all persons attending can hear each other communicate (for example, conference calls, Skype, WebEx or Zoom calls).
Whilst telephone or video meetings might be helpful, it is still important for you to check your Constitutional Documents to see what other restrictions exist. For example, your Constitutional Documents may require that the majority of directors must attend a board meeting physically in Jersey or Guernsey (as the case may be) to form the necessary quorum. This can be for a number of reasons, for example, to maintain the company's local tax residency or to meet Jersey or Guernsey's economic 'substance' requirements1. It follows that if your non-resident directors are unable to fly to Jersey or Guernsey (and your board cannot form a quorum), then you may need to consider:
• appointing more directors locally; or
• arrangements to appoint local directors as alternates,
to form the appropriate quorum. These new arrangements will likely take time to consider and implement. In such cases, it is best to discuss your situation with us and we will help find a solution. It is also worth bearing in mind that if your company is regulated locally, the appointment of a new director or alternate director may require advance consent and vetting by the local regulator. This should be considered early as part of your transaction timetable.
Subject to a company's Constitutional Documents, written resolutions of the directors or shareholders may also be passed. In such case, the written resolutions can be executed in counterpart, and may be executed by electronic signature (see below for more discussion on electronic signing).
Helpfully, Jersey's Comptroller of Revenue has recognised the disruption that COVID-19 has caused to Jersey companies and has offered some re-assurance to those companies having to make adjustments to compensate for the COVID-19 outbreak. On 11 March 2020, Jersey's Comptroller of Revenue has confirmed that where a Jersey company's operating practices have to be adjusted to compensate for the COVID-19 outbreak, the Comptroller will not determine under Article 6 of the Taxation (Companies Economic Substance) (Jersey) Law 2019, that a company has failed the economic substance test. This treatment will only apply to adjustments to a company's normal operating practices and to the extent required to mitigate the threats from the outbreak. The illustration given by Jersey's Comptroller of Revenue is as follows:
'… where a company would normally hold directors' meetings in Jersey but, to avoid travel or because individuals are self-isolating, these meetings are temporarily held virtually to allow those individuals – or alternatives - to attend. The Comptroller would not regard this as failing to meet the economic substance test.'
While this concession offers practical solutions that will help many Jersey companies, it may not solve all of the issues facing those Jersey companies that have specific director quorum and/or attendance restrictions 'hard-wired' into their Constitutional Documents. Any requirements contained in the company's Constitutional Documents must still be complied with. Again, in such cases it would be best to discuss your situation with us and we will help you find a solution.
As regards the position in Guernsey, we anticipate guidance to be released by the Director of Revenue Service shortly which we do not anticipate to be too dissimilar to the approach being adopted by Jersey.
For shareholder meetings, subject to the Constitutional Documents, the ability for shareholders to appoint a local proxy or a corporate representative will be of assistance to those unable to travel, attend or vote at a shareholder meeting being convened in Jersey or Guernsey.
If I cannot get to a signing meeting, or my office is closed, or I am quarantined, how can I execute transaction documents?
Appointment of Attorneys under a Power of Attorney
One issue affecting clients is the availability of having one or more signatories available to sign transaction documents. This can prove challenging due to travel restrictions, flight cancellations, limited access to technology or the unavailability of multiple signatories to attend to sign together. You should consider at the early stages of a transaction whether appointing attorneys would be appropriate. This can help ensure your attorneys are in the right place at the right time to execute the transaction documents for your transaction.
Depending upon the nature of the documents to be executed, any specific execution formalities and the company's Constitutional Documents, a power of attorney may not even be necessary – for instance, both Jersey and Guernsey companies can approve the use of 'authorised signatories' to sign transaction documents on behalf of the company, even if the signatory is not a director or officer of the company.
It is also important to identify early on whether documents need to be notarised, so that an appropriate notary can be located. We have recently experienced delays on transactions because of the inability for signatories to meet face-to-face with notaries, or when notaries have been unable to access their offices where their notarial stamps are stored. Some jurisdictions will permit e-notarisation or notarisation by way of video-conference, which may be beneficial under current circumstances.
With containment measures being implemented globally, an unprecedented number of people are working remotely – often with limited access to print execution documents. This poses a challenge to directors of companies who may be required to execute transaction documents or board resolutions in anticipation of closing a transaction. Using electronic signatures to sign documents (whether transaction documents or board resolutions) can help overcome some of these difficulties. Electronic signing typically involves either affixing an electronic signature to a contract, which is then emailed to the other contracting parties, or the use of encrypted e-signature platforms such as DocuSign.
The Electronic Communications (Jersey) Law 2000 and the Electronic Transactions (Guernsey) Law, 2000 recognise electronic signatures as legally valid, binding and enforceable where the signatory signs the relevant document with an intent to authenticate it. In Jersey, other rules apply if contracting with a States of Jersey entity.
Generally, agreements and written resolutiic Signaturesons of directors or shareholders can all be executed and witnessed electronically (provided that the terms of the agreement and the Constitutional Documents do not prohibit it). A witness should, however, be physically present (ie at the same computer terminal) with the signatory when the signatory signs the document and it is recommended that the form of attestation reflects this (eg by stating 'signed by [name of individual] in the physical presence of'). The witness must also sign the same counterpart of the document as the signatory. Where a document requires the affixing of a common seal, an electronic seal of a Jersey and Guernsey company can be affixed if permitted by the governing law of the document and the Constitutional Documents. However, in the case of Jersey or Guernsey law governed agreements it is not recommended that sealing is used as a method of execution unless the statute imposing the sealing requirement has been amended to permit electronic sealing.
It is recommended that the practice of an individual authorising someone else to affix the individual's electronic signature to a document should be avoided as it may, in certain circumstances, invalidate the execution (particularly if the signature must be witnessed). Similarly, it is recommended that where a contract is being formed by exchange of emails (ie where the terms of the contract are set out in an email chain rather than in an agreement), the persons exchanging the emails personally type their name at the bottom of each email even where their name is inserted as part of a standard sign off. Failure to do so might result in the contract not being binding.
Traditional wet-ink signatures will still be required for a limited number of Jersey or Guernsey documents with special execution formalities e.g. wills and for contracts for the transfer of interest in real estate, certain powers of attorney, documents that need to be notarised (depending on the laws of the relevant jurisdiction) and any other agreement that is specifically required by law to be made under hand. Tax and enforcement considerations and filing requirements may also mean that it is prudent or necessary to use wet-ink signatures.
What other factors might delay the closing of my transaction?
Physical data-rooms and on-site inspections of records are still sometimes used for conducting due diligence in connection with a potential transaction or financing. Corporate entities, investment funds and services providers (particularly corporate and fund administrators) should be alive to the difficulties of conducting physical due diligence, inspection or file hand-overs under current circumstances, and the impact this may have on the timing of a potential transaction. It may now be more practical to upload documents into a virtual data-room to ensure access and to agree the delivery of physical documents post-transaction.
Where the closing of a transaction is subject to receipt of certain original conditions precedent (for example, original share certificates pursuant to a share security), parties need to be mindful of, and prepare for, potential delays caused by not being able to access couriers in a timely fashion or not having counterparties in their offices to receive documents.
Out of Adversity Comes Opportunity
COVID-19 has created an unprecedented set of challenges globally, but by taking some simple practical measures, businesses with Jersey and Guernsey companies can mitigate the impact on their transactions.
This crisis presents opportunities for legislators and businesses to embrace technology to improve business continuity – perhaps by better enabling remote working and creating further efficiencies in transactions (eg even greater use of electronic data rooms and efficient e-signing platforms). Indeed, some of the measures increasingly being adopted by the business community may catalyse the evolution of best working practices for the future.
1 Please see our updates and guides on economic 'substance' requirements