Whilst COVID-19 has put the brakes on certain areas of M&A activity, Appleby is seeing an increase in public-to-private transactions as buyers pursue opportunities to acquire at a discount listed offshore targets across various industry sectors.
This article considers:
(i) why public-to-private deal activity is on the rise;
(ii) certain factors that are unique to the current COVID-19 pandemic deal-making landscape; and
(iii) the key legal mechanics to effect a take private transaction in each of the major offshore jurisdictions referenced above.
In addition to the legal mechanics described in this article, bidders and targets will also need to take into account the rules and policies of any stock exchange or share quotation system and any securities commission or similar authority and any other regulatory authority having jurisdiction over the target (collectively, the Listing and Regulatory Rules).
WHAT IS FUELLING PUBLIC-TO-PRIVATE DEAL ACTIVITY?
2019 saw robust public-to-private deal activity and Appleby, across our unique global network, advised on a number of these deals. No two transactions are ever the same, but a combination of access to cheap debt and yield hungry sponsors seeking to deploy large cash reserves in a bull market were key factors driving these deals.
Whilst interest rates remain historically low and private equity/venture capital participants continue to sit on vast quantities of cash, it is undoubtedly the dramatic fall in listed equity prices, and the sentiment that these unique pricing opportunities may not remain available in the medium to longer term, that is currently fuelling take private activity. Buyers are seeking to capitalise on price dislocation and the liquidity needs of shareholders as they seek out perceived bargains.
FACTORS THAT MAKE THE CURRENT DEALMAKING LANDSCAPE UNIQUE
Interest rates may remain low for the foreseeable future, but the key question is: will lenders commit to lending in circumstances where the debt is secured against potentially uncertain underlying cash flows of the target? Now, more than ever, strong relationships between buyers and their funders will be crucial. Buyers with large cash reserves that are able to do deals with less debt will be in pole position and cash will remain king. We also expect that deals may be structured with larger non-cash components.
Valuing a business in the current, unique market will be challenging and the adage of valuation being an art, not a science, rings true. Both selling shareholders and a target’s board will be wary of accepting/recommending an offer that they feel grossly undervalues the target’s business. Equally, buyers will be concerned about overpaying, particularly given the highly public nature of a take private transaction. The role of independent valuation experts could be crucial here as buyers will seek to justify the methodologies used to ascribe a valuation to a target business.
Shareholder and court approvals – technology to the fore
Except in the case of a successful hostile takeover bid followed by a squeeze out of remaining minority shareholders under applicable statutory squeeze out provisions, a take private transaction, whether by way of a statutory merger, a tender offer or a scheme of arrangement (each of which is considered in greater detail below) will require the approval of the shareholders of the target. Practically, obtaining this approval will be more challenging than usual in light of the current global social distancing measures and travel restrictions. Technology will play an increasingly important role in getting deals done as physical shareholder meetings will be replaced with virtual meetings and electronic signatures will be used instead of “wet ink” signatures.
A scheme of arrangement also requires Court approval. This factor has made the scheme of arrangement a popular method for conducting a friendly takeover where a target has a material number of shareholders who are U.S. Persons for the purposes of U.S. securities laws and a ‘fairness hearing’ exemption from registration requirements under those laws is sought in respect of securities the bidder may wish to issue to the shareholders of the target in exchange for their shares in the target. The Courts in all of the jurisdictions above have proactively moved towards virtual hearings to facilitate the continued conduct of Court business.
Conducting effective due diligence will also be challenging as a result of travel restrictions. Whilst online data rooms are nothing new, in person meetings with management teams and physical visits of key target sites will prove problematic and may be a thing of the past in the short to medium term. Deal parties and their advisors will need to find bespoke solutions to advance the due diligence process. Legal advisors will be particularly focused on force majeure provisions and other contractual termination rights.
KEY LEGAL MECHANICS TO EFFECT A TAKE PRIVATE TRANSACTION
The key methods for acquiring a Bermuda target are a merger or amalgamation, a tender offer followed by a squeeze out, and a scheme of arrangement. Bermuda law, specifically, the Companies Act 1981 (Companies Act), does not differentiate between public and private companies and so, other than the Listing and Regulatory Rules applicable to the target, the method of acquisition of a public versus private company is fundamentally the same under Bermuda law.
Bermuda companies have historically gone private for one of three key reasons: self-determination, negotiated sale and hostile takeovers. This article focusses on the sale and takeover mechanisms.
A third party, the bidder, may acquire the issued share capital of a target by way of a tender offer pursuant to Section 102 of the Companies Act. This mechanism allows the bidder to compel the acquisition of the shares of shareholders dissenting to the offer where approval of holders of not less than 90% in value of the shares of the Company has been received within four months of the making of the offer (excluding from the calculation shares already held by the bidder, or a nominee or subsidiary of the bidder). The bidder has two months from the date the 90% approval threshold is met to give notice to the dissenting shareholders of its desire to acquire their shares, and once notice is given they are entitled and bound to acquire on the same terms as the offer originally made.
If the bidder holds more than 10% of the shares in the target at the time the offer is made, it must obtain the approval to the offer of not only 90% in value of the remainder, but a three-fourths majority in number.
A dissenting shareholder who receives a notice has the ability to apply to Court for relief within one month after receipt of the notice. The right of a dissenting shareholder is not limited to having the fair value of its shares appraised; the statutory language gives the Court a broad discretion to order as it thinks fit in the context of a compulsory acquisition.
Merger and Amalgamation
Two or more Companies may merge and their undertaking, property and liabilities shall vest in one of such companies as the surviving company (the Surviving Company) or amalgamate and continue as one Company (Amalgamated Company).
Subject to a Company’s bye-laws which may provide for different thresholds, a merger or amalgamation ordinarily requires the approval of both the board and a majority vote of three fourths of shareholder’s voting at a duly convened meeting where the quorum is two persons holding in person or by proxy at least one third of the issued shares.
A merger or amalgamation agreement containing specific information required by statute must be prepared and a copy or summary of it put to shareholders for consideration at the meeting. The board must also state in the notice convening the meeting the fair value of the shares of the Company as determined by them and that a dissenting shareholder is entitled to be paid at least fair value for his shares.
Any shareholder who did not vote in favour of the merger or amalgamation and who is not satisfied that he has been offered fair value for his shares may, within one month of the giving of notice, apply to the Supreme Court of Bermuda (the Court) to appraise the fair value of his shares. Within one month of the Court appraising the fair value of the shares the involved Company shall be entitled either: (a) to pay to the dissenting shareholder an amount equal to the value of his shares as appraised by the Court; or (b) to terminate the merger. If the merger has already completed and the Court determined the fair value to be more than that determined by the Board, then the dissenting shareholder is entitled to receive the difference.
Once approved by shareholders, an application must be submitted to the Registrar of Companies to register the merger or amalgamation together with ancillary documentation that includes an officer’s statutory declaration relating to solvency and creditors not being prejudiced.
Scheme of Arrangement
In the context of a takeover, a scheme of arrangement is a Court-approved arrangement between the target and its shareholders that allows the target to implement an arrangement agreed upon with the bidder that will be binding on all affected shareholders of the target. The scheme typically involves either the transfer of shares in the target to the bidder or the cancellation of the share capital of the target. In consideration for the transfer or cancellation of the shares in the target, the bidder either makes a payment to target’s shareholders or issues new shares in the bidder (or a combination of such payment and shares) – the end result being a takeover by the bidder of the target.
The process to effect a takeover by way of scheme of arrangement is as follows:
- upon application by the target to effect an offer by way of scheme of arrangement, the Court will, in the first of two hearings, summon a meeting of target shareholders to be held in accordance with the Court’s orders;
- the target will send a notice to target shareholders summoning the meeting which will include an explanatory statement/information circular to target shareholders explaining the effect of the proposed scheme;
- in every notice which is given by advertisement target shareholders should be advised of the place at which and the manner in which target shareholders entitled to attend the meeting may obtain copies of the explanatory statement/information circular;
- a majority in number representing 75% in value of shareholders (or a class of shareholders) present and voting (in person or by proxy) must approve the scheme; and
- in the final hearing, the Court will sanction the scheme if it is satisfied that all conditions precedent and other requirements have been complied with in accordance with the Court orders issued at the initial hearing.
The scheme document contains the formal offer and is usually accompanied by an acceptance form/proxy. It is sent to each of the target shareholders and contains a statement by the directors of the bidder that they accept responsibility for its contents. The scheme document must contain sufficient information to enable target shareholders to reach a properly informed decision and no relevant information should be withheld.
The Companies Act requires that the explanatory statement/information circular explain the effect of the scheme on the target shareholders. The City Code on Takeovers and Mergers (the Takeover Code), while not directly applicable to Bermuda companies, reflects ‘the collective opinion of those professionals involved in the field of takeovers as to appropriate business standards and as to how fairness to shareholders and an orderly framework for takeovers can be achieved’. Accordingly, voluntary compliance with the Takeover Code, or certain of its provisions, is likely to give comfort to the Court should questions be raised. Specific content requirements for schemes are set out in the Takeover Code including the requirement that the bidder state its intentions regarding the future business of the target and its strategic plans for the target and their likely repercussions on employment and locations of its place(s) of business.
British Virgin Islands
The key methods for effecting a takeover of a BVI target are a merger or consolidation, a tender offer followed by a squeeze out, and a scheme or plan of arrangement.
Mergers and consolidations both involve the target and the bidding entity or its nominee merging into one surviving single entity, being or held by the bidder. A merger results in one of the merging companies being the surviving entity, whilst a consolidation results in the target and the bidding entity or its nominee being consolidated into a new company. BVI law affords a great deal of flexibility as to how the shares of the BVI target can be treated upon the merger or consolidation, including the ability to exchange target shares for shares in the bidder, for debt obligations or to cancel target shares in exchange for cash. Subject to the Listing and Regulatory Rules, shares of the same class can be treated differently — allowing, for example, for certain key shareholders’ or managers’ shares to be converted into shares in the bidding or new entity, whilst other shares are exchanged for cash or for different treatment to be afforded based on the securities laws of a shareholder’s jurisdiction. Mergers must be approved by the boards of each company (ruling this mechanism out for hostile takeovers) and by a simple majority (being over 50% of those issued shares represented at a general meeting or, if by written resolution, of the issued shares entitled to vote) of each class of shareholder entitled to vote.
Tender offers are contractual offers between the bidder and some or all shareholders of a target to acquire the shares in the target they hold. Where a bidder manages to acquire 90% of the outstanding shares, subject to the constitutional documents of the target, it can proceed to squeeze out the remaining minority. A BVI company is required to give written notice to each shareholder whose shares are to be redeemed, but the law does not specify any further requirements for the redemption (for instance, the minimum length of notice or the price at which shares are to be redeemed). Whilst the high threshold may present difficulties in take private transactions, stake-building and lock-up agreements or irrevocable undertakings to tender from key shareholders of the target may provide further certainty to purchasers.
Schemes of arrangement and plans of arrangement are both court-sanctioned procedures which allow flexibility in their terms and structuring. A scheme of arrangement requires the sanction of the BVI’s High Court of Justice and the approval of a majority in number of shareholders representing 75% in value present and voting. A plan of arrangement (which follows the Canadian model) also requires the sanction of the Court, but can be proposed with only the prior approval of the directors (and not shareholders) of the target. Notwithstanding this, plans of arrangement are likely only feasible where all concerned parties (including shareholders) have approved the plan in advance, but where a Court sign-off is desired to give legitimacy to any complicated structuring issues. Once approved, the scheme or plan of arrangement is binding on all shareholders of the target.
Mergers, consolidations and tender offers (followed by a squeeze-out) are flexible mechanisms which result in a quick transfer of ownership. Shareholder meetings, where required, can be held via conference call and other electronic means and electronic signatures are, in most cases, accepted in place of ‘wet ink’ originals.
While dissent rights are available to shareholders who object to a merger, consolidation, squeeze-out and, where sanctioned by the Court, a scheme or plan of arrangement, the dissent process is quick and finite compared to the processes in many other jurisdictions,. Upon giving formal notice of their intent to dissent, dissenting shareholders cease to have any shareholder rights, save for the right to be paid the fair value for their shares by the company (such value to be agreed between the company and shareholder within a statutory time frame or, if no agreement can be reached, by jointly appointed appraisers). Importantly, dissenters will not hold onto their shares following the take private transaction coming into effect.
Hostile takeovers are rare in the BVI and hostile bidders would, in all practicality, need to reach the squeeze-out threshold in order to effect a full takeover (in light of the need for the target’s cooperation for all other acquisition methods). To note, there is no prohibition on the inclusion of ‘poison pill’ mechanisms in a BVI target’s constitutional documents.
The key methods for effecting a takeover of a Cayman Islands target are a merger or consolidation, a tender offer followed by a squeeze out, and a scheme of arrangement.
Mergers and consolidations are permitted under the Cayman Islands’ Companies Law. Both involve the target and the bidding entity or its nominee merging into one surviving single entity, being or held by the bidder. A merger results in one of the merging companies being the surviving entity, whilst a consolidation results in the target and the bidding entity or its nominee being consolidated into a new company. Provided that the merger is permitted by, or is not contrary to, the laws of the jurisdiction of incorporation of the overseas company, Cayman companies may merge or consolidate with overseas companies where either a Cayman company or an overseas company being the surviving entity.
The typical approach is to form a new MergerCo (typically, another Cayman Islands exempted company). MergerCo and the target are then merged, with MergerCo as the surviving company.
Subject to any requirements in the target’s articles of association, a statutory merger or consolidation requires only a special resolution passed in accordance with the articles of association (typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting). The board of each company must also approve the plan of merger. Court approval is not required for a merger or consolidation (unlike for a scheme of arrangement).
The consent of any secured creditors of each merging or consolidating company must be obtained for a merger. However, if such consent is not forthcoming, the company that has issued the security may make application to the Cayman Islands Grand Court to have the requirement for consent waived upon the condition of the surviving or consolidated entity granting such security as may be satisfactory to the secured party.
The Companies Law is permissive as to the form the merger consideration can take. For example, the consideration can comprise cash, securities, a mixture of both or something else. What is important is that the consideration (whatever this may be) is correctly set out in the plan of merger approved by the shareholders.
Dissenters in a merger/consolidation have the right to be paid the fair value of their shares, and may compel the target to institute court proceedings to determine that fair value. Minority dissenters will not be able to block the merger or consolidation arrangements if the relevant approvals and thresholds are satisfied.
Often, a takeover will be structured as a tender offer. Such a bid can be used in negotiated (friendly) or unsolicited (hostile) transactions. There is no prescribed form a tender offer must take under Cayman law, except where the target is listed on the Cayman Islands Stock Exchange.
The Companies Law provides for a squeeze-out of shareholders holding 10% or less of the shares following a takeover. There must be a scheme or contract for the transfer of shares or any class of shares in a Cayman company to another company. The offer must be approved by not less than 90% in value of the shares subject to the offer; notice must be given to dissenting shareholders that the bidder wishes to acquire their shares; if dissenters do not apply to Court within the given time periods the bidder will be entitled and bound to acquire their shares. The Court has the power to exercise its discretion to order against a proposed squeeze-out and acquisition of the dissenters’ shares.
Scheme of Arrangement
A friendly takeover of a public Cayman Islands target can also be accomplished through a statutory scheme of arrangement between the target and its shareholders, which requires the sanction of the Court sought in two stages, at an initial hearing before the meeting of target’s shareholders is called and at a final hearing after the shareholders have voted in favour of the scheme. The steps are as follows:
- an application may be made to the Court by a shareholder of the target or the target itself proposing the scheme of arrangement;
- at the interim hearing, the Court determines the constitution of the relevant classes (if more than one) of shareholders for voting purposes, the adequacy of draft proxy materials submitted to the Court and (if evidence concerning the level of opposition to the scheme is provided) whether the scheme of arrangement should proceed to a shareholders’ meeting;
- if the Court determines the scheme should proceed to a shareholders’ meeting, the Court will issue Court orders in respect of the calling and holding of the meeting and set a date for the final hearing at which the Court will consider whether to sanction the scheme and consider any question of fairness of the scheme;
- a majority in number representing 75% in value of the shareholders or class of shareholders, as the case may be, present and voting at the meeting must agree to the scheme in order for it to have received the requisite shareholder approval; and
- in the final hearing, the Court will sanction the scheme if it is satisfied that all conditions precedent and other requirements have been complied with in accordance with the Court orders issued at the initial meetingf arrangement, upon which all shareholders, or class(es) of shareholders, as applicable, of the target are bound by the scheme.
The Court sanction allows the Court to exercise its power to impose conditions to its approval of the scheme. The Court must be satisfied that the scheme is fair and, for example, that no attempt to manufacture the outcome through manipulation of voting classes has occurred.
A friendly bidder would typically be a party to an arrangement agreement with the target, with their agreed upon plan of arrangement attached to that agreement.
Schemes of arrangement provide flexibility in terms of structure, they are Court sanctioned and dissenting shareholders do not have the right to payment of fair value for the shares in the target held by them. Moreover, once the scheme takes effect, all shareholders (or class(es) of shareholders, as applicable) subject to it are bound by the scheme and so there is no need to take another step to squeeze out a minority that might otherwise have existed.
Guernsey company legislation does not distinguish between public and private companies and therefore no statutory requirements need to be satisfied when taking a company private. A Guernsey company listed on the International Stock Exchange need only give 20 days’ notice to the Exchange to cancel its listing, but doing so would be subject to any restrictions in its constitutional documents or prospectus (which would usually require shareholder consent to such an action). It is as likely, however, that a Guernsey listed company will be listed on a London exchange, in which case the rules of that exchange should be followed.
Under Guernsey company legislation, two or more companies may amalgamate and continue as one body corporate, which may be one of the existing bodies or a new body corporate. The shareholders of each amalgamating company must approve the amalgamation by special resolution.
Guernsey law permits a third party acquirer of 90% or more of the shares in a Guernsey target to squeeze out the remaining shareholders of the target, using the statutory procedure contained in the Companies Law.
Guernsey law also permits court-approved schemes of arrangement requiring the consent of 75% or more of the shareholders of the target. A scheme of arrangement would require some form of compromise between the target’s shareholders, but “cancellation schemes” whereby shares are cancelled by way of scheme of arrangement against the undertaking by a bidder to pay consideration to the relevant shareholders remain available in Guernsey, and therefore the options are not restricted solely to transfer schemes. Whilst not yet popular, hostile schemes of arrangement, without the support of the target itself, remain an option for a bidder who is a shareholder or creditor of the target.
In each case, however, it should be borne in mind that any Guernsey company listed in the United Kingdom, Guernsey, Jersey or Isle of Man will be subject to the rules of the Takeover Panel and as such mandatory timetables and rules will have to be followed by the acquirer and, where necessary, integrated into these actions. Further, any timetabling obligations agreed between the bidder and the company which are desirable in a scheme of arrangement will have to satisfy the exceptions to offer related arrangements which are otherwise prohibited by the Takeover Code. If the company withdraws support for a scheme it is likely that the Takeover Panel will impose the requirement of a tender offer with a requirement for a 90% uptake.
Isle of Man
A take private of an Isle of Man incorporated target can be conducted through (a) scheme of arrangement; (b) contractual takeover offer or (c) in some circumstances, statutory merger.
Schemes of Arrangement
The most common method of executing take private transactions in recent years has been through schemes of arrangement. The Isle of Man Companies Acts permit court sanctioned schemes, which require the approval at a general meeting of a majority in number of the shareholders present and voting, representing not less than 75% in value of the shares held by such shareholders.
Once approved by the shareholders, sanctioned by the Court and the necessary filings made, the scheme is binding on all shareholders, whether or not they have voted in favour of the scheme, and offers certainty that the bidder will acquire a 100% shareholding in the target.
Schemes of arrangement offer flexibility in terms of structure. Typically Isle of Man schemes are effected by way of share transfer but cancellation schemes are permissible.
A take private offer may also be structured as a contractual offer to shareholders. Squeeze out rights under the Isle of Man Companies Acts allow a bidder which has obtained a 90% level of acceptances compulsorily to acquire the shares of any shareholder who does not accept the offer.
The squeeze out process involves notice being given to dissenting shareholders that the transferee wishes to acquire their shares; if dissenters do not apply to Court within the given time periods the transferee will be entitled and bound to acquire their shares.
Takeover offers are less commonly used, though a bidder will typically reserve the right to convert an acquisition by way of scheme to a takeover offer.
Scheme of merger
For certain Isle of Man companies, statutory mergers are also available as an acquisition structure, provided both constituent companies are Isle of Man incorporated. The process requires approval by the directors of each merging company and shareholders holding at least 75% of the voting rights in each merging company, along with the written consent of chargeholders.
The rules of the exchange on which the shares are listed and any relevant takeover regime will apply to a take private transaction, however effected. Isle of Man companies listed on exchanges in the United Kingdom, Jersey, Guernsey or the Isle of Man, are subject to the Takeover Code.
Any take private of a Jersey target will need to be effected in accordance with the Listing and Regulatory Rules. For Jersey public companies (and in limited circumstances, private companies) listed on exchanges in the United Kingdom or Crown Dependencies, a take private will be subject to the rules of the Takeover Panel so that mandatory timetables and rules will have to be followed by the bidder and, where necessary, integrated into the transaction. Appleby in Jersey have acted in relation to take private transactions for companies listed on exchanges in the United Kingdom, Europe, South Africa and Mauritius, among others.
Under Jersey law, a take private transaction may be effected by (less commonly) statutory merger, by a takeover offer or by a scheme of arrangement.
A merger may be effected between Jersey companies or between a Jersey company and another body corporate (either within or without Jersey) with the consent of the Jersey Financial Services Commission. In either case, a merger agreement will need to be approved by a special resolution of the shareholders of the Jersey target and both creditors and disaffected shareholders may object to the Courts of Jersey. The merger will need to be supported by director’s solvency statements in prescribed form or Court approval.
In the case of a takeover offer, Jersey law permits a third party acquirer of 90% or more of the shares in a Jersey target to which the offer relates to squeeze out the remaining shareholders, using the statutory procedure contained in the Companies (Jersey) Law 1991.
Jersey law also permits Court-approved schemes of arrangement requiring the consent of a majority in number of the shareholders of the Jersey target present and voting and representing 75% or more of the votes cast at a meeting or meetings approving the scheme and the sanction of the Royal Court of Jersey. “Cancellation schemes” whereby shares are cancelled by way of scheme of arrangement against the undertaking by a bidder to pay consideration to the relevant shareholders remain available in Jersey, and therefore the options are not restricted solely to transfer schemes. Whilst not yet popular, hostile schemes of arrangement, without the support of the target itself, remain an option for a bidder who is a shareholder or creditor of the target.
In current conditions, the most popular take private mechanism is the Court-approved scheme of arrangement.