What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The Companies Act 1981, as amended (Companies Act) is the principal piece of legislation governing companies in Bermuda and under which most companies in Bermuda are incorporated by registration. The provisions by which business combinations (either by merger, amalgamation or, in some instances scheme of arrangement) are effected in Bermuda are contained in the Companies Act. Provisions concerning the compulsory acquisition in connection with a share acquisition or business acquisition are also contained in the Companies Act. If the entity is a regulated entity and either registered under the Insurance Act 1978, as amended (Insurance Act) or the Investment Business Act 2003, as amended (Investment Business Act), these two acts may also be relevant to the transaction.
The regulatory authority responsible for registering a merger or amalgamation pursuant to the Companies Act is the Bermuda Registrar of Companies (RoC). In addition, the Bermuda Monetary Authority (BMA) may also: (i) be required to give permission from an exchange control perspective in the event there is an issue or transfer of shares in connection with the M&A transaction, unless a general permission already exists; and/or (ii) if such target is a BMA regulated and registered entity, be required to either be notified of or provide its approval to the change of control of the target.
What is the current state of the market?
Bermuda is known as a first class centre for international business. 2015 saw significant merger and acquisition activity for Bermuda headquartered (and often international stock exchange listed) companies in the (re)insurance market. In general 2016 has seen less merger and acquisition activity in Bermuda.
Which market sectors have been particularly active recently?
The (re)insurance sector has been particularly active over the past two years. This was largely a result of insurance groups seeking to consolidate but targets have been acquired by parties looking for a way in which to access Bermuda’s (re)insurance market by gaining control of an established brand.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
There is speculation that the (re)insurance market will continue to provide the majority of M&A activity due to the following:
1. continued soft market as well as pressure on terms and conditions in the market;
2. purchasers’ desire to increase their global footprint, expand into new products and distribution channels and the need to achieve scale and stronger client relationships; and
3. the effects of Solvency II equivalence with increased compliance costs and enhance capital requirements requiring larger balance sheets.
What are the key means of effecting the acquisition of a publicly traded company?
There are essentially four ways of acquiring a publicly traded company; namely merger, amalgamation, scheme of arrangement or the making of an offer to the shareholders of a publicly traded company to acquire their shares.
It is open for a potential acquirer, subject to compliance with rules and regulations of any applicable stock exchange, to present an offer to the shareholders of a Bermuda company which may, or may not, be recommended by the board of that target company. A company (whether incorporated in Bermuda or not) can make an offer to the target company’s shareholders to acquire all of their shares in the target company. In the event that the offer reaches certain thresholds of acceptance, an acquirer can find themselves with certain rights and obligations to obtain the remaining shares as discussed further at questions 25, 26 and 27.
A scheme of arrangement is a court sanctioned compromise between a company and its creditors (or any class of them) or its members (or any class of them). In the context of an acquisition, a Bermuda company or any member may apply to the Bermuda Court requesting that the Court order a meeting at which the members (or any class of them) are asked to consider the scheme. If the approval is obtained of a majority in number representing three-fourths in value of members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, the Court may sanction the scheme and if so sanction, it becomes binding (subject to delivery of the requisite order of the Court to the RoC) upon the member (or any class of them, as the case may be).
Whilst any of these means would be open to a potential acquirer, we frequently see the acquisition of high profile publicly traded companies in Bermuda acquired by way of merger or amalgamation. Whilst the processes to complete either and practical effect are similar, from a technical stand point, each produces different results.
A merger between two (or more) Bermuda companies is typically effected pursuant to section 104H of the Companies Act and, upon completion, the undertaking, property and liabilities of each merging company is vested in the surviving company whilst the remaining company or companies cease to exist.
Conversely, an amalgamation between two (or more) Bermuda companies is typically effected pursuant to section 104 of the Companies Act and, upon completion, each of the companies become and continue as a single amalgamated company and the undertaking, property and liabilities of each becomes the property of the amalgamated company.
The Companies Act does not legislate as to whether a transaction should be structured as a merger or an amalgamation. Commercially and optically, companies might proceed by way of an amalgamation if structuring the business combination as a “merger amongst equals”, given that neither company is deemed to be the survivor. However, where one party is the “purchaser”, a merger may be the preferred choice.
In order to effect a merger or an amalgamation, the merger or amalgamation (including its terms) must be approved by the shareholders of the company, whether or not they ordinarily have a right to vote. As such, holders of non-voting preference shares may also vote on a merger or amalgamation.
There are often two agreements in the context of an amalgamation or merger. The main transaction agreement (the “Agreement and Plan of Merger/Amalgamation” (in the case of US transactions) or “Implementation Agreement” (in the case of English law transactions)), which will be subject to the law of the parties’ onshore counsel or the jurisdiction in which the company is listed or where the company conducts the majority of business, which sets out the terms and means of effecting the transaction and which will include comprehensive warranties, indemnities, conditions precedent, deal protection mechanisms (if any). In addition, a statutory merger or amalgamation agreement will also be used, which sets out that which is required to be approved by the shareholders under section 105 of the Companies Act.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
If the entities are listed and the bid is a recommended bid, the target company may look to limit the scope of due diligence undertaken and, in particular, withhold sensitive financial and business information until it is clear the bidder has a genuine interest in proceeding with the transaction. Generally if the acquisition is by way of a hostile bid, the target company will not assist in providing due diligence information and any due diligence will be limited solely to information that is publicly available.
The following information is publicly available in Bermuda:
a) By way of a search of the entries and filings shown in respect of a Company in the Register of Companies at the offices of the RoC, which will include:
the certificate of incorporation and memorandum of association;
the address of the registered office;
any prospectus or offer document required to be filed pursuant to the Companies Act;
certain other filings required pursuant to the Companies Act, including any charges registered against the company under the Companies Act.
b) At the Registered Office of the Company, including the following:
details of directors and officers on the register of directors and officers. The register of directors and officers is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day be allowed for inspection); and
the register of members, which shall include the names and addresses of the shareholders, in the case of a company having a share capital, details of the number of shares held by each shareholder (distinguishing each share by its number so long as the share has a number), the amount paid up on the shares and the date on which the person was entered in the register of members as a shareholder. The register of members of a company is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day be allowed for inspection). It should be noted, however, that shares can be held by, and registered in the name of, a nominee.
c) If the company is listed on the Bermuda Stock Exchange (BSX), at the BSX. Such information will include any filings with or announcements to the BSX, including published accounts and auditors’ reports.
At the Registry of the Supreme Court, the entries and filings shown in respect of the Company in the Supreme Court Causes Book. Such information will include any pending legal proceedings or judgments.
To what level of detail is due diligence customarily undertaken?
Due diligence, as in most established and recognised jurisdictions, is customarily and commonly undertaken. It would be a very rare occurrence where due diligence would not be undertaken unless where a competing bidder forgoes due diligence as a completive advantage. However, as noted above, if the bid is hostile then the only information which might be available for due diligence would be that in the public domain. As also indicated above, the target company may look to limit the scope of due diligence undertaken and, in particular, withhold sensitive financial and business information until it is clear the bidder has a genuine interest in proceeding with the transaction.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision making organs of a target company are its board of directors. The Board of Directors as in other jurisdictions must comply and be mindful of their duties owed to the company when making any decisions.
All shareholders, whether or not they ordinarily have the right to vote, have the right to vote on a merger or amalgamation under the Companies Act. In addition, pursuant to the Companies Act, any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that he/she has been offered fair value for the shares may within one month of the giving of the notice required under the Companies Act in respect of the merger or amalgamation apply to the courts in Bermuda to appraise the fair value of his/her shares. The Companies Act sets out this appeal process and what should occur in the event that the Court appraises the fair value of the shares of the target company.
What are the duties of the directors and controlling shareholders of a target company?
Shareholders of a target company have no duties in the context of a merger or amalgamation.
Directors of companies in Bermuda are subject to statutory and common law duties. Under Bermuda law, duties are owed to the Company and not owed to shareholders individually but directors can be required to have a heightened awareness of the shareholder body as a whole in certain situations.
On a cash acquisition offer, there is authority to suggest that the directors should act so as to ensure that shareholders are able to receive and accept an offer at the “best” price. Attention is often focused upon any deal protection mechanisms that may be implemented as part of or in the lead up to the negotiation process (whether such mechanisms are included within transaction documentation or constitutional arrangements), particular where there is a realistic possibility of an alternative takeover offer being made which would, if allowed to proceed, represent a better deal for the shareholders.
Generally, a court will only interfere with the directors’ decisions in an acquisition context where (i) there is evidence of bad faith, (2) having taken all of the available courses of action into account, no sensible board could reasonably have come to the decision that the directors reached, or (3) the directors were negligent in the performance of their duties.
Absent such factors, the Bermuda courts will not look to retrospectively judge the merits of director decisions or act in a supervisory capacity as the board exercises its powers.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Transactions such as these may of course lead to a rationalisation of staff. Section 30 of Bermuda’s Employment Act 2000 provides that where any redundancy, whether the result of M&A or not, is considered the employer must, as soon as practicable –
a) inform the employee’s trade union or other representative (if any) of the following information:
1. the existence of the relevant condition of redundancy;
2. the reasons for the termination contemplated;
3. the number and categories of employees likely to be affected; and
4. the period over which such termination is likely to be carried out; and
b) consult the employee’s trade union or other representative (if any) on:
1. the possible measures that could be taken to avert or minimise the adverse effects of such redundancy on employment; and
2. the possible measures that could be taken to mitigate the adverse effects of any termination on the employees concerned.
Employees do not have any general consultation rights under Bermuda law unless they are “unionised”, that is to say members of a union. The procedure of consultation and/or further specific rights may vary dependent upon the particular terms of the collective bargaining agreement between the company and the union.
To what degree is conditionality an accepted market feature on acquisitions?
The acceptability of conditionality, e.g. with respect to certainty of funds, tends to be driven by onshore counsel rather than by the Bermuda market. Any Bermuda centric conditionality tends to be restricted to being able to obtain the regulatory permissions referred to elsewhere in this chapter and appropriate shareholder approvals as, without those, the transaction cannot close.
What steps can an acquirer of a target company take to secure deal exclusivity?
As is the case in many other jurisdictions, once an agreement has been reached to commence formal negotiations it is common to see arrangements whereby the parties agree that they will only negotiate with one another for an agreed period of time with a view to agreeing a definitive deal.
When negotiating and documenting the terms of any agreed deal, particularly where there will be a large gap between signing and closing, we are often asked to advise on “no-shop” provisions. These seek to prevent a target company from soliciting or encouraging third-party proposals once a binding transaction agreement has been executed.
Deal exclusivity provisions tend to vary from a less restrictive provision that permits the target company to provide information to unsolicited bidders, to the much more restrictive “no-talk” provision prohibiting the target company from responding to any third-party advances. Because of their potential for discouraging what may be superior competing offers, no-shop provisions are subject to increasing scrutiny.
Whilst such provisions are common in Bermuda M&A transactions, those which are overly restrictive could be subjected to scrutiny on the basis that the target board breached its fiduciary duty to act in the best interest of the company (including the shareholders as a whole) both on the basis that the target was locked into a transaction that did not reflect its true value and that its shareholders were unable to realise the same.
Occasionally provisions try to push so far as to commit a board to move forward with a transaction or recommend the same to the company’s shareholders when it is clearly no longer in the best interests of the company (for example, because a third party has made clear that it wishes to enter into negotiations and has demonstrated a clear indication that should such negotiations be successful, they would represent a far superior proposal.
As a result, when negotiating exclusivity provisions, clients are well advised to seek a carve out where, in order to comply with director fiduciary duties, they will no longer be bound to refuse to negotiate with third parties and recommend that shareholders accept inferior proposals.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Although it is not possible to provide an exhaustive list, in addition to exclusivity and “no shop” provisions, the inclusion of break fees is relatively common. Where setting a break fee, care must be taken so that the party seeking to recover the fee can demonstrate that it is a payment to represent loss incurred by that party as a consequence of having invested in the negotiation of a transaction that has ultimately been aborted rather than a provision intended solely to penalise the other party and prevent them from terminating the agreement because it would be economically unfeasible to do so.
More innovative approaches are also considered. Recently, we have seen consideration being given to the granting of options to prospective purchasers which would be triggered in the event that a third party were to seek to acquire the company. The issuance of those additional shares would make the transaction more expensive and, it is hoped, unappealing to such a third party. Another potential tool is the so-called “crown jewel” provision, pursuant to which a company would agree that in the event that a transaction does not proceed it would dispose of one of its key assets to the counterparty in the transaction.
When agreeing to any deal protection mechanisms, particularly those that stand to make a company materially unattractive (such as the granting of options) or potentially compromise its future (such as by the sale of one of its “crown jewels”) there is a risk that the directors could be found to be in breach of their fiduciaries because such measures are not in the best interests of the company. However, there is no bright line test and the acceptability of such provisions will turn on their facts.
Which forms of consideration are most commonly used?
Our recent experience has seen shares, cash or a mixture of the two depending upon whether the transaction is a pure acquisition or more of a merger amongst equals.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
The Companies Act does not prescribe public disclosure in the context of an acquisition. Should the acquirer reach the thresholds discussed below in questions 25 and 27, a notice disclosing intention to acquire shares may be circulated to the remaining shareholder(s) as applicable.
Public disclosure may be required by the applicable stock exchange upon which the target is listed. For example, if the company were listed on the BSX, the company would have to keep the BSX, shareholders of the company and other holders of its listed securities informed without delay, by way of public announcements and/or circulars, of any information relating to the company (or its group) that:
1. is necessary to enable them and the public to appraise the financial position of the company and the group;
2. is necessary to avoid the establishment of a false market in its securities; and
3. might reasonably be expected materially to affect market activity in and the price of its securities.
Additionally, where an acquirer becomes a holder of 5% or more of a local company, the local company must notify the Exchange.
At what stage of negotiation is public disclosure required or customary?
Other than as mentioned in question 15 above, there is no requirement for public disclosure under Bermuda law. If the Company is listed on the BSX, public disclosure is required on the signing of the relevant transaction agreement. Customarily, public disclosure happens immediately after the execution of an Agreement and Plan of Merger/Amalgamation or an Implementation Agreement (as applicable).
Is there any maximum time period for negotiations or due diligence?
There is no statutorily prescribed time period for negotiations or due diligence. However, in committing to any such period, particularly with respect to any corresponding exclusivity that is to apply as between the parties, the directors of any Bermuda company must be comfortable that doing so is in the best interests of the company. This is to ensure that there has been an appropriate exercise of their fiduciary duties, particularly to act in the best interests of the company and avoid fettering their discretion to do so.
Are there any circumstances where a minimum price may be set for the shares in a target company?
There is no “minimum price” but when the required shareholder approval is sought, a notice must be provided which includes a statement of what the directors of a company have determined the “fair value” of the shares to be.
Provided that a shareholder does not vote in favour of the merger or amalgamation, they are entitled to apply to the Bermuda courts to have them appraise the value of their shares. Although such appraisal rights do not carry the ability to prevent the transaction from closing, to the extent that there is a difference between the price paid to the shareholders and the court determined “fair value”, the shareholders would be entitled to receive the difference.
Is it possible for target companies to provide financial assistance?
Financial assistance was formally generally prohibited in Bermuda, however this was removed following a 2011 amendment to the Companies Act.
Given the historical prohibition, the bye-laws of any company formed prior to the amendment should be reviewed to confirming that no provisions still remain which would, notwithstanding the general ability to provide financial assistance under Bermuda law, act to prevent a target from being able to do so without taking steps to have such bye-laws amended.
Which governing law is customarily used on acquisitions?
For tender offers: the governing law can vary depending on the domicile of the purchaser. For example, if the purchaser is a US entity, the agreements tend to be governed by New York law, whilst a UK purchaser would in all likelihood use UK law. For mergers and amalgamations: as mergers tend to be more of a US concept, the agreement and plan of merger is normally governed by New York law, however the statutory merger or amalgamation agreement is always governed by Bermuda law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Where an acquisition is being effected by way of amalgamation, merger or scheme of arrangement there is no formal instrument to transfer shares. In the context of a merger or amalgamation, the merger or amalgamation is effected by operation of law subject to the terms of a statutory merger agreement upon the submission to the RoC of an application to register the same together with certain supporting documentation.
In the context of a scheme of arrangement, the transfer of shares is effected by the order of the Bermuda courts sanctioning the scheme (or any subsequent order).
Where a company is a private company, an instrument of transfer is required under Bermuda law. However, where a company is a public company listed on an exchange, the bye-laws of the company will typically provide that transfers can be made in accordance with the rules of such exchange. This will usually negate the need for an instrument of transfer and may permit transfers by electronic means.
Provided that the subject of the acquisition is an exempted company, that is to say, not a company subject to local ownership requirements, no transfer taxes or duties should arise on the transfer of shares.
Are hostile acquisitions a common feature?
No. Hostile takeovers are quite rare in Bermuda.
What protections do directors of a target company have against a hostile approach?
The bye-laws of a Bermuda company can provide directors with the power to protect against hostile approaches. One such approach is to dispose of a company’s unissued shares, so long as they are empowered to do so by the target company’s bye-laws and that these actions are supported by Bermuda common law. The bye-laws of a Bermuda company may provide that the unissued shares will be at the disposal of the board, which may dispose of them to such persons and upon such terms and conditions as the board may determine.
An example of a protection which illustrates the director’s ability to protect the company against a hostile approach is the poison pill strategy. Such a strategy permits the directors to issue shares to all shareholders, except for the acquirer, at a discounted purchase price. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
A company’s bye-laws may be drafted to include such defensive measures in such form as the shareholders decide are appropriate or necessary. The directors’ use and application of such provisions are subject to the following considerations.
Common Law and Directors’ Duties
Under Bermuda common law, directors have wide discretion in the conduct of a company’s affairs as long as they act both in what they believe to be the company’s interest and within their powers. Although the interests of the company as a separate body corporate, distinct from its shareholders, have to be advanced, the interests of current shareholders will normally be the principal factor in the directors’ decisions. Directors may also take into account the long term interest of the company, future shareholders, employees and the creditors in deciding what actions to take.
Section 97 of the Companies Act sets out the duty of care of the officers and directors of a company. Directors must act honestly and in good faith with a view to the best interests of the company, and maintain a standard of care which is that of the reasonably prudent person in comparable circumstances. This is often a subjective test. Although directors may rely on the advice of professionals, they retain a residual duty to make certain basic assessments of any given factual situation. They have a duty of loyalty, and must not put themselves in conflict with the company.
Under Bermuda law, as under the laws of other jurisdictions, “advance defensive preparations” are more easily upheld than are measures taken as a result of a takeover bid. The Bermuda courts will carefully scrutinize actions taken in response to a proposed change of control transaction, on the grounds that a company has no legitimate concern of its own with the exercise by a shareholder of the rights to sell his/her shares. This does not mean that directors may not resist a bid in the absence of advance preparation although it does mean that there are relatively narrow limits to the methods by which they do so. Thus, the directors may present their views on the wisdom of accepting an offer, provided that the advice is based on full information, fairly presented and is not influenced by the personal interest of management.
While directors must fulfill the requirements of the Companies Act by acting honestly and in good faith with a view to the best interests of the company, however, as a practical matter, directors must also act with a view towards value maximization of shareholdings. Actions taken primarily for the collateral purpose of entrenching management or of maintaining the proportional interest of the shareholders via shareholders rights plans, or for any other improper purpose, may be an abuse of the directors’ power and may not stand up in court. However, actions taken in the best interests of the company and the current shareholders will not be so sanctioned.
In general, the Bermuda courts will not interfere in directors’ decision making unless it has been proved by an aggrieved party that the directors have breached their fiduciary duty. There is no statutory provision regarding enhanced duties with respect to takeovers, and so any enhancement of duty arises out of the more conscious and cautious application by the directors of their ordinary duty.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Section 102 of the Companies Act gives dissenting shareholders the ability to compel the acquirer to acquire their shares on the same terms as set out in the initial bid or on such other terms as the parties may agree or as the court deems fit upon application by either party. Where a purchaser makes an offer to acquire the shares of the company, and in pursuance of that offer has transferred to it more than 90% of the shares of the company, the purchaser must, within one month of the date of the transfer which caused it to exceed the 90% threshold, give notice of that fact to the holders of the remaining shares who have not consented to the scheme or contract. Any such holder may, within three months from receiving the notice from the purchaser that the purchaser has acquired 90% of the shares of the company, him/herself give notice compelling the purchaser to acquire his/her shares. Where a remaining shareholder gives such a notice, the purchaser is entitled and bound to acquire those shares on the same terms as set out in the scheme or contract or on other terms as may be agreed or as the court, on application by either party, thinks fit to order.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
A dissenting shareholder who receives a notice has the ability to apply to court for relief within one month after receipt of the notice by the purchaser to compulsorily acquire his/her shares. The right of a dissenting shareholder who has received a notice from the purchaser to compulsorily acquire his/her shares under section 102 of the Companies Act is not limited to having the value of his/her shares appraised. The statutory language gives the court a broad discretion to order as it thinks fit in the context of an application made by a dissenting shareholder who has received a notice pursuant to a section 102 compulsory acquisition.
The principal argument of any dissenting shareholder requesting that the court vitiate the notice of compulsory acquisition would be that, in some way, he/she is being oppressed in his/her capacity as a minority shareholder. Such oppression would usually turn on the price being offered for the shares because the court will look to shareholders as a whole and not simply the loss of control or dilution in respect of an individual shareholder. The onus is on the dissenting shareholder to convince the court that a compulsory acquisition would be unfair. The test probes whether the offer is fair to the shareholders as a body. The dissenter must convince the court that the judgment of those who have accepted the offer was somehow at fault. This is difficult to maintain where more than 90% in value of the shares of the company have accepted the purchaser’s offer to purchase their shares.
Is a mechanism available to compulsorily acquire minority stakes?
Section 103 of the Companies Act, provides that holders of 95% or more of the shares of a Company may compulsorily acquire the remainder. The principal difference between section 103 and section 102 is that a dissentient in section 103 can only apply to court to appraise the value of its shares. It cannot seek to vitiate the compulsory acquisition. The English case law on equivalent statutory provisions will be persuasive in Bermuda courts. English case law is such that a minority shareholder will find it very difficult to persuade the Court that on offer accepted by a majority of 95% is not reasonable and fair.