Private equity transactions
What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions? Have you seen any changes in the types of private equity transactions being implemented in the last two to three years?
The majority of the private equity funds established in Bermuda have fund managers which are located onshore. As such, market trends in Bermuda track major onshore markets and in particular we see mirroring of investment strategies of US, European and Asian fund managers.
What are the most significant factors or developments encouraging or inhibiting private equity transactions in your jurisdiction?
Bermuda remains an attractive jurisdiction for investors as a well-regulated, politically stable and business-orientated jurisdiction.
Over the past two years key stakeholders, including the government, the financial services regulator (the Bermuda Monetary Authority (BMA)) and industry professionals have collaborated to make legislative changes aimed at improving Bermuda’s private equity product that serves to further bolster its position as a premier offshore jurisdiction for private equity funds.
Key among the recent legislative changes is the introduction of the Limited Liability Company Act (LLC Act); see section 10 below for further details. Bermuda has also implemented a series of innovative changes to the existing partnership legislation. One of the clearly defined government mandates is to attract and retain entities in Bermuda. A previous barrier to this was the inability to easily transfer non-corporates to Bermuda while retaining their existing corpus. The amended partnership legislation permits a foreign partnership to re-domicile in Bermuda from any jurisdiction and vice versa. Under the new legislation, the re-domiciliation into Bermuda will not be deemed to create a new legal entity or affect the continuity of the partnership. The partnership will not need to transfer, assign or novate any of its assets or liabilities. In addition, an exempted, limited partnership that has elected to have seperate legal personality will also be able to convert into an exempted company or an LLC, further expanding the structuring opportunities available in Bermuda for private equity funds.
Private equity structures
What are the most common acquisition structures adopted for private equity transactions in your jurisdiction? Have new structures increasingly developed (e.g. minority investments)?
Acquisition structures involving Bermuda companies where the shares are privately held may involve direct investment into the target company through the issue of new shares to the private equity investor or through a share transfer from existing investors to the private equity investor. Alternatively, the private equity investor may incorporate a holding company (HoldCo) into which the private equity investor will invest (alongside management and other shareholders) and in turn, the HoldCo would acquire the shares of the target company. The common methods of acquisition in such a structure are by way of a share purchase, share for share exchange, scheme of arrangement or a merger or amalgamation with the target company.
Where shares in the target company are publically held, structuring of a private equity acquisition usually takes one of the following forms:
a general offer to purchase the shares of the target which must generally be accepted by the holders of at least 90% of the shares that are subject to the offer to compulsorily acquire the remaining shares;
compulsory acquisition of the remaining shares where the acquirer holds 98% or more of the shares;
a court sanctioned scheme of arrangement pursuant to section 99 of the Companies Act 1981, as amended (Companies Act). A scheme of arrangement requires board approval (via a simple majority or higher if required by the constitutional documents) and shareholder approval (via a majority in number of shareholders whom also represent three-quarters of the votes at a a special general meeting convened by the court to approve the scheme of arrangement); and
amalgamations or mergers pursuant to the Companies Act. An amalgamation is when two or more companies amalgamate and continue as one company. A merger is when two or more companies merge into one another with only one surviving company. The approval process is the same for amalgamations and mergers. The board of directors and shareholders of the company must approve the amalgamation or merger. Statutorily, an amalgamation or merger requires the approval of 75% of the shareholders present and voting at a special general meeting; however, this majority can be increased by the constitutional documents of the company. All shareholders (including non-voting shareholders) have a right to vote in respect of a merger or amalgamation. Dissenting shareholders also have a right to apply to the courts to have the fair value of their shares assessed within one month of the notice of the special general meeting.
What are the main drivers for these acquisition structures?
Tax considerations are typically the key drivers in the structuring. Given Bermuda is a fiscally neutral jurisdiction, the onshore tax requirements will dictate the structuring arrangements.
How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
Private equity transactions are structured to accommodate the particular commercial, tax and regulatory requirements of each transaction and therefore there is no one type of structure. That said, we typically expect private equity investors to subscribe for ordinary shares, preference shares (which may be voting or non-voting) and/or loan notes. Management typically subscribe for ordinary shares or will be expected by the private equity investor to “roll over” all or a portion of their existing investment into the new acquisition vehicle.
What are the main drivers for these equity structures?
Equity structures are ususally driven by the location of the investor and the particular commercial, regulatory and tax considerations relevent to the transaction.
In relation to management equity, what are the typical vesting and compulsory acquisition provisions?
Vesting provisions follow customary practice in European and US markets.
If a private equity investor is taking a minority position, are there different structuring considerations?
An investor who is taking a minority position would consider:
pre-emption rights (protecting against dilution) on new issues and share transfers;
drag/tag along rights;
other change of control provisions; and
veto rights of the investor in certain circumstances (usually changes to: share capital; debt position; constitutional documents; control of the company; and/or the nature of the business conducted by the company).
Private equity governance and shareholders
What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?
The composition of the board of directors of the company varies depending on deal structure. The board would usually include a combination of executive directors, investor directors and independent directors.
The authority of the board is derived from the constitutional documents of the company, namely, the memorandum of association, bye-laws and any shareholders and/or subscription agreement. The memorandum of association sets out the objects and powers of the company while the bye-laws (along with any shareholders and/or subscription agreement to which the bye-laws may be subject) govern the relationship between the company and the shareholders.
Only the memorandum of association is publically available as it is filed with the Registrar of Companies in Bermuda.
Do private equity investors and/or their director nominees typically enjoy significant veto rights over major corporate actions (such as acquisitions and disposals, litigation, indebtedness, changing the nature of the business, business plans and strategy, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?
Yes. Please see two questions above.
Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?
Any veto rights granted via the constitutional documents (which for the avoidance of doubt would include a shareholders’ and/or subscription agreement) and the transaction documents would generally be upheld by the Bermuda courts unless they were considered to be an unlawful fetter on the statutory powers of the company. The Companies Act expressly permits a company to fetter its powers in certain circumstances, including changes to the constitutional documents, changes to share capital, removal of directors, approval of amalgamations and mergers and voluntary liquidations.
An investor or nominee director is subject to overriding fiduciary and statutory duties which are owed to the company and its shareholders as a whole. At all times directors (including executive, investor and independent directors) must ensure that all decisions are being made with a view to the best interests of the company.
Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?
A private equity investor would not generally owe any fiduciary or other duties to a minority shareholder (unless it had agreed to assume them). The shareholders’ agreement will commonly contain provisions that expressly exclude any such duties on the part of the investor.
Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?
There are no specific limitations or restrictions in respect of shareholder agreements. Shareholder agreements that are subject to a governing law other than the laws of Bermuda would generally be enforceable in Bermuda (provided they do not contravene statute or public policy). Third-party rights may be conferred by contractual provisions (but not by the bye-laws) of the company and any such provisions should be set forth in the shareholders’ agreement.
Non-compete and non-solicitation provisions would be upheld to the extent that they are necessary to protect the legitimate business interests of the private equity investor.
Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies under corporate law and also more generally under other applicable laws?
Directors of Bermuda companies owe their duties generally to the company itself and not to the party that nominated them. Nominee directors need to be particularly mindful of their duties to act in the best interests of the company as a whole (which should take into account creditors, all shareholders and employees) and to avoid conflicts of interests.
Although the concept of a ‘shadow director’ is not formally recognized in Bermuda, for the purposes of section 243 of the Companies Act (dealing with offences by past or present officers of companies in liquidation), the definition of ‘officer’ includes a person ‘in accordance with whose directions or instructions the directors of a company have been accustomed to act’.
How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?
Directors’ duties in Bermuda include a duty not to put oneself in a position of conflict. Directors would be required to comply with provisions of the Companies Act, the bye-laws and any shareholder and/or subscription agreement in relation to any conflicts arising and a director would be required to disclose any interest he or she may have.
What are the major issues impacting the timetable for transactions in your jurisdiction, including competition and other regulatory approval requirements, disclosure obligations and financing issues?
If entities involved in the transaction are regulated in Bermuda by the BMA, the transaction timetable will need to take into account any regulatory notification and/or approval requirements. There are no competition or anti-trust filings in Bermuda.
Any issue or transfer of securities (which includes shares) in a Bermuda company requires the prior permission of the BMA unless the BMA has already granted a general permission.
Any changes to the intermediate or ultimate beneficial ownership of a Bermuda company will also need to be approved by the BMA.
Public offers of shares of a Bermuda company may require a prospectus to be published and filed in Bermuda unless an exemption is available.
Have there been any discernible trends in transaction terms over recent years?
Investment strategies of US, Europe and Asia fund managers are reflected in the investments made by the private-equity funds established in Bermuda.
In terms of companies which are incorporated in Bermuda as targets for private equity investment, there are no industry-specific regulatory issues which would limit a Bermuda company being a potential target for a private equity firm.
What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?
The principal regulations governing take-privates involving Bermuda companies are derived from:
the Companies Act and other applicable legislation;
if the shares of the target entity are listed on the Bermuda Stock Exchange (BSX), the BSX Listing Regulations;
if the shares of the target entity are listed and/or traded on a foreign stock exchange, the Takeover Code and applicable Listing Rules and regulations concerning disclosure, insider dealing and market manipulation in the relevant jurisdiction; and
the constitutional documents (namely, the memorandum of association, bye-laws and any shareholders and/or subscription agreement).
Please also see earlier responses on structuring considerations.
Are break-ups fees avaiable in your jurisdiction in relation to public acquisitions? If not, what other arrangements are available, e.g. to cover aborted deal costs? If so, are such arrangements frequently agreed and what is the general range of such break-up fees?
Bermuda law permits break fees on the assertion that they provide compensation for losses incurred during the course of negotiating the failed transaction (and do not constitute a penalty). Break fees are usually between 2-4% of the transaction value. Other common provisions are exclusivity, ‘no shop’ and ‘go shop’.
Directors of Bermuda companies must be mindful of duties applicable to them. As noted above, directors of Bermuda companies owe various fiduciary duties to the company including to act honestly and in good faith in the best interests of the company. Directors commonly seek ‘fiduciary out’ clauses (particularly with respect to ‘no shop’ restrictions and exclusivity undertakings).
What consideration structures are typically preferred by private equity investors (i) on the sell-side, and (ii) on the buy-side, in your jurisdiction?
Consideration structures in private equity transactions involving Bermuda entities are driven by particular PE investor’s profile and onshore tax requirements and there are no Bermuda-specific legal or regulatory restrictions which would impact structuring. Bermuda is a major centre in the international offshore private equity industry and has fund managers located globally and therefore consideration structures and trends in Bermuda track major onshore markets.
What is the typical package of warranties/indemnities offered by a private equity seller and its management team to a buyer?
The scope and extent of warranties and indemnification is in line with key onshore markets in the US and Europe and therefore PE sellers of Bermuda entities will typically only provide warranties in relation to title to their shares, capacity and authority with the full suite of commercial warranties provided by the management team. As in key onshore markets, we would typically expect the warranty/indemnity package to include indemnification of specific items uncovered during due diligence.
What is the typical scope of other covenants, undertakings and indemnities provided by a private equity seller and its management team to a buyer?
As noted above, the contractual buyer protections are usually determined onshore and would typically include customary non-compete and non-solicitation provisions to be given by the exiting management teams. Whilst the scope and extent of such provisions are subject to negotiation they should be appropriate to protect the legitimate business interests of the buyer to ensure they are enforceable. In line with onshore markets, a private equity seller would not typically give any non-compete or non-solicitation undertakings.
Is warranty and indemnity insurance used to “bridge the gap” where only limited warranties are given by the private equity seller and is it common for this to be offered by private equity sellers as part of the sales process? If so, what are the typical (i) excesses/policy limits, and (ii) carve-outs/exclusions from such warranty and indemnity insurance policies?
As warranty and indemnity insurance has become increasingly more common in both US and European markets, so too we are seeing an uptick in the use of W&I insurance in our jurisdiction, both in bilateral and auction sale processes. The level of coverage will depend on the terms of the sale agreement, market standards, and the level of due diligence.
What limitations will typically apply to the liability of a private equity seller and management team under warranties, covenants, indemnities and undertakings?
Caps and limitation periods follow established trends in US and European markets, including with respect to maximum liability caps. The limitations are heavily negotiated, although in line with market standard we would typically expect to see a de minimis threshold, a basket and time caps (usually running from one to three years).
Do (i) private equity sellers provide security (e.g. escrow accounts) for any warranties/liabilities, and (ii) private equity buyers insist on any security for warranties/liabilities (including any obtained from the management team)?
In line with key onshore markets, it is unusual for private equity sellers to provide security for any warranties or indemnities, although dependent upon the relative negotiating power of each power, limited escrow arrangements and/or parent guarantees may be agreed.
How do private equity buyers typically provide comfort as to the availability of (i) debt finance, and (ii) equity finance? What rights of enforcement do sellers typically obtain if commitments to, or obtained by, an SPV are not complied with (e.g. equity underwrite of debt funding, right to specific performance of obligations under an equity commitment letter, damages, etc.)?
As is customary in the UK and US, commitment letters (both in respect of equity funding and debt financing) are provided to the sellers.
Are reverse break fees prevalent in private equity transactions to limit private equity buyers’ exposure? If so, what terms are typical?
Reverse break fees are permissible in Bermuda and there are no restrictions or requirements under Bermuda law governing their application. The use of such structures is driven by onshore requirements and therefore we would typically see these in connection with US bidders where their use is more prevalent.
What particular features and/or challenges should a private equity seller be aware of in considering an IPO exit?
IPOs are a common exit strategy in Bermuda although the chosen exchange is typically outside of the jurisdiction. The key issues for private equity sellers in the context of an IPO exit are therefore centred on the regulatory rules and the prevailing market conditions in the jurisdiction in which the IPO is being launched.
What customary lock-ups would be imposed on private equity sellers on an IPO exit?
The lock-up periods imposed on private equity sellers is transaction-specific, although 180 days following the IPO is typically imposed.
Do private equity sellers generally pursue a dual-track exit process? If so, (i) how late in the process are private equity sellers continuing to run the dual-track, and (ii) were more dual-track deals ultimately realised through a sale or IPO?
The three most commonly used exit strategies which we see are initial public offerings (IPO) secondary buy-outs and trade sales. There are no specific Bermuda law requirements which would dictate which exit strategy is the most favourable, giving the managers the flexibility to select whichever route will lead to maximum value for investors.
Please outline the most common source of debt finance used to fund private equity transactions in your jurisdiction and provide an overview of the current state of the finance market in your jurisdiction for such debt (particularly the market for high yield bonds).
The majority of private equity funds established in Bermuda have managers which are located globally and therefore market trends in Bermuda track major onshore markets.
Are there any relevant legal requirements or restrictions impacting the nature or structure of the debt financing (or any particular type of debt financing) of private equity transactions?
No, there are no industry specific regulatory issues which would limit or restrict the nature or structure of the chosen debt financing.
What are the key tax considerations for private equity investors and transactions in your jurisdiction? Are offshore structures common?
Bermuda is fiscally neutral in the sense of having no tax applicable to the establishment and operation of private equity funds. Bermuda private equity funds are not subject to any tax, as there are no Bermuda corporations, profit, withholding, capital gains or income taxes applicable to a PE fund, or to its share or unitholders or partners that are not resident in Bermuda. Upon application, usually made just after incorporation of a PE fund company or formation of a unit fund or partnership fund, the Minister of Finance will issue a certificate confirming the exemption of the investment fund from such taxes, which is presently expressed to operate until 31 March 2035. This assurance is given as a matter of course to any PE fund with exempted status. Instruments executed by or in relation to a PE fund are exempt from stamp duties. Thus, stamp duties are not payable upon, for example, an instrument that affects the transfer or assignment of a share, unit or interest in a private equity fund.
Bermuda has exchange of information relationships with 44 jurisdictions through four double tax conventions with Bahrain, Qatar, the Seychelles and the United States; and 41 tax information exchange agreements. Bermuda also has over 60 multilateral tax information exchange agreement partners following Bermuda’s recent adoption of the Multilateral Convention on Mutual Assistance in Tax Matters and one multilateral mechanism.
Bermuda has entered into Model 2 intergovernmental agreements (IGAs) with the United States and the United Kingdom. Consequently, reporting Bermuda financial institutions report directly to the United States’ Internal Revenue Service (IRS) and Her Majesty’s Revenue and Customs Service (HMRC) in the UK respectively. The Common Reporting Standard came into effect in Bermuda on 1 January 2016, with the first reporting completed in September 2017 for the year ending 31 December 2016.
What are the key tax considerations for management teams that are selling and/or rolling-over part of their investment into a new acquisition structure?
As a tax-neutral jurisdiction, Bermuda does not impose any taxes on dividends or stamp duty in share transfers for exempted companies, partnerships or LLCs.
What are the key tax-efficient arrangements that are typically considered by management teams in private equity portfolio companies (such as growth shares, deferred/vesting arrangements, “entrepreneurs’ relief’ or “employee shareholder status” in the UK)?
As management teams are not typically located in Bermuda, any tax structuring is driven by the relevant onshore requirements.
Have there been any significant changes in tax legislation or the practices of tax authorities (including in relation to tax rulings or clearances) impacting private equity investors, management teams or private equity transactions and are any anticipated?
No, see further the earlier answers to questions on tax above.
What are the key laws and regulations affecting private equity investors and transactions in your jurisdiction, including those that impact private equity transactions differently to other types of transaction?
There are no specific legal or regulatory rules that apply only to private equity funds.
A Bermuda company which is the target of a private equity investment will be governed by the Companies Act 1981 and its constitutional documents, comprising of its memorandum of association and its bye-laws. An exempted company (so called because it does not meet local ownership requirements) is a company limited by shares where the liability of its shareholders is limited to the value of any unpaid shares (if any) held by the shareholder. The constitutional documents govern the company’s internal organization, management and administration.
From a private equity structuring perspective, the key pieces of legislation relate to the structuring of the private equity funds itself. The most common vehicle used for private equity funds in Bermuda is the exempted limited partnership. This is governed by the Exempted Partnership Act 1992, the Limited Partnership Act 1883 and the Partnership Act 1902. A limited partnership consists of one or more general partners (which may be bodies corporate, or general or limited partnerships, formed under the laws of Bermuda or another jurisdiction) and one or more limited partners (namely investors) whose relationship is governed by a partnership agreement. In Bermuda, limited partnerships are not legal entities separate from their partners. Nevertheless, a partnership may function as an ‘entity’, and may sue and be sued and carry on business in its own name. It is possible for a partnership to irrevocably elect to have legal personality. If such an election is made, the partnership will continue regardless of whether all the partners die or are declared bankrupt or if there is a change in its constitution.
General partners are fully liable for partnership debts and obligations. In the case of limited partnerships, the general partners will have such general liability to third parties, while generally speaking, the liability of the limited partners is limited to the value of the money and the value of any property that they contribute (or agree to contribute) to the limited partnership. However the limited partners may forfeit their limited liability status if they participate in the management of the partnership.
The LLC Act makes provision for the formation of limited liability companies, which are closely modelled on the widely-used Delaware LLC vehicle. While the LLC vehicle may be utilised by clients in a broad range of sectors, the Bermuda LLC is an attractive structuring option for operators of investment funds and in particular closed-ended private equity funds as the flexible corporate governance structure allows managing members to manage the fund (in a similar way to a general partner), but without unlimited liability for such members in respect of the fund’s losses. Under the Bermuda LLC Act, parties can create bespoke vehicles, having the contractual freedom to set out in the LLC agreement the terms of operation and management of the LLC as well as expressly agreeing the allocation of profits and timing of distributions amongst its members.
Regulatory and compliance
Have there been any significant legal and/or regulatory developments over recent years impacting private equity investors or transactions and are any anticipated?
Bermuda as a jurisdiction is highly responsive to evolving market demands and over the past two years key stakeholders, including the government, the financial services regulator (the BMA) and investment industry professionals have collaborated to make legislative changes that serve to cement Bermuda’s position as a premier offshore jurisdiction for private equity. One of the most interesting changes from a private equity perspective given the increased demand by investors for transparency and the global focus on management oversight has been the clarification of safe-harbour provisions for limited partners. The limited partnership agreement can provide for the establishment of boards and committees, and it is important to note that subject to any express provision in the limited partnership agreement, a limited partner that acts in that capacity does not owe a fiduciary duty in exercising rights or authorities under the partnership agreement to any partners, including any other limited partner.
Bermuda has also implemented a series of innovative changes to the existing partnership legislation. One of the clearly defined government mandates is to attract and retain entities in Bermuda. A previous barrier to this was the inability to easily transfer non-corporates to Bermuda while retaining their existing corpus. The amended partnership legislation permits a foreign partnership to re-domicile in Bermuda from any jurisdiction. Under the new legislation, the re-domiciliation into Bermuda will not be deemed to create a new legal entity or affect the continuity of the partnership. The partnership will not need to transfer, assign or novate any of its assets or liabilities. In addition, an exempted, limited partnership that has elected to have separate legal personality will also be able to convert into an exempted company, further expanding the structuring opportunities available in Bermuda.
In addition, the statute specifically provides that the general partner has to act in good faith and, subject to any express provisions in the partnership agreement, in the best interests of the partnership. This is one of the most interesting changes from a private equity perspective given the increased demand by investors for transparency and the global focus on management oversight.
How detailed is the legal due diligence (including compliance) conducted by private equity investors prior to any acquisitions (e.g. typical timeframes, materiality, scope etc.)? Do private equity investors engage outside counsel/professionals to conduct all legal/compliance due diligence or is any conducted in-house?
Being able to implement and co-ordinate a robust legal due diligence process is essential when assessing and negotiating a transaction, and private equity investors ordinarily engage in a detailed due diligence process. Whilst the target of a private equity transaction might be domiciled in Bermuda, its assets are frequently located outside of the jurisdiction. Therefore the ability to co-ordinate cross-border legal due diligence is key to our clients and they value our firm’s ability to manage the due diligence process from our 10 jurisdictions across the globe. Whilst the scope and focus of the legal diligence of a Bermuda target will of course vary on a transaction by transaction basis, one of the fundamental areas to include is a detailed review of the corporate structure and governance of the target group.
Has anti-bribery or anti-corruption legislation impacted private equity investment and/or investors’ approach to private equity transactions (e.g. diligence, contractual protection, etc.)?
In line with the global trend towards increased regulatory scrutiny, private equity sellers are increasingly focused on the anti-corruption and anti-bribery policies of a target and will expect this to be a focus of both diligence as well as contractual provisions for potential liability. Bermuda’s Bribery Act 2016 was modelled largely on the UK’s Bribery Act 2010 and provides a modern and comprehensive scheme of bribery offences, in order to allow investigators, prosecutors and the courts to tackle bribery effectively whether committed in Bermuda or overseas.
Are there any circumstances in which (i) a private equity investor may be held liable for the liabilities of the underlying portfolio companies (including due to breach of applicable laws by the portfolio companies); and (ii) one portfolio company may be held liable for the liabilities of another portfolio company?
The liability of a shareholder in a Bermuda company limited by shares is limited to the unpaid amounts (if any) in respect of their shares. Generally, a Bermuda court will not “pierce the corporate veil” and typically where it does such cases would involve the legal personality of the company being used for wrongdoing.
What other factors commonly give rise to concerns for private equity investors in your jurisdiction or should such investors otherwise be aware of in considering an investment in your jursidiction?
Whilst Bermuda is constantly evolving – developing products and more convenient ways to do business, thereby facilitating the needs of industry – the current private equity landscape in Bermuda remains one which has exceptionally flexible legislation and a first-class reputation.
First published in the ICLG s 2018 Guide to Private Equity guide, July 2018