What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
Sources of Regulation
The primary sources of regulation of Cayman Islands M&A are (i) the Companies Law (2016 Revision) (the “Companies Law”), (ii) the Limited Liability Companies Law, 2016 (the “LLC Law”), and (iii) the common law.
1. mergers, amalgamations and reconstructions by way of a scheme of arrangement are available for complex mergers (usually in the context of a restructuring) if approved by the requisite majorities of shareholders and creditors and by an order of the Cayman Islands court under section 86 or 87 of the Companies Law or section 42 or 43 of the LLC Law (as applicable); and
2. section 88 of the Companies Law and section 44 of the LLC Law provide a limited minority squeeze-out procedure which may be used in connection with a contractual acquisition of equity.
Different Rules for Different Types of Company
Except to the extent described below with respect to companies listed on the Cayman Islands Stock Exchange (the “CSX”), there are not different rules for different types of company.
The Cayman Islands does not have a prescriptive set of legal principles specifically applicable to ‘take-overs’, ‘going private’ or other acquisition transactions (unlike certain other jurisdictions such as, for example, Delaware). Rather, broad common law and fiduciary principles will apply.
While there is no specific Cayman Islands statute or regulation concerning the conduct of M&A transactions, where the target’s equity securities are listed on the CSX, the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares (the “Code”) will apply. The Code exists principally to ensure fair and equal treatment of all shareholders.
There are change-of-control rules applicable to entities in regulated sectors, including those regulated by the Cayman Islands Monetary Authority under the Banks and Trust Companies Law (2013 Revision), the Insurance Law, 2010 (as amended) or, with respect to mutual fund administrators, the Mutual Funds Law (2015 Revision). In addition, ownership and control restrictions apply to certain entities regulated by the Information & Communications Technology Authority Law (2016 Revision).
What is the current state of the market?
In 2017, worldwide M&A activity exceeded $3.5tn for the fourth consecutive year. 2017 was the fifth most active year on record in terms of deal volumes representing the continuation of an unprecedented period of dealmaking. The global conditions that drove dealmaking in 2017 remain at the time of writing – buyers continue to seek access to new markets and take advantage of continued low interest rates, whilst private equity funds actively seek to deploy capital. We anticipate that, despite global political and regulatory challenges as well as continuing high equity market valuations, 2018 will see further strong deal activity.
Which market sectors have been particularly active recently?
The technology, media and telecommunications, real estate and healthcare sectors continue to dominate deal flow. Buyers are also keeping a watchful eye on the nascent fintech industry.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
We believe that the most significant factors influencing M&A activity in the Cayman Islands will be (i) whether or not interest rates remain low which will determine the availability of inexpensive debt, (ii) the increase in activist shareholders and their strategies to unlock value and (iii)private equity firms seeking to deploy capital.
What are the key means of effecting the acquisition of a publicly traded company?
Since the introduction of the regime in the Cayman Islands in 2010, mergers have become by far the most common acquisition structure. However, there are certain circumstances in which the merger regime may not be suitable and the traditional options remain (such as contractual equity acquisitions).
The threshold for a merger (subject to the relevant constitutional documents of the company) requires only a special resolution passed in accordance with the articles of association or the LLC agreement – typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting. Dissenters in a merger usually have the right to be paid the fair value of their shares in cash and may compel the company to institute court proceedings to determine that fair value. This can be a factor where the offer involves a share-for-share swap (as opposed to an all cash offer) or where the bidder anticipates issues with minority shareholders.
Schemes of Arrangement
Schemes of arrangement under section 86 or 87 of the Companies Law or section 42 or 43 of the LLC Law may be appropriate in certain circumstances. A scheme of arrangement will involve the production of a circular. Typically, this is a detailed disclosure document which must provide stakeholders with all information required to make an informed decision on the merits of the proposed scheme. The principal benefit of a scheme is that, if all the necessary majorities are obtained and hurdles are cleared and the court approves the scheme, the terms of the scheme become binding on all members of the relevant class(es) of shareholders or creditors, whether or not they: (i) received notice of the scheme; (ii) voted at the meeting; (iii) voted for or against the scheme; or (iv) changed their minds subsequent to the vote.
Tender Offer/Contractual Acquisition
In a tender offer, contractual acquisition or public takeover, where the removal of a minority is required, the statutory squeeze-out remains available where the relevant statutory thresholds are met. Where a bidder has acquired 90% or more of the shares in a company, it can compel the acquisition of the shares of the remaining minority shareholders and thus become the sole shareholder. Such a squeeze-out requires the acceptance of the offer by holders of not less than 90% in value of the shares to which the offer relates, excluding shares held or contracted to be acquired prior to the date of the offer. Shares held by the bidder or its affiliates are typically not counted for purposes of the 90% threshold. Dissenters have limited rights to object to the acquisition and, in the case of a tender offer which is not on an all cash-basis, dissenters have no right to compel a cash alternative.
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?
Publicly available information in the Cayman Islands is limited to the company name and the location of its registered office. If the target company is listed, additional information may be available (for example, any SEC filings). A search of the court registers in the Cayman Islands will disclose any originating process, in which the company is identified as a defendant or respondent, pending before the Grand Court of the Cayman Islands.
To what level of detail is due diligence customarily undertaken?
As Cayman Islands companies tend to occupy the holding or top-co position in corporate group structures, due diligence is usually limited to the existence of the company, the terms of its securities and any shareholder arrangements (such as voting or registration rights agreements). Where the company is engaged in a regulated sector or is an operating company, verification of such licences and those operating agreements (and their terms) is typical.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The directors of a company or the manager(s)/managing member(s) of an LLC (as applicable) (the “Board”) will be integral in consummating a merger or acquisition, whether by merger, scheme of arrangement or equity acquisition.
In the context of a merger, the Board will be required to approve the terms of the transaction on behalf of the company. For a scheme of arrangement, the company must consent to the scheme which will involve the consent of the Board. It is traditional that the transfer of shares in a Cayman Islands company (other than a listed company) is subject to the consent of the Board. As such, the Board will generally be able to control an equity acquisition.
However, the directors of a company will, in making decisions on a proposed takeover, need to act consistently with their fiduciary duties, including (i) by acting bona fide in the best interests of the company (meaning the shareholders of the company as whole), and (ii) by not allowing their personal interests to conflict with their duties to the company. Directors of a company have a strict duty to avoid a conflict of interest. However, the constitutional documents of a Company will almost invariably contain provisions which relax this duty, usually by allowing directors to vote in connection with transactions in which they are interested provided they make appropriate disclosures (albeit such provisions do not modify the directors’ overriding duty to act bona fide in the best interests of the company).
In relation to an LLC, the default position under the LLC Law is that, subject to any express provisions in the LLC agreement, the manager(s)/managing member(s) of an LLC will not owe any duty (fiduciary or otherwise) to the LLC other than the duty to act in good faith, including when making decisions on a proposed takeover.
It is common for the Board of a listed company to elect to establish an independent committee of uninterested members to consider takeover offers. While this may assist from a risk-management perspective, it does not provide the same ‘safe harbour’ or ‘roadmap’ protection which it may offer in other jurisdictions.
Absent any special thresholds or consent required by the constitutional documents of a company and the consents discussed above, shareholder approval of two-thirds of those attending and voting at the relevant meeting is required for a merger.
A scheme of arrangement will require the approval of each of the relevant class(es) of members whose rights are to be subject to the scheme – majorities which must be achieved for approval of each class of members are the same as those applicable to creditors.
What are the duties of the directors and controlling shareholders of a target company?
Pursuant to common law rules, the directors of a company owe fiduciary duties (generally described as being those of loyalty, honesty and good faith) to the company. While it is common for directors of a company to be indemnified for certain breach of this duty, as a matter of public policy, it is not possible for directors to be indemnified for conduct amounting to wilful default, willful neglect, actual fraud or dishonesty.
As discussed in question 8 above, the default position under the LLC Law is that, subject to any express provisions in the LLC agreement, the manager(s)/managing member(s) of an LLC will not owe any duty (fiduciary or otherwise) to the LLC other than the duty to act in good faith.
To the extent that consent to a merger or acquisition is procured via an information memorandum or proxy statement, civil liability in tort may arise for negligent misstatement or fraudulent misrepresentation. In addition, the Contracts Law (1996 Revision) gives certain statutory rights to damages in respect of negligent misstatements. There are certain criminal sanctions under the Penal Code (2013 Revision) for deceptive actions, including for any officer of a company (or person purporting to act as such) with intent to deceive members or creditors of the company about its affairs, who publishes or concurs in publishing a written statement or account which to their knowledge is or may be misleading, false or deceptive in a material particular.
Any disposition of property made at an undervalue by or on behalf of a company and with the intent to defraud its creditors, will be voidable: (i) under the Companies Law or LLC Law at the instance of the company’s official liquidator; or (ii) under the Fraudulent Dispositions Law (1996 Revision) at the instance of a creditor thereby prejudiced.
If the consideration is to be shares in a company, the Companies Law and the LLC Law prohibits an exempted company or LLC (as applicable) that is not listed on the CSX from making any invitation to the public in the Cayman Islands to subscribe for any of its securities.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Both a merger and a squeeze-out provide for certain dissenter rights. In the merger context, dissenting shareholders are permitted (upon completion of the statutory process) to make an application to the court for the payment of fair value for their shares. Similar considerations apply for statutory squeeze-outs; however, where there is a tender offer which is not on an all cash-basis, dissenters have no right to compel a cash alternative. For schemes of arrangement, the key challenge is achieving the high approval majorities required of each class of shareholders.
Aside from a general consideration with respect to any relevant employment contracts, there are no employee or pension-specific provisions applicable to a merger; save that, where the surviving company is a Cayman Islands company, it assumes all contracts, obligations, claims, debts and liabilities of each of the other constituent companies, including any employment liabilities.
Additionally, the consent of each secured creditor of each constituent company to a merger is required. However, in certain circumstances, the court may grant relief from this requirement.
For a scheme of arrangement, there are no employee or pension-specific provisions applicable but, where the rights of creditors are to be affected, their consent will be required.
Employee, pension or creditor consideration will not be relevant to a tender offer or statutory squeeze-out.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is widely accepted as a feature of acquisitions. It is common practice to include any mandatory consents and approvals which are not within the gift to give of the purchaser as a condition to completion of a transaction, for example the grant of regulatory approval.
What steps can an acquirer of a target company take to secure deal exclusivity?
Subject to the Board complying with their fiduciary and other duties, an acquirer can negotiate for exclusivity and a no-shop, no-talk and/or an outright prohibition on supplying due diligence information to or negotiating with other potential bidders.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
As with exclusivity discussed at question 13 above, subject to complying with their fiduciary and other duties (including exercising their powers and discretions (for example, to issue shares) for a proper purpose, and not to frustrate, or protect, a particular deal), parties are generally free to contract as they wish. The Board of target is able to agree to a wide range of deal protection (no-shops, go-shops, matching rights, lock-ups, voting agreements, top-up options, dispositions re anti-trust issues, escrows, indemnities, earn-outs or contingent purchase price payments, etc.) and cost coverage mechanisms (break fees, reverse-break fees, failure fees, etc.). The use of any particular protection or cost coverage mechanism should be considered on a deal-by-deal basis.
Which forms of consideration are most commonly used?
Again, parties are generally free to contract as they wish with regards to terms, price and nature of consideration. However, in the context of a merger, where dissenters have the right to be paid the fair value of their shares in cash, a share-for-share deal may add complexity.
Where an acquisition is structured by way of a merger or scheme of arrangement, differing consideration can be paid to shareholders (including to holders of the same class of security). For tender offers utilising a statutory squeeze-out, the same ‘offer’ must be made to all shareholders. There are no statutory or common law obligations to purchase other classes of target securities.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
The Cayman Islands do not have any regulations relating to the making or content of any announcement.
While not strictly prescribed by the Companies Law or the LLC Law, and regardless of any applicable listing rules or regulation, any merger will require some form of disclosure statement. The Companies Law and LLC Law require each constituent company to enter into a written plan of merger. Such plan sets out certain prescribed information and, for more complex transactions, this is usually accompanied by a more detailed merger agreement.
For schemes of arrangement, alongside the applicable court documents, the scheme circular must be provided to the scheme participants and include sufficient information so as to allow them to make an informed decision on the merits of the proposed scheme.
For a tender offer, there is no Cayman Islands prescribed documentation. However, listing rules or regulations may be applicable. For a squeeze-out, the Companies Law and LLC Law require that notice be given to dissenting shareholders.
At what stage of negotiation is public disclosure required or customary?
Please see the answer to question 15 above – The Cayman Islands do not have any regulations relating to the making or content of any announcement.
Is there any maximum time period for negotiations or due diligence?
As a matter of Cayman Islands law, there are no minimum or maximum time periods allowed for conducting negotiations or due diligence. The parties would be free to contract as they wish in this regard. In the case of a listed takeover, the particular rules of the relevant exchange would apply.
Are there any circumstances where a minimum price may be set for the shares in a target company?
The Cayman Islands do not have a regulation relating to setting the floor price of any offer. Subject to the Board complying with their fiduciary and other duties, parties are generally free to contract as they wish as to terms and price.
Is it possible for target companies to provide financial assistance?
Yes – There are no financial assistance limitations applicable under Cayman Islands law.
Which governing law is customarily used on acquisitions?
It is typical for Cayman Islands law to govern (i) in relation to a merger, the plan of merger, and (ii) in relation to a scheme of arrangement, the scheme document. In respect of a merger agreement or an equity purchase agreement, it is customary for them to be governed by either Cayman Islands law or the law of the purchaser’s jurisdiction.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The Cayman Islands do not have a law or regulation requiring disclosure of discussions of acquisition decisions.
For companies listed on the CSX, the Code provides that, during the course of an offer or when an offer is in contemplation, the offeror, the offeree and any of their respective advisers may not furnish information to some shareholders if such information is not available to all shareholders. This principle does not apply to the furnishing of information in confidence by the offeree company to a bona fide potential offeror or vice versa. To the extent that the discussions of the Board may contravene this provision, they should be disclosed to shareholders. For companies listed on other exchanges, the relevant listing rules will be relevant.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
There is no transfer tax or duty in the Cayman Islands in connection with the transfer of shares in a Cayman Islands company. It is typical that the contractual agreement pursuant to which the share transfer is taking place is produced to the Board of the company which issued the securities. The Board will then instruct the relevant person to update the register of members of the company (at which time the transferee will become the legal holder of such shares in the company).
Are hostile acquisitions a common feature?
There is no statutory mechanism to consummate an unsolicited acquisition. Neither a merger nor scheme of arrangement can ever be truly hostile insofar as they require the consent of the target Board. In situations where the Board of target is uncooperative or unwilling to engage, the acquirer may launch a proxy fight (on the terms and subject to the conditions set out in the constitutional documents of the target) to have the Board or certain members thereof replaced. The proxy fight may be launched in connection with a tender offer or contractual acquisition of equity. The squeeze-out procedure is also available in the context of a hostile transaction (assuming the relevant thresholds are met).
The Cayman Islands does not have any applicable takeover, competition or anti-trust legislation. The constitutional documents of a company may contain certain poison pill or other structural defence provisions (such as classified boards, fixed number of board members, limited rights to call meetings, etc.) which may make a hostile takeover more difficult to consummate or give the target superior bargaining power.
In order to comply with their fiduciary duties, the directors of a company will need to give due consideration to any bona fide offer, even if it is unsolicited, to determine if the acceptance of such an offer is in the best interests of the company. Depending on the scope of the fiduciary duties imposed on the manager(s)/managing member(s) of an LLC, they may also be obligated to consider any bona fide offer.
What protections do directors of a target company have against a hostile approach?
There are no stakebuilding rules applicable under Cayman Islands law. However, transfers of equity securities in an unlisted company are usually subject to the consent of the Board.
To the extent that the target’s constitutional documents do not include anti-takeover provisions, the directors of the target will be limited in their ability to resist a change of control by their fiduciary duties to the company – the directors will be obliged to consider the terms of the acquisition in good faith and act bona fide in the best interests of the company as a whole in relation to any acquisition proposal. As noted in question 22 above, depending on the scope of the fiduciary duties imposed on the manager(s)/managing member(s) of an LLC, they may also be obligated to consider any bona fide offer.
In addition, if the target is listed on the CSX, the Code provides that at no time after a bona fide offer has been communicated to the board of the offeree company, or after the board of the offeree company has reason to believe that such an offer might be imminent, may any action be taken by the board of the offeree company, without the approval of the shareholders in general meeting, which could effectively result in any bona fide offer being frustrated or in the shareholders being denied an opportunity to decide on its merits.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
The Cayman Islands do not have a law or regulation requiring an acquirer to make a mandatory or compulsory offer for a target company.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders have very limited rights in the Cayman Islands. Minority rights primarily relate to (i) information rights, (ii) the right to bring legal action – personal, representative and derivative action, and (iii) just and equitable winding up. Each of these has been summarised below:
Unless specifically stated in the constitutional documents or agreed by contract, a minority shareholder of a company has no right, by virtue of his position as shareholder, to be provided with information regarding the company (including the company’s accounts). However: (i) on the application of the holders of not less than one-fifth of a company’s shares, the court may appoint inspectors to examine the company’s affairs and prepare a report thereon to the court; and (ii) the court also has discretion to order pre-action discovery of information by an intended defendant but only if this is required to facilitate the precise formulation of the claim. If a shareholder has a potential claim against the company’s directors, he may be able to use this rule to obtain information.
A shareholder in a company may be able to bring an action against the company if he can show that a duty owed to him personally (rather than to the company) has been breached. For example, if a shareholder is prevented from exercising a contractual right embedded in the company’s constitutional documents, they would generally bring a personal action against the company for a declaration/injunction.
It is possible for an individual shareholder to bring an action on behalf of himself and their fellow shareholders. This type of action would be appropriate if there is a common interest or right which the representative shareholder seeks to enforce on behalf of all the shareholders. Apart from in certain limited circumstances, a judgment will bind all of the parties named in the proceedings.
It is possible for shareholders to enforce a right belonging to the company rather than to any individual shareholder or shareholders (such as a breach by a director of their fiduciary duties). Since the right belongs to the company, the litigation has to be brought by the company itself. Normally, a company’s constitutional documents will state that the right to commence litigation will lie with the Board. As such, the shareholders will need to persuade the directors to bring an action on behalf of the company.
If the directors decline to take action, the shareholders will want to consider whether they can replace the directors with a newly constituted Board, who can then initiate the action against the former directors. Alternatively, it is also possible for the shareholders (by ordinary resolution) to bring litigation in the name of the company, at least where the directors are alleged to be a party to the wrongdoing.
Also, if the shareholder can bring himself within one of the exceptions to the rule in Foss v Harbottle, he may be able to bring a derivative action, whereby he may bring an action in his own name but on behalf of the company (for example, where the alleged act is beyond the capacity of the company or illegal (i.e. ultra vires), constitutes a ‘fraud on the minority’ or infringes the personal rights of an individual shareholder).
Just and Equitable Winding Up
A last resort for a shareholder who has been unfairly treated is to petition the court to wind up the company on the basis that it is ‘just and equitable’ to do so. If a winding up order is made, liquidators will be appointed who can then investigate the company’s affairs and pursue claims against the former directors (and any others who have caused loss to the company).
A shareholder bringing a petition on this ground will have to show that he has a ‘tangible interest’ in the winding up (i.e. that there is likely to be a surplus of assets available for distribution to shareholders). If the company is hopelessly insolvent and there is no prospect of a return to shareholders, a shareholder will not have standing to issue a petition on this ground (and if such a petition is issued it is liable to be struck out).
Is a mechanism available to compulsorily acquire minority stakes?
100% control can be achieved contractually under a merger, equity acquisition or upon the terms of a scheme of arrangement, each as described above. 100% control may also achieved by a bidder availing themselves of the statutory squeeze-out provisions as more particularly described above.