This guide to M&A in the Cayman Islands covers the following topics:
Deal structure of M&A DEALS
1.1 How are private and public M&A transactions typically structured in the Cayman Islands?
Public M&A transactions in the Cayman Islands are typically structured as either:
- a statutory merger/consolidation;
- a tender offer (accompanied by a squeeze-out); or
- a scheme of arrangement.
Each of these is discussed in more detail in question 1.2. In the authors’ experience, the statutory merger remains a popular tool for facilitating M&A transactions involving Cayman Islands companies, with the scheme of arrangement now tending to be reserved for more complex M&A transactions.
Private M&A transactions in the Cayman Islands are often accomplished by statutory merger/consolidation or asset acquisition. Tender offers (and squeeze-outs) and schemes of arrangement remain available options for private M&A transactions in the Cayman Islands, although these are less commonly used.
The primary sources of regulation of M&A transactions in the Cayman Islands are:
- the Companies Act (as revised) (Companies Act);
- the Limited Liabilities Companies Act (as revised) (‘LLC Act’); and
- common law.
Unlike some other jurisdictions, the Cayman Islands does not have a set of legal principles specifically relevant to ‘going-private’ transactions. Rather, directors must observe their general fiduciary and common law duties. Additionally, the Cayman Islands Stock Exchange’s (‘CSX‘) Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares will apply where the target is listed on the CSX.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
Part XVI of the Companies Act provides a statutory regime for:
- the merger or consolidation of two or more Cayman Islands companies; and
- the merger or consolidation of one or more Cayman Islands companies with one or more overseas companies.
A merger is the process whereby one or more constituent companies are subsumed into another constituent company (or a new company in the case of a consolidation), the latter of which becomes the surviving company. The LLC Act provides a similar statutory merger framework, permitting Cayman Islands LLCs to merge and consolidate with Cayman Islands exempted companies and overseas companies. A segregated portfolio company cannot be merged or consolidated under either regime. The advantages of a statutory merger/consolidation include the following:
- The shareholder approval threshold for a statutory merger/consolidation (subject to any additional requirements in a merging company’s articles of association) requires only a special resolution passed in accordance with the company’s articles of association (typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting);
- Court approval is not required (unlike for a scheme of arrangement); and
- Once the relevant approvals and thresholds have been satisfied, the merger or consolidation is binding on all shareholders. Dissenting shareholders will have the right to dissent and be paid the fair value of their shares, and may compel the company to institute court proceedings to determine fair value if the parties are unable to agree themselves; but importantly, they will be unable to block the merger or consolidation. These merger dissent rights are discussed further in question 8.1.
The consent of any secured creditors of each constituent company must be obtained prior to the merger or consolidation (except where the Cayman court has granted relief for such requirement).
Tender offer (accompanied by a squeeze-out)
A tender offer can be used in negotiated or unsolicited transactions. There is no prescribed form that a tender offer must take under Cayman Islands law, except where the target is listed on the CSX. One advantage of a tender offer is that the Companies Act provides for a squeeze-out of shareholders holding 10% or less of the shares following a takeover offer, allowing the purchaser to acquire the entire share capital of the target. A mirroring squeeze-out right is available under the LLC Act.
In order for a purchaser to invoke the squeeze-out provisions:
- there must be a scheme or contract for the transfer of shares or any class of shares in a Cayman Islands company to another company (the bidder);
- the offer must be approved by not less than 90% in value of the shares subject to the offer (and so excludes shares held or contracted to be acquired prior to the date of the offer – a relevant consideration for bidders embarking on a stake-building exercise prior to the launch of an offer) within four months of the offer being made; and
- notice must be given to dissenting shareholders that the bidder wishes to acquire their shares.
The court has the power to exercise its discretion to order against a proposed squeeze-out and acquisition of the dissenters’ shares upon application by dissenting shareholders. A disadvantage of the tender offer approach is that the bidder must acquire acceptances from 90% or more of the shares which are subject to the tender offer before it can exercise the squeeze-out mechanism, which is typically a higher shareholder approval threshold than for a statutory merger/consolidation. 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, have no right to compel a cash alternative.
Schemes of arrangement
A scheme of arrangement is a court-approved compromise or arrangement that can be used to effect a takeover of a public or private company. This involves an application being made to the Cayman Islands court by a shareholder of the target or the target itself proposing an arrangement. Amendments to the Companies Act in 2022 removed the ‘headcount test’ for shareholder schemes, which had previously caused issues when dealing with companies whose shares are held by nominee entities – as is commonly the case for Cayman Islands companies listed on public stock exchanges. Following the 2022 amendments, the approval threshold for a shareholders’ scheme of arrangement is 75% in nominal value of the shareholders, or class of shareholders, present and voting either in person or by proxy at the shareholders’ meeting. The scheme must then be sanctioned by the court. The advantages of a scheme of arrangement are as follows:
- Once sanctioned by the court, the scheme will be binding on all shareholders or class of shareholders and the target;
- It provides flexibility in terms of structure; and
- Dissenting shareholders do not have the right to claim payment of fair value for their shares (unlike in a statutory merger/consolidation).
A main disadvantage is that a scheme of arrangement, being a court-driven process, can take longer to close than other routes such as a merger/consolidation. The high shareholder approval threshold can also be a hurdle. Lastly, a scheme of arrangement requires the support of the target’s board of directors and is therefore unavailable in a hostile takeover situation.
A contractual asset acquisition remains a useful tool for effecting M&A transactions. However, for most transactions, the statutory merger is likely to provide a more efficient mechanism for acquiring the target’s business (with a statutory merger resulting in all of the target’s property and liabilities vesting in the surviving company).
1.3 What factors commonly influence the choice of sale process/transaction structure?
Key factors which commonly influence the choice of acquisition structure include:
- whether the takeover is friendly or hostile;
- consent thresholds and the target’s share capital structure – for example, the shareholder approval threshold for a statutory merger/consolidation is typically a two-thirds majority of those shareholders attending and voting at the relevant meeting (unless the articles of association specify a higher threshold), which is lower than is required for a scheme of arrangement (75% majority) or to invoke a squeeze-out (90% approval);
- the likelihood of shareholders dissenting; and
- whether the target is listed – for example, the listing/takeover rules of the overseas stock exchange may not permit a statutory merger.
Initial steps of an M&A transaction
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
The preliminary documents entered into during the initial preparatory stage of an M&A transaction include:
- non-disclosure agreements;
- a letter of intent, which may include an exclusivity provision – commonly referred to as a ‘no-shop’ clause;
- adviser appointment agreements; and
- lock-up letters.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
There is no express restriction on break fees in the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares or generally under Cayman Islands law. Break fees are a common feature of cross-border M&A transactions to incentivise parties to consummate the transaction. They can also act to deter competing offers by other would-be-buyers. With increased competition for attractive targets, reverse break fees (where the bidder has to pay) and mutual break fees are now also seen. The terms of any break fees will be deal specific and will depend on the relative strength of the parties’ negotiating positions, although they are generally designed to compensate a party for its out-of-pocket costs and expenditure if the other party backs out of the deal. The directors of the Cayman Islands company will need to be satisfied that:
- entering into the break fee arrangement is in the best interests of the company; and
- they are discharging their fiduciary duties to the company.
The Cayman Islands company’s memorandum and articles of association should also be checked to ensure that they do not contain any objects or other provisions which restrict or prohibit break fees.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
We see a mixture of cash reserves, debt and equity used to finance transactions in the Cayman Islands. In recent years, special purpose acquisition companies (‘SPACs‘) have re-emerged as an alternative fund-raising tool, with the SPAC’s trust fund used to finance the business combination transaction and bring cash to the balance sheet of the combined business.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
The common advisers and stakeholders involved at the initial preparatory stage of transactions include financial advisers, PR advisers, accountants and lawyers. On take-privates involving founder/management shareholders and other conflict transactions, a special committee of disinterested directors is often formed by the target’s board to lead the negotiations and approve (or reject) the transaction. It is common for special committees to engage their own independent advisers at an early stage.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
M&A due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target?
Buyers should conduct the usual diligence of the target’s:
constitutional documents – including its memorandum and articles of association and statutory registers, the minute book and any shareholders’ agreements; and
- commercial contracts entered into by the target to check for any change of control provisions, indemnities and termination rights, among other things.
Buyers should be aware that:
- the register of members of Cayman Islands companies is prima facie evidence of the matters set out therein (ie, the register of members will raise a presumption of fact on the matters set out therein, unless rebutted); and
- a shareholder registered in the register of members will be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members.
The register of members and other constitutional documents are not publicly available for Cayman Islands companies and must be provided by the target as part of the due diligence process, which will be highly unlikely on a hostile bid.
There are no Cayman-specific points relating to financial due diligence and buyers should conduct the usual checks in this regard.
Searches of the Cayman Islands courts are routinely carried out as part of the due diligence exercise to determine whether the Cayman target has been involved in any local litigation (past or ongoing cases) or subject to winding-up proceedings.
The Cayman Islands currently has:
- no income, corporate or capital gains tax; and
- no estate duty, inheritance tax or gift tax.
Other than stamp duty, no registration, documentary or any similar taxes or duties of any kind are payable in the Cayman Islands in connection with the signature, performance or enforcement by legal proceedings of any Cayman Islands law-governed documents.
A Cayman Islands exempted company may apply to the Financial Secretary at the Ministry of Finance and Economic Development of the Cayman Islands for a written undertaking that should a law ever be enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations, that law shall not apply to the exempted company or its operations. This undertaking may be granted for up to 30 years from the date of the undertaking. The target should be asked whether such undertaking has been obtained as part of the due diligence process.
A charge to ad valorem stamp duty under the Stamp Duty Act (as revised) or the Land Holding Companies Share Transfer Tax Act (as revised) may apply in the case of M&A transactions involving companies which own freehold or long leasehold real estate in the Cayman Islands. Specialist advice should be sought where this could apply.
The Labour Act (as revised) is the key law governing the terms and conditions of employment in the Cayman Islands and employment contracts must comply with minimum levels of protections provided under this law. However, given the nature of offshore business, the majority of Cayman Islands entities in cross-border M&A transactions are unlikely to have local employees and therefore Cayman Islands employment law considerations are not usually relevant.
Intellectual property and information technology
The Trade Marks Act 2016 establishes a Cayman Islands Register of Trade Marks and the Patents Act (as revised) provides for a Cayman Islands Registry of Patents.
The Data Protection Act (as revised) (‘CIDPA‘) is the primary legislation in the area of data protection in the Cayman Islands. The CIDPA is based substantially on the UK Data Protection Act, 1998 and is intended to meet the ‘adequate protection’ requirements relating to the international transfer of personal data. The CIDPA does not replicate the EU General Data Protection Regulation (2016/679), but there is considerable overlap.
The Cayman Islands Monetary Authority (‘CIMA‘) recently updated its Rule and Statement of Guidance relating to Cybersecurity for Regulated Entities, which came into effect in April 2023. The Rule applies to entities that are regulated by CIMA, including banks and insurance companies, and requires such entities to establish and maintain a cybersecurity framework. The Statement of Guidance supplements the Rule by providing detailed guidance on implementing rule requirements, including in relation to:
- risk identification and assessment;
- risk monitoring and reporting;
- incident response, containment and recovery;
- use of the Internet;
- employee training and awareness;
- outsourcing arrangements; and
- data protection.
Title to real estate is evidenced by registration at the Cayman Islands Land Registry, which is open to public inspection and is the primary source of information on any real estate due diligence in the Cayman Islands. The potential stamp duty tax which may apply to M&A transactions involving Cayman Islands real estate is discussed above under Tax.
3.2 What public searches are commonly conducted as part of due diligence in the Cayman Islands?
Limited information about Cayman Islands entities – such as entity number, formation date, registered office and status – is available through a search portal which can be accessed through the Cayman Islands General Registry website by account holders (usually Cayman Islands law firms or local registered office service providers). The names of the directors of Cayman Islands entities can also be accessed for an additional fee. However, no other information is publicly available on the particulars of such directors, and it is not possible to run a search of a person’s name to determine all the directorships that he or she holds in the Cayman Islands.
Local court searches and a search of the Land Registry can also be carried out, as mentioned in question 3.1.
The Cayman Islands Intellectual Property Office maintains a register of trademarks and patents. This is not a publicly searchable register and access is available only to licensed agents appointed by the proprietor of the rights.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
We sometimes see pre-sale vendor due diligence as the target seeks to ready itself for sale. This pre-sale vendor due diligence process may be accompanied by a pre-sale restructuring to streamline the target’s operations and assets. Reliance and liability caps are determined on a case-by-case basis.
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in the Cayman Islands?
Examples include the approval of:
- the Cayman Islands Monetary Authority (‘CIMA’), which must be obtained before closing on M&A transactions involving banking/insurance/fiduciary entities that are regulated by CIMA – regulated entities which themselves are listed or have a listed parent may be exempted by CIMA from the requirement to obtain prior approval for changes in control; and
- the Utility Regulation and Competition Office (‘OfReg‘), which must be obtained before closing on transactions involving OfReg-regulated entities in the information, communications, technology, energy, fuel and water sectors.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
The Cayman Islands Stock Exchange (‘CSX’) regulates public M&A transactions involving entities that are listed on the CSX. The CSX’s powers are broad and include the ability to suspend or cancel a listing and impose sanctions (in addition to or instead of a suspension in trading or cancellation of a listing) if any of the listing rules are breached.
4.3 What transfer taxes apply and who typically bears them?
No registration, documentary (other than on documents signed in the Cayman Islands or brought into the jurisdiction – for example, on enforcement) or any similar taxes or duties of any kind are payable in the Cayman Islands.
No stamp duty is payable on the issue or transfer of shares of a Cayman Islands exempted company (other than those of a company that holds an interest in real estate in the Cayman Islands).
Treatment of seller liability in M&A transactions
5.1 What are customary representations and warranties? What are the consequences of breaching them?
Customary representations and warranties include confirmation that:
- the parties have corporate authority to enter into the transaction;
- all required consents, approvals, licences and so on have been obtained;
- entry into the transaction does not violate any laws or regulations; and
- the seller is the owner of the target property.
Damages is the usual remedy for a breach of warranty. Damages are calculated on a contractual basis, with the aim of putting the claimant in the position it would have been in if the warranty had been true. A claim for misrepresentation may also be brought in the event of a breach of a representation; the remedies for such claim include rescission of the contract and damages. It is common for the purchase agreement to impose caps and/or hurdles on a seller’s liability for warranty claims.
5.2 What Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) typically apply to M&A transactions in the Cayman Islands?
In addition to ‘materiality’ and knowledge qualifiers, it is common for the purchase agreement to impose caps and/or hurdles on a seller’s liability for breach of warranty and indemnity claims.
Specific indemnities may be negotiated to address losses flowing from potential liabilities identified during the buyer’s due diligence.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in the Cayman Islands?
We are increasingly seeing buyers seeking to obtain warranty and indemnity insurance in the Cayman Islands on larger or more complex M&A transactions (following the onshore trend in this area).
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
Financial guarantees, holdbacks and escrow arrangements are common mechanisms to support a seller’s obligation to meet warranty and indemnity claims made by a buyer.
5.5 Do sellers in the Cayman Islands often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
Restrictive covenants in sale and purchase agreements are common for local M&A transactions in the Cayman Islands. These typically cover matters such as restrictions on the seller competing with the target business or soliciting employees, customers or suppliers of the target business, with each such restriction limited for a certain period of time and agreed on a deal-by-deal basis.
The enforceability of such restrictive covenants in the Cayman Islands depends on a number of factors, including:
- whether a legitimate business interest is being protected;
- the time period attaching to the particular restrictive covenant; and
- its geographical scope.
These factors will be considered on a case-by-case basis. Restrictive covenant timeframes which are limited to those reasonably necessary to protect a legitimate business interest are generally considered to be enforceable in the Cayman Islands.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
Where there is a gap between signing and closing, it is common to have conditions to closing, such as no MAC, bring-down of warranties (subject to certain materiality standards set forth in the purchase agreement) and material compliance by each party with its pre-closing covenants. We often see MAC clauses being heavily negotiated.
Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
The Cayman Islands Stock Exchange (‘CSX’) Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares will apply where the target is listed on the CSX. As at the time of writing, only three companies have their equity listed on the CSX. The typical timetable for an offer and key milestones for a transaction where the code applies is as follows:
- First closing date: An offer must initially be open for at least 28 days following the date on which the offer document is posted.
- Further closing dates: In any announcement of an extension of an offer, either the next closing date must be stated or, if the offer is unconditional as to acceptances, a statement may be made that the offer will remain open until further notice. In the latter case, at least 21 days’ notice in writing must be given to those holders of relevant shares which have not accepted before the offer is closed.
- Offer to remain open for at least 21 days after unconditional as to acceptances: Once an offer has become or is declared unconditional as to acceptances, the offer must remain open for not less than 21 days after the date on which it would otherwise have expired.
- Final day rule: An offer (whether revised or not) may not become or be declared unconditional as to acceptances after midnight on the 60th day after the day on which the initial offer document was posted (save with the consent of the CSX Council Executive).
- Time for fulfilment of all other conditions: All other conditions must be fulfilled or the offer will lapse within 28 days of the first closing date or the date on which the offer becomes unconditional as to acceptances, whichever is the later (save with the consent of the CSX Council Executive).
- Settlement of consideration: The consideration must be posted within seven days of the date of the offer becoming or being declared unconditional and acceptance thereof, whichever is the later (save with the consent of the CSX Council Executive).
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
In accordance with the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares, when a bidder or any person acting in concert with it acquired relevant shares in the target within the three months prior to the commencement of the offer period or, otherwise than with the consent of the CSX Council Executive, prior to that three-month period, the offer to the holders of relevant shares of the same class must be on terms similar to the most favourable of such acquisitions, if the CSX Council Executive takes the view that there are circumstances which render this necessary.
In accordance with the code, if after the commencement of the offer period and before the offer closes for acceptance, a bidder or any person acting in concert with it purchases relevant shares in the target at above the offer price (being the then-current offer price), it must increase its offer to not less than the highest price paid for the shares so acquired. Immediately after the acquisition, an announcement is required that a revised offer will be made. The announcement must also state the number of shares acquired and the price paid.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out’)? What kind of minority shareholders rights are typical in your jurisdiction?
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. Please see question 1.2.
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
In accordance with the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares, the announcement of a firm intention to make an offer containing a wholly or partial cash consideration must include confirmation by the financial adviser or by another appropriate third party that resources are available to the offeror sufficient to satisfy full acceptance of the offer. Except with the consent of the CSX Council Executive, the confirming party will be expected to produce the cash itself if, in giving the confirmation, it acted irresponsibly or failed to take all reasonable steps to assure itself that the cash was available.
6.5 What threshold/level of acceptances is required to delist a company?
Under the CSX’s listing rules, to delist a company’s securities from the CSX, the issuer must obtain the approval of the holders of the affected class, and the holders of any securities convertible into the affected class, of its listed securities by way of a three-quarters majority vote at duly convened meetings of such holders.
6.6 Is ‘bumpitrage’ a common feature in public takeovers in your jurisdiction?
We have seen instances of ‘bumpitrage’, where activist investors of target entities purchase shares after the announcement of a bid with a view to forcing the bidder to improve the terms of its offer for the target.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
Subject to the price implications pursuant to the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares, where shares are being acquired before or during the offer period (as discussed in question 6.2), there is no minimum level of consideration that a buyer must pay on a takeover bid.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
We are not aware of MAC conditions being tested in the Cayman Islands, but it is likely that the approach adopted by the UK Takeover Panel would be followed in the Cayman Islands. The Takeover Panel’s refusal to allow Brigadier Acquisition Company Limited to rely on a MAC condition when the impact of the COVID-19 pandemic became apparent after Brigadier’s announcement of a firm intention to make an offer for Moss Bros Group PLC confirms that MAC conditions continue to be very difficult for bidders to invoke in the United Kingdom, with such approach likely to be followed in the Cayman Islands.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
7.1 Are hostile bids permitted in the Cayman Islands in public M&A transactions? If so, how are they typically implemented?
Hostile bids are permitted in the Cayman Islands. Neither a merger nor a scheme of arrangement can ever be truly hostile, insofar as each requires the consent of the target board. In situations where the target board 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. Otherwise, the squeeze-out procedure as described in question 1.2 is the only mechanism available in the context of a hostile takeover transaction (assuming that the relevant thresholds are met).
In order to comply with their fiduciary duties, the directors of a target will need to give due consideration to any bona fide offer, even if it is unsolicited, to determine whether 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 a limited liability company (LLC), they may also be obliged to consider any bona fide offer.
The constitutional documents of a target may contain certain poison pill or other structural defence provisions (eg, staggered boards; fixed number of board members; no ability for shareholders to requisition general meetings; authorised share capital which includes a class of ‘blank cheque’ preferred shares issuable by the board), which may make a hostile takeover more difficult to consummate or give the target superior bargaining power.
7.2 Must hostile bids be publicised?
In the public M&A context, this is determined by the rules of the relevant exchange on which the relevant bidder (if applicable) and the target are listed. In the private M&A context, there is no statutory requirement for a hostile bid to be published.
7.3 What defences are available to a target board against a hostile bid?
Other than for companies listed on the Cayman Islands Stock Exchange (‘CSX’), there are no stake-building rules applicable under Cayman Islands law. However, transfers of equity securities in an unlisted company are typically subject to the consent of the board.
To the extent that the target’s constitutional documents do not include anti-takeover provisions (discussed in question 7.1), 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 takeover offer in good faith and act bona fide in the best interests of the company as a whole in relation to any acquisition proposal. 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.
If the target is listed on the CSX, the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares provides that at no time after a bona fide offer has been communicated to the target board, or after the target board has reason to believe that such an offer might be imminent, may any action be taken by the target board 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.
M&A trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in the Cayman Islands? What significant deals took place in the last 12 months?
The Cayman Islands saw unprecedented M&A activity in 2021, led in large part by yield-hungry private equity participants armed with significant war chests of dry powder and a surge in the number of special purpose acquisition companies (‘SPACs’). While private equity players were still extremely active in 2022, overall global deal volume was down compared to 2021 as the market felt the effects of higher interest rates, tightened lending conditions, the war in Ukraine and rising inflation. We expect 2023 to follow a similar pattern to 2022. It is the authors’ view at the time of writing that many would-be-buyers and sellers are adopting a ‘wait and see’ approach, looking for signs that inflation in the United States and Europe is coming under control and central banks may pause or start cutting interest rates. We expect to see a resurgence in deal activity when these signs appear and the market settles into the new rate environment, with buyer and seller price expectations coming back into greater parity. There are, however, exceptions, with de-SPAC business combinations continuing to contribute to M&A deal flow. Examples of deals of note announced or closed that involved Cayman Islands vehicles include:
- the business combination between Black Spade Acquisition Co, a Cayman Islands SPAC, and Vietnamese EV maker VinFast, which valued VinFast at an enterprise value of approximately US$27 billion and an equity value of US$23 billion, making it one of the largest SPAC mergers in history;
- the business combination between Artisan Acquisition Corp and Prenetics Group Limited, a global leader in genomic and diagnostic testing, which valued Prenetics at an enterprise value of US$1.25 billion and created Hong Kong’s first unicorn to list on NASDAQ when the combined company commenced trading on 18 May 2022; and
- the business combination between Silver Crest Acquisition Corporation and TH International Limited, the exclusive operator of Tim Hortons coffee shops in China, which valued Tims China at an initial enterprise value of approximately US$1.4 billion.
Jurisprudence in respect of shareholder valuation/merger dissent claims under Section 238 of the Companies Act continues to evolve, with some important judgments handed down in recent years. Section 238 provides that any shareholder of a Cayman Islands company dissenting from a merger or consolidation is entitled to payment of the fair value of its shares in exchange for those shares, provided that the dissenting shareholder gives the company written notice of its objection, before the company’s shareholders vote on the merger or consolidation.
Of particular note, the Cayman Islands Court of Appeal recently upheld the Grand Court’s decision in Changyou, confirming that minority shareholders are entitled to dissent and be paid the fair value for their shares in the context of a ‘short-form’ merger notwithstanding the fact that the company could effect the merger without a shareholders’ vote (the majority shareholder owned 95.2% of the issued and outstanding voting shares).
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
Potential reforms to a number of sections of the Companies Act, including dissenter rights, are currently under consultation.
Important reforms to the Cayman Islands restructuring regime took effect in August 2022, with the introduction of a new restructuring officer regime. The new restructuring officer regime allows debtors to file in the Cayman Islands court to request the appointment of a restructuring officer and obtain an immediate stay on unsecured creditor action, without the need to file a winding-up petition.
M&A tips and traps
A number of factors will help to ensure the smooth closing of M&A transactions, including the following:
- Closing timetable: A realistic closing timetable should be determined in advance after consultation amongst the parties, their respective advisers and any applicable regulatory authorities.
- Due diligence: Given the current deal climate, buyers are placing increasing importance on careful due diligence to identify risk and attempt to mitigate it. Sellers should ensure that data rooms are complete early on in the deal process to avoid slippage of deal timelines. Pre-sale vendor legal due diligence can greatly assist with facilitating a smooth buyer due diligence process.
- Engage with the regulator early on: Early engagement with CIMA (where the target is CIMA licensed) will undoubtedly result in obtaining quicker regulatory approval.
- Catch-up calls: Regular deal team catch-up calls are helpful to ensure that all workstreams are progressing in accordance with the transaction timeline.