1. 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 Act (As Revised) (the Companies Act), in particular Part XVI which governs statutory mergers and consolidations, sections 86 and 87 which govern amalgamations and reconstructions by way of a scheme of arrangement, and section 88 which provides a limited minority squeeze-out procedure which may be used in connection with a contractual acquisition of equity, (ii) the Limited Liability Companies Act (As Revised) (the LLC Act), in particular Part 10 which governs statutory mergers and consolidations, sections 42 and 43 which govern amalgamations and reconstructions by way of a scheme of arrangement, and section 44 which provides a limited minority squeeze-out procedure which may be used in connection with a contractual acquisition of equity, (iii) the Cayman Islands Stock Exchange (the CSX) Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares (the Takeover Code), which applies to all companies listed on the CSX other than open-ended mutual funds, and (iv) the common law.
Different Rules for Different Types of Company
Except to the extent described below with respect to companies listed on the CSX or which are licensed or regulated in the Cayman Islands, 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).
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 Takeover Code will apply. The Takeover Code exists principally to ensure fair and equal treatment of all shareholders, and provides an orderly framework within which takeovers of a CSX listed company are conducted.
There are change-of-control and ownership rules applicable to entities in regulated sectors, including those regulated by the Cayman Islands Monetary Authority (CIMA) under the Banks and Trust Companies Act (As Revised), the Companies Management Act (As Revised), the Insurance Act (As Revised) and, with respect to mutual fund administrators, the Mutual Funds Act (As Revised), and those regulated by the Utility Regulation and Competition Office (OfReg) in the information, communications, technology, energy, fuel and water sectors.
2. What is the current state of the market?
The offshore sector has followed the global trend with strong M&A activity and deal making in 2021. M&A activity during the first quarter of 2022 has remained at an impressive level in terms of both deal volume and value.
We have seen a continued trend of clients utilising the Cayman Islands merger regime to effect ‘take private’ transactions of holding companies listed on overseas stock exchanges, commonly New York, London and Hong Kong, as well as to take private companies public through SPAC business combinations. We consider the typical M&A motivations remain as relevant as ever – buyers continue to seek access to new markets and business owners continue to seek cash events, whilst private equity funds actively seek to deploy or recycle capital through acquisitions and exits of existing investments.
We anticipate that, despite global political uncertainty and expected further interest rate rises, 2022 will see further strong deal activity with the Cayman Islands remaining at the forefront of global deal making.
3. Which market sectors have been particularly active recently?
The technology, information and communication, financial and insurance and energy sectors continue to attract significant deal flow. The Cayman Islands has witnessed several renewable energy deals over the past year. In the local market, the trend of consolidation in the fiduciary and corporate services sector has continued and we expect this to remain an active sector through the remainder of 2022. Buyers are also showing continued interest in opportunities in the FinTech industry as the Cayman Islands continues to cement its place as an eminent global FinTech hub. We have also seen a keen uptick in new reinsurance structures (and resultant M&A work) backed by large private equity companies and hedge funds.
Special purpose acquisition companies (SPACs) were the darling of the first half of 2021 with a record number of new IPOs and ‘de-SPAC’ business combinations. SPACs are companies that are formed to raise capital through an initial public offering to fund a strategic acquisition in the future, usually within 12 to 24 months of their IPO. Cayman Islands exempted companies are one of the most popular vehicle choices for SPACs, owing to their flexibility and their familiarity to international investors and stock exchanges. Despite a slowdown in the volume and size of new SPAC IPOs in the second half of 2021 and beginning of 2022, SPAC M&A activity remains strong with a large number of existing SPAC issuers seeking to identify and consummate business combination transactions with both Cayman and overseas targets. We expect to see continued high levels of M&A activity over the next 12 to 18 months involving Cayman SPACs, boosted by the Hong Kong Stock Exchange’s introduction of a new listing regime for SPACs on 1 January 2022.
4. What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Other than technology disruption and private equity deployment, we consider the three most significant factors for the Cayman Islands to be:
- Political uncertainties, including the conflict in Ukraine and US/China relations;
- US, UK and EU tax and regulatory reforms; and
- Central Bank interest rate rises and consequential impact on cost of borrowing.
At the time of writing COVID-19 continues to impact the global economy and supply chains, with strict travel restrictions and lockdowns remaining in place in many places, including Asia. This may well have a considerable impact on economic output and M&A activity both locally and on an international scale, as China is also central to a diverse range of global supply chains.
5. 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, statutory mergers and consolidations remain the favoured method for acquiring public companies, with buyers attracted by the two-thirds shareholder approval threshold and no requirement for Court sanction. However, there are certain circumstances in which the statutory merger/consolidation regime may not be suitable and take-privates may be achieved by way of a tender offer and ‘squeeze out’ process or a scheme of arrangement, but these methods involve higher shareholder approval thresholds and, in the case of a scheme of arrangement, Court sanction.
A merger or consolidation 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 entity. Provided that the merger is permitted by, or is not contrary to, the laws of the jurisdiction of incorporation of the overseas company, Cayman Islands companies may merge or consolidate with overseas companies where either a Cayman Islands company or an overseas company will be the surviving entity.
The threshold for a statutory merger/consolidation (subject to any higher threshold or additional requirements in the relevant constitutional documents of the company) requires only a special resolution passed in accordance with the articles of association – typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting. Court approval is not required (unlike for a scheme of arrangement). However, the consent of any secured creditors of each constituent company must be obtained prior to the merger or consolidation (except where the Court has granted relief for such requirement).
Provided that certain preconditions are met, dissenters in a merger/consolidation 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. However, importantly dissenting shareholders will not be able to block the merger or consolidation arrangements if the relevant approvals and thresholds are satisfied. 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. The dissenting shareholder provisions are contained in section 238 of the Companies Act and section 52 of the LLC Act and supplemented by a growing body of case law.
Schemes of Arrangement
Schemes of arrangement under section 86 or 87 of the Companies Act or section 42 or 43 of the LLC Act may also be used to effect a takeover of a public company. A scheme of arrangement is a Court-supervised procedure providing flexibility in terms of structure. This involves an application being made to the Cayman court by a shareholder of the target or the target itself proposing an arrangement. A majority in number representing 75% in value of the shareholders or class of shareholders, as the case may be, present and voting at the meeting must agree to the scheme, and the scheme must then be sanctioned by the Court.
The Court sanction allows the court to exercise its power to impose conditions to its approval of the scheme. The Court must be satisfied that the scheme is fair and, for example, no attempt to manufacture the outcome through manipulation of voting classes has occurred.
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. Dissenting shareholder provisions do not apply.
A scheme of arrangement will require the support of the target’s board and is therefore unavailable in a hostile takeover situation.
Tender Offer/Contractual Acquisition (and ‘squeeze out’)
A takeover of a public company may be structured as a tender offer made to a target’s shareholders. Such a bid 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 Cayman Islands Stock Exchange.
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 (and so excludes shares held or contracted to be acquired prior to the date of the offer) within four months of the offer being made. 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.
6. 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?
The following information relating to a Cayman Islands target company is available publicly or via licensed agents:
- CORIS Search: Limited information about Cayman Islands entities, such as entity number, formation date, registered office and status, is available through a search of the Cayman Online Registry Information Service (CORIS) 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).
- Corporate Records of a Cayman Islands company: The list of the names of the current directors and alternate directors of a Cayman Islands company is available for inspection by any person at the Companies Registry on payment of the prescribed inspection fee and subject to such conditions as the Registrar may impose. 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 they hold in the Cayman Islands. In addition, a company’s register of mortgages and charges is open to inspection by any creditor or member of the company. The register of members of a Cayman Islands exempted company is not available for public inspection (except where the exempted company is a licensed entity). Further, copies of the company’s constitutional documents (including memorandum and articles of association) are not publicly available.
- Corporate Records of a Cayman Islands LLC: The list of the names of the current managers of an LLC is available for inspection by any person at the Companies Registry on payment of the prescribed inspection fee and subject to such conditions as the Registrar may impose. In addition, an LLC’s register of mortgages and charges is open to inspection by any creditor or member of the LLC. The register of members of an LLC is open to inspection only by such persons as are expressly provided for in the LLC’s limited liability company agreement or as otherwise permitted by the manager. The information recorded on the LLC’s registration statement (including the LLC’s name, registered office address, names and addresses of the initial members, the nature of the LLC’s business and the LLC’s financial year end date) is available for inspection by any person at the Companies Registry on payment of the prescribed inspection fee of CI$50 and subject to such conditions as the Registrar may impose. Inspection of other records of the LLC (including by members of the LLC) may be restricted by the terms of the LLC’s limited liability agreement. Copies of an LLC’s limited liability company agreement or operating agreement are not publicly available.
- Litigation: 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.
- Real Estate: A search of proprietors of registered land via by the ‘Cayman Land Info’ online service maintained by the Cayman Islands Land Registry will disclose details of any registered interests in Cayman Islands real estate.
- Intellectual Property: 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.
- Licensing: An online search of CIMA’s website will disclose the list of current licence holders and regulated entities under the Cayman Islands regulatory laws.
There is no general obligation on a Cayman Islands target company to co-operate or disclose diligence related information to a potential acquirer, although the directors of the target company must be mindful of their fiduciary duties (including the duty to act in good faith and in the best interests of the company and for a proper purpose). If the target is listed on an exchange, additional information may be available according to the relevant exchange’s listing rules (for example, any SEC filings, and copies of its accounts, interim reports and announcements). Further, the Takeover Code, if it applies, may require a target to provide equivalent information to competing bidders.
7. 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, due diligence is usually more extensive, typically involving a full business review, verification of such regulatory licences and those operating agreements (and their terms).
In the case of a hostile bid, due diligence is typically limited to information from public sources or available through searches by licensed agents as described in our response to question 6 above. For a recommended or supported bid, public information may be supplemented by the target providing an electronic data room and/or responses to a list of financial, legal, regulatory and operational due diligence questions and requests.
8. 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 managers/managing member 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 (such Board approval being in addition to shareholder approval). For a scheme of arrangement, the company must consent to the scheme which will involve the consent of the Board. Save in the case of listed companies, it is typical that the transfer of shares in a Cayman Islands company or membership interests in a Cayman Islands LLC is subject to the consent of the Board. As such, the Board will generally be able to control an equity acquisition.
In relation to a company, the directors 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 often contain provisions which relax this duty, usually by allowing directors to count in the quorum and 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 Act is that, subject to any express provisions in the LLC agreement, the managers/managing member 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. A higher standard is often imposed on the managers/managing member (in such capacity) in the LLC agreement.
Whilst not compulsory under Cayman Islands law, it is common for the Board of a listed target 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. It is also common for the Board of a listed target to engage financial advisers to advise them on the fairness of the offer price for the company’s shares.
Absent any special thresholds or consent required by the constitutional documents of a company or LLC and the consents discussed above, shareholder approval of two-thirds of those attending and voting at the relevant meeting is required for a statutory merger or consolidation of a Cayman Islands company or an LLC.
A scheme of arrangement will require the approval of a majority in number representing 75% in value of the members or class of members, as the case may be, present and voting at the scheme meeting. A scheme of arrangement must also be sanctioned by the Court.
The Board of a company engaged in a takeover may still seek shareholder approval to provide support for their compliance with their fiduciary duties, even if a shareholder vote is not otherwise required. Such might be the case if the consideration will be shares issued by the company and the shares to be issued represent many times the outstanding capitalisation of the company.
9. What are the duties of the directors and controlling shareholders of a target company?
A director of a Cayman Islands company has a duty to attend to the requirements of his offices with care, diligence and skill. In addition, a director owes broader fiduciary duties, including the duty to act in good faith in the best interests of the company, for a proper purpose, and to avoid any conflict of interest. The directors of a target company will need to act in accordance with these duties when considering whether to approve the takeover offer. The duties are owed by the directors to the company as a whole rather than to individual shareholders or to particular classes of shareholders (except where the company is insolvent or on the brink of insolvency where the directors’ duties then extend to the company’s creditors). The English courts (whose decisions the Cayman Islands Court generally regards as persuasive but not technically binding) have held directors to be under a duty to act in good faith when giving shareholders advice whether to accept a takeover offer for their shares or whether to sanction a scheme for the purchase of a large block of assets from another company. The directors have no obligation to give such advice but if they give it, the advice should not be given for their own improper reasons. While it is common for directors of a company to be indemnified against personal liability for any loss they may incur arising out of the company’s business, as a matter of public policy, it is not possible for directors to be indemnified for conduct amounting to wilful default, wilful neglect, actual fraud or dishonesty.
Except to the extent assumed by contract (for example, in a shareholder agreement), a shareholder of a company (in their capacity as such) does not owe any duty (fiduciary or otherwise) to the company or to their fellow shareholders in their capacity as shareholder, and where a shareholder is exercising any vote, consent or approval right in respect of their shares, the shareholder may exercise such vote, consent or approval right in their own best interests and as they see fit even though it may not be in the best interests of the company or their fellow shareholders.
As discussed in our response to question 8 above, the default position under the LLC Act is that, subject to any express provisions in the LLC agreement, the managers/managing members of an LLC will not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than the duty to act in good faith. This duty of good faith may be expanded or restricted by the express provisions of the LLC agreement.
In the case of a member of an LLC, the default position under the LLC Act is that, subject to any express provisions in the LLC Agreement, a member (in their capacity as such) does not owe any duty (fiduciary or otherwise) to the LLC or to their fellow members, and where a member is exercising any vote, consent or approval right in respect of their LLC interest, the member may exercise such vote, consent or approval right in their own best interests and as they see fit even though it may not be in the best interests of the LLC or their fellow members.
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 Act (As Revised) gives certain statutory rights to damages in respect of negligent misstatements. There are certain criminal sanctions under the Penal Code (As Revised), for deceptive actions, including for any officer of a company (or person purporting to act as such) who with intent to deceive members or creditors of the company about its affairs, 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.
10. Do employees/other stakeholders have any specific approval, consultation or other rights?
Both a statutory merger/consolidation and a squeeze-out provide for certain dissenter rights for shareholders who are opposed to the transaction. At the core of the dissent process is the assertion by the dissenter shareholder that the offer price for their shares is at an undervalue. In the statutory merger/consolidation 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 or creditors.
Aside from a general consideration with respect to any relevant employment contracts, there are no employee or pension-specific provisions applicable to a merger or equity acquisition; save that, in the case of a statutory merger where the surviving company is a Cayman Islands company or LLC, it assumes all contracts, obligations, claims, debts and liabilities of each of the other constituent companies, including any employment liabilities.
Additionally, the prior consent of each secured creditor of each constituent company to a statutory merger or consolidation is required; save that the Court may, upon application by the relevant constituent company, 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.
11. 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 control or gift of the target or purchaser’s Boards as a condition to completion of a transaction, for example the grant of regulatory approval and any required shareholder approval.
In the case of a tender offer, it is common for the offer to made conditional upon the bidder acquiring at least a sufficient percentage of the target shares to pass any required shareholder approvals or effect a scheme of arrangement. If the bidder wishes to acquire 100% ownership of the target, then it is common for the tender offer to be made conditional upon the bidder acquiring at least 90% of the target shares so that it may compulsorily acquire the remaining shares through a squeeze-out.
12. 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.
13. What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
As with exclusivity discussed in our response to question 12 above, subject to directors of a company complying with their fiduciary and other duties (including exercising their powers and discretions 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 the target company 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.
14. Which forms of consideration are most commonly used?
Parties are generally free to contract as they wish with regards to the terms, price and nature of consideration. Cash and equity securities are the most commonly used forms of consideration but loan notes may also be offered.
Where an acquisition is structured by way of a statutory merger/consolidation or scheme of arrangement, differing consideration can be paid to shareholders of a company or members of an LLC (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 of a company or members of an LLC. There are no statutory or common law obligations to purchase other classes of target securities, although the constitutional documents of the target should be reviewed to check for any ‘tag along’ or ‘drag along’ rights.
Where the Takeover Code applies and a mandatory offer is required to be made under Rule 8 of the Takeover Code (please see question 25 below), the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
15. At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
For companies listed on the CSX, the Takeover Code requires a cautionary announcement to be published on the CSX’s News Service and in the press preceding or during negotiations which may lead to an announcement of a firm intention to make an offer. A cautionary announcement must be made when an offer is under discussion and either the target is the subject of rumour and speculation or there is an abnormal movement in the price of the target’s shares traded on the CSX or any other exchange or negotiations or discussions are about to be extended to include more than a very restricted number of persons.
The Takeover Code further requires an announcement of a firm intention to make an offer to be published on the CSX’s News Service and in the press either when the board of the target has been notified in writing of a firm intention to make an offer from a serious source, irrespective of the attitude of the target’s board to the offer (responsibility for making the announcement rests with the target in such case), or immediately upon an acquisition of shares which gives rise to an obligation to make a mandatory offer under Rule 8 of the Takeover Code (please see question 25 below).
Irrespective of whether the Takeover Code applies, upon consummation of a statutory merger or consolidation, a copy of the certificate of merger or consolidation must be given to the shareholders and creditors of the constituent company and a notification of the merger or consolidation must also be published in the Cayman Islands Gazette.
Otherwise the Cayman Islands do not have any regulations relating to the making or content of any public announcement unless required by the target’s constitutional documents or by a foreign stock exchange if the target’s shares are listed.
16. At what stage of negotiation is public disclosure required or customary?
Please see our response to question 15 above – other than where the Takeover Code applies, the Cayman Islands do not have any regulations relating to the making or content of any public announcement.
17. 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. The purchaser’s period of exclusivity will often be a point of negotiation and documented in the letter of intent (LOI).
18. Are there any circumstances where a minimum price may be set for the shares in a target company?
For companies listed on the CSX, the Takeover Code mandates that cash offers at a set minimum price must be made in certain circumstances. Otherwise 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.
19. Is it possible for target companies to provide financial assistance?
There are no financial assistance rules in the Cayman Islands and it is possible for the target to pay adviser costs (although the Board will still need to consider corporate benefit and obtain any necessary shareholder approvals required under the company’s or LLC’s constitutional documents).
20. Which governing law is customarily used on acquisitions?
It is typical for Cayman Islands law to govern (i) in relation to a merger or consolidation, the plan of merger itself, 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 these to be governed by either Cayman Islands law or, more commonly for cross border deals, the law of the purchaser’s jurisdiction.
21. What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
This will be determined by the rules of the stock exchange upon which the target is listed but typically this will include: (i) a circular setting out the terms and conditions of the offer; (ii) the offer document and/or prospectus; and (iii) an acceptance form.
In order to comply with their fiduciary duties, the directors of the target will need to provide shareholders with sufficient information to enable them to reach a properly informed decision. This could include financial statements and valuations. No relevant information should be withheld from the shareholders.
For companies listed on the CSX, the Takeover Code provides that, during the course of an offer or when an offer is in contemplation, the offeror, the target 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 target 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.
22. 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 stamp duty in the Cayman Islands in connection with the transfer of shares in a Cayman Islands exempted company (other than those of a company that holds interest in real estate in the Cayman Islands).
In the case of a company, the articles of association will typically require that an instrument of transfer in writing executed by the transferor (and, where the shares are not fully paid, by the transferee) has been delivered to the Board of the company which issued the shares. The articles of association of the company usually specify additional requirements including delivery of the relevant share certificate (or the giving of an appropriate indemnity for a lost share certificate). The Board will then approve the transfer and 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).
In the case of an LLC, the formalities for transfers of LLC interests prescribed in the LLC agreement must be complied with. The LLC agreement will typically require that an instrument executed by the transferee has been delivered to the Board of the LLC pursuant to which the transferee agrees to be bound by the terms of the LLC agreement. The Board will then approve the transfer and instruct the relevant person to update the register of members of the LLC and, as applicable, the schedule to the LLC agreement.
23. 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 target’s 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. The squeeze-out procedure is also available in the context of a hostile transaction (assuming the relevant thresholds are met).
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.
The Cayman Islands does not have any applicable takeover, competition or anti-trust legislation save for competition rules which apply to changes of control of certain entities regulated by the Information and Communications Technology Act (As Revised). Pursuant to the Utility Regulation and Competition Act (As Revised), if the target’s business is caught within the ambit of the Act, OfReg has the power to determine if an entity has significant market power in a relevant market. If so determined, OfReg can impose specific conditions, including obligations relating to cost recovery and price controls.
In order to comply with their fiduciary duties, the directors of a target 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 managers/managing members of an LLC, they may also be obligated to consider any bona fide offer.
24. What protections do directors of a target company have against a hostile approach?
Other than for companies listed on the CSX, 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 our response to question 23 above, depending on the scope of the fiduciary duties imposed on the managers/managing member of an LLC, they may also be obligated to consider any bona fide offer.
If the target is listed on the CSX, the Takeover Code provides that at no time after a bona fide offer has been communicated to the board of the target, or after the board of the target has reason to believe that such an offer might be imminent, may any action be taken by the board of the target 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.
25. Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
In the case of a company listed on the CSX, the Takeover Code requires that, where there has been an announcement of a firm intention to make an offer, the offeror must, except with the consent of the Council Executive, proceed with the offer unless the posting of the offer is subject to the prior fulfilment of a previously disclosed specific condition and that condition has not been fulfilled. The offeror must publish its offer document within 30 days of the announcement of a firm intention to make an offer. In addition, the Takeover Code requires a mandatory offer to be made when the bidder: (i) acquires, whether by a series of transactions over a period of time or otherwise, shares which (taken together with shares already held by the bidder or held or acquired by persons acting in concert with the bidder) carry 30% or more of the voting rights of a company; or (ii) together with persons acting in concert with him, holds not less than the 30% but not more than 50% of the voting rights of a company and the bidder, or any person acting in concert with the bidder, acquires in any period of 12 months additional shares carrying more than 1% of the voting rights.
Otherwise the Cayman Islands do not have any laws or regulations requiring an acquirer to make a mandatory or compulsory offer for a target company, although the constitutional documents of the target should be reviewed to check for any ‘tag along’ or ‘drag along’ rights.
26. If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Without an express shareholder agreement, minority shareholders of Cayman Islands companies have very limited rights. 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 (for example, in a shareholder agreement), 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 they can show that a duty owed to them personally (rather than to the company) has been breached. For example, if a shareholder is prevented from exercising a right conferred on them by the company’s constitutional documents, they would be able to 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 in certain circumstances for shareholders to enforce a right belonging to the company (such as a breach by a director of their fiduciary duties) by bringing an action in the company’s name against another party (a derivative action). This will typically be in a case where the minority alleges that a wrong has been committed against the company by a party that is being protected by the majority shareholders.
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 lay with the Board. However if the Board are responsible for the wrong doing then the Board may choose not to pursue the matter. In a scenario where 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 (1843) 2 Hare 461, 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. A derivative action can only be maintained with the Court’s permission and the court will not give permission unless the minority shareholder can satisfy the Court that the wrongdoing alleged would, if proved, amount to a ‘fraud on the minority’ and that the wrongdoers are themselves in control of the company, so that the company is prevented from acting for itself.
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).
27. Is a mechanism available to compulsorily acquire minority stakes?
100% control can be achieved through a statutory merger/consolidation, equity acquisition or upon the terms of a scheme of arrangement, each as described in our response to question 5 above. 100% control may also be achieved by a bidder availing themselves of the statutory squeeze-out provisions as more particularly described in our response to question 5 above.
Originally provided for Legal 500’s Country Comparative Guide to Mergers & Acquisitions, 2022.