New provisions of the Cayman Islands Companies Law (2007 Revision) (the "Law") to regulate the merger and consolidation of companies have recently been approved by the legislature. It is anticipated that the Companies (Amendment) Law, 2009 (the "Amendment") will come into effect around the end of April 2009. The new provisions are a welcome enhancement to the Law.
The Amendment introduces a new Part XVA of the Law which allows for the merger and consolidation of companies.
A "merger" involves the merging of two or more constituent companies whereby one of such companies is the surviving company. A "consolidation" involves the combination of two or more constituent companies into a consolidated company. In each case, the property and liabilities of the constituent companies will be vested in the surviving or consolidated company.
The new merger and consolidation provisions will sit alongside the existing scheme of arrangement provisions in Sections 86 and 87 of the Law. The new provisions will offer a quicker, less onerous system of achieving a merger or consolidation than is possible by way of a scheme of arrangement. The scheme of arrangement mechanism which requires (amongst other things) court approval will remain relevant for more complicated combinations where the surviving company is to be a foreign corporation.
Who can merge/consolidate?
Any two or more Cayman Islands companies limited by shares (other than segregated portfolio companies) may merge or consolidate in accordance with the Amendment.
The Amendment also allows one or more Cayman Islands companies to merge or consolidate with one or more foreign companies (provided that the laws of the foreign jurisdiction permit such merger or consolidation), where the surviving or consolidated company will be a Cayman Islands company.
What is the procedure for a merger/consolidation?
Step 1: Approve the plan of merger or consolidation
The first step is for the directors of each constituent company to approve a written plan of merger or consolidation (a "Plan"). The Amendment specifies the required content of the Plan, which includes (i) the terms and conditions of the proposed merger or consolidation, including the rights and restrictions to be attached to the shares issued in the consolidated or surviving company, (ii) details of the memorandum and articles of association of the surviving or consolidated company, (iii) any amount or benefit paid or payable to the directors as a consequence of the merger or consolidation and (iv) the name and address of any secured creditor and the nature of the secured interest held.
Some or all of the shares in each company may be converted into different types of property (shares, debt obligations, other securities in the surviving company or consolidated company, money, other property or any combination thereof) as provided in the Plan.
Step 2: Obtain the required consents
The Plan must be authorized by each constituent company by a shareholder resolution by a majority in number representing 75% in value of the shareholders voting together as one class. If the shares to be issued to each shareholder in the consolidated or surviving company are to have the same rights and economic value as the shares held in the constituent company, the Plan must be authorized by each constituent company by a special resolution (usually, and in any event not less than, a two-thirds majority) of the shareholders voting together as one class. In each case, a shareholder has the right to vote regardless of whether the shares held by him otherwise confer voting rights.
Where a parent is merging with one or more of its Cayman Islands subsidiaries, shareholder consent is not required. A parent for these purposes is a company that owns at least 90% of the issued shares of each class in a subsidiary company that are entitled to vote.
The consent of each holder of a fixed or floating security interest in a constituent company must be obtained. If consent is not obtained with respect to a Cayman Islands company, the Court can waive the requirement for such consent upon such terms as the Court considers reasonable. Where the relevant company is a foreign company, consent or approval of the transfer of any security interest to the surviving or consolidated company must be obtained.
Any relevant consents from, or filings with, the Cayman Islands Monetary Authority must be obtained or made. This would apply to any funds registered under the Mutual Funds Law or any licensees under the Mutual Funds Law, the Banks and Trust Companies Law, the Insurance Law and/or the Securities Investment Business Law.
Step 3: Filing and Registration
Once the constituent companies have obtained the necessary authorizations and consents, the Plan must be signed by a director of each of the constituent companies and be filed with the Registrar of Companies (the "Registrar") together with various supporting documents in relation to each constituent company. These documents include a declaration by a director in relation to various matters concerning the applicable constituent company including a list of the constituent company's assets and liabilities (see further below) and an undertaking to provide a copy of the certificate of merger or consolidation to shareholders and creditors and publish a notice in the Gazette. Where any one or more of the constituent companies is a foreign company, certain additional declarations are required to be given by the director(s).
Upon receipt of the Plan, the supporting documents and the prescribed fee, the Registrar will register the Plan (including any amended and restated memorandum and articles of association) and issue a certificate of merger or consolidation.
The merger or consolidation may take effect on the date of registration of the Plan or, if a particular date is specified in the Plan, on the specified date (provided it is within 90 days of the filing).
The Registrar shall then strike off the register a constituent company that is not the surviving company in a merger, or any constituent company that participates in a consolidation.
What is the effect of a merger or consolidation?
Upon the merger or consolidation taking effect, all rights and property of each of the constituent companies immediately vest in the surviving or consolidated company and the surviving or consolidated company assumes all obligations of each of the constituent companies. The Amendment also provides for continuation of any existing claims, causes or proceedings.
What protections are there for creditors?
The director's declaration submitted to the Registrar must include (i) a declaration of solvency both of the constituent companies and of the consolidated or surviving company, with respect to the time immediately following the merger or consolidation and (ii) a declaration that the merger or consolidation is bona fide and not intended to defraud unsecured creditors.
The prior consent of secured creditors is required (subject to waiver by the Cayman Islands court with respect to Cayman Islands companies). Unless the relevant parties specifically agree otherwise, the surviving or consolidated company becomes liable under all mortgages, charges or security interests.
Are there any special provisions for dissenting shareholders?
The Amendment contains a mechanism whereby a shareholder of a constituent company which is a Cayman Islands company can seek payment of the fair value of his shares upon dissenting from a merger or consolidation. The shareholder must object in writing prior to the date upon which the shareholder vote to consider the merger or consolidation takes place. A procedure exists to seek a court ruling on fair value, failing agreement within a specified period. There are certain limitations on rights of dissenters – for example, the provisions generally will not apply to shares for which an open market exists on a recognized stock exchange or interdealer system.
The introduction of the new provisions comes at a time of unprecedented numbers of corporate reorganizations. The new regime offers a userfriendly mechanism for more straightforward mergers and consolidations, while at the same time offering a balance between commercial expediency and the interests of both creditors and shareholders. We anticipate significant interest from clients seeking to restructure their operations, whether as a consequence of the economic crisis or otherwise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.