The Cayman Islands now offers a very effective way for companies to amalgamate. Partner, Paul Scrivener and Senior Associate, Kay Carter, of Cayman Islands law firm, Solomon Harris, explain.
In May 2009 the Cayman Islands Companies Law (Revised) (the "Companies Law") was amended to provide a new statutory framework for companies to amalgamate either by way of merger or consolidation. Previously, an amalgamation could only be achieved by a purchase by Company A of shares in Company B, a purchase by Company A of the business and undertaking of Company B or by a scheme of arrangement involving a court-approved amalgamation of Company A and Company B. None of these offer the level of relative simplicity provided by the statutory framework for amalgamations introduced in May 2009 and further enhanced in April 2011. This statutory framework permits the merger or consolidation of two or more companies, called "constituent companies" and greatly facilitates company amalgamations under Cayman Islands law.
The difference between a merger and a consolidation is a technical one. In a merger, one of the constituent companies survives and becomes the surviving company from the merger, whilst the other constituent company or companies disappear by operation of law without the need for those companies to be wound up. In a consolidation, all of the constituent companies disappear by operation of law without the need for winding up and a new company, called the consolidated company, is automatically created. For ease of reference, we will use the term "merger" to refer to both mergers and consolidations.
A merger is generally preferable to a scheme of arrangement - the traditional way that companies merged under Cayman law - because it does not require the approval of the court and therefore takes less time and is less costly. A merger is also generally a better option than a transfer of the business and undertaking of one company to another because in a merger the assets and liabilities of the constituent companies are transferred to the surviving company or consolidated company by operation of law, which would generally mean that consents are not required from contractual counterparties (unless those parties hold security interests).
Until the Companies Law was further amended in April this year, companies incorporated outside the Cayman Islands ("foreign companies") could only be constituent companies if at least one of the other constituent companies and the surviving or consolidated company was a Cayman Islands company. This limitation meant that a merger under the Companies Law could only be used to "import" a foreign company into the Cayman Islands; it could not be used to "export" a Cayman company to another jurisdiction. This limitation was effectively removed in April by amending the Companies Law to provide that the merged company could be a foreign company as long as at least one of the other constituent companies was a Cayman company.
It is important to bear in mind that the Companies Law only permits mergers of companies that are not segregated portfolio companies. A segregated portfolio company is known in some jurisdictions as a protected cell company and is a type of company that may establish cells to ring fence different pools of assets and liabilities within the company. In addition, all constituent companies must be companies that are limited by shares and therefore a company limited by guarantee could not participate in a merger.
A merger will involve the directors of the constituent companies approving a written plan of merger which will contain various information prescribed by the Companies Law including certain details about the constituent companies and the terms and conditions of the proposed merger.
Each of the constituent companies must be in good standing and solvent and there must be no prohibition on merger or consolidation in the memorandum and articles of association or other constitutional documents. In addition, the constituent companies cannot be "tainted" by the commencement of any winding up proceedings, the appointment of any trustee or administrator in any jurisdiction, or any arrangement such as a scheme where the rights of creditors of the constituent company are suspended or restricted. A director of each Cayman constituent company must make a written declaration as to these matters and declare that the merger is not intended to defraud unsecured creditors of the company. A statement of the company's assets and liabilities must be attached to the director's declaration. For a Cayman regulated entity (eg a bank, trust company, mutual fund or insurance company), the approval in principle of the Cayman Islands Monetary Authority ("CIMA") would need be obtained and a statement should be included in the director's declaration that the company has complied with CIMA's requirements.
Unless a parent company incorporated under the Companies Law is proposing to merge with one or more Cayman-incorporated subsidiaries, the Plan must also be authorised by each constituent company by:-
(a) a special resolution of the voting shareholders (ie a two third majority of voting shareholders present in person or by proxy at a general meeting or a unanimous written resolution of all voting shareholders); and
(b) such other authorisation, if any, as is specified under the constituent company's articles of association.
As indicated above, it is not necessary to obtain court approval to merge or two or more constituent companies. Involvement of the court is only required where a secured creditor does not consent to a plan of merger or consolidation. In that case, the relevant constituent company may apply to the court for a waiver of the requirement to obtain consent of the relevant secured creditor.
For a foreign constituent company, the declaration must be made by a director of one or all of the Cayman constituent companies and will contain specific information with regard to the foreign constituent company.
A merger or consolidation may be made effective on the date when the required documents are filed with the Registrar of Companies or a date within 90 days after the filing date. An effective date later than the filing date may be identified either by reference to a specific date or the date when a specified event occurs eg obtaining of regulatory approvals.
Subject to certain limitations, if the shares of a constituent company are listed on a recognised stock exchange or interdealer quotation system, a shareholder of a constituent company who dissents from a merger is entitled to be paid the fair value of their shares. In order to exercise the right of dissent, the shareholder must provide the constituent company with a written objection to the merger or consolidation before the shareholders vote on the merger or consolidation.
Since Cayman's introduction of the statutory framework for mergers, the procedure has been used for many transactions and has made the Cayman Islands an increasingly attractive domicile for cross-border mergers. We certainly anticipate that this trend will continue as international merger activity continues.
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.