Recently there have been an increasing number of companies listed in the USA with their main operations in China been taken private by their founders. Invariably these listed companies are incorporated in the Cayman Islands.
Parties are taking advantage of amendments to the Cayman Companies Law (as amended) (Companies Law) in 2009 which allowed for mergers or consolidations under certain circumstances involving Cayman companies without the need for court approval, which can have significant cost and timing implications.
A typical "take private" will utilise the Companies Law to effect a statutory merger by the founders of the listed company setting up a new Cayman company (MergerCo) which will merge with the listed company (Target), the Target being the "surviving company".
CAYMAN MERGERS – IN A NUTSHELL
Under the Companies Law certain key documents are required and certain procedures need to be carried out to achieve a statutory merger. Both constituent companies need to prepare a plan of merger (Plan), which is typically in short form and governed by Cayman law and is normally scheduled to a more detailed merger agreement. The Plan must be approved by the shareholders and directors of both constituent companies. Shareholder approval must be by way of special resolution (normally a two thirds majority) and any other special requirements in the constitutional documents of the companies. In addition all existing secured creditors of the constituent companies must also agree to the Plan, or the companies may seek a waiver for this requirement from the Cayman courts.
Once all consents have been obtained, the Plan will be filed with the Registrar of Companies in the Cayman Islands (Registrar) along with certain other documents are required by the Companies Law. In most cases these documents will be reviewed and signed off by the Registrar in advance of formal submission.
The Registrar will issue a certificate of merger (Merger Certificate) and this will be date the merger is effective (unless parties have agreed in advance to set a subsequent effective date, which is no later than 90 days after the date the Plan is registered with the Registrar) (Effective Date). On the Effective Date the MergerCo will be struck off the Cayman companies register, although it is not deemed to be wound-up. All rights, obligations, assets and liabilities of each constituent company continue with the Target, as the surviving entity.
To successfully achieve a take private, all the shares in the Target will need to be purchased and the cost can often be considerable. For a listed company with a large share capital, this may require financing from lenders. In many respects providing loan financing in relation to a take private is similar to other forms of secured lending transactions, but providing financing for a merger does raise several unique considerations.In the first instance the lenders should review the merger documents before they are signed and filed with the Registry so the lenders are familiar with the terms of the merger. In addition, if lenders are taking security pre merger, they will need to consent to the merger pursuant to the requirements of the Companies Law.
In a take private financing there are normally several layers of companies on top of the MergerCo, who may act as guarantors, security providers and borrowers. Often these companies are also Cayman incorporated, and sometimes companies incorporated in the British Virgin Islands (BVI). Lenders will enter into a loan agreement with MergerCo and its associated companies. Cayman Islands and BVI are beneficial in such structures as there are no exchange control, tax or financial assistance issues.
The terms of the loan agreement will have to deal directly with the merger and especially how and when security will be provided both pre and post merger.
As with any secured lending, parties will need to provide security for their loan obligations. It is common for lenders to take security over the shares in MergerCo. Another form of security will be for the MergerCo to assign its rights in the merger agreement. Lenders should make sure any registration requirements are attended to upon signing of any security documents.
As the majority value in the merger will lie with the Target, lenders will want to obtain security at Target level, including share security over the Target and other security in relation to any of its subsidiaries. However this can only occur post merger, however often these security documents are drafted and agreed in advance of the merger as part of the conditions precedent to the loan agreement.
DRAWDOWN V TAKING OVER
There will be a time difference between when the lenders will allow the MergerCo group to drawdown on the loan facilities and when the selling shareholders of the Target will be paid and the Merger Certificate is issued. During these periods lenders are naturally concerned as to whether they are protected. The borrower group will require the monies to effect the merger. Each transaction will follow its own patterns, but possible solution is for parties to enter into escrow arrangements so the loan proceeds are held with an escrow agent to be released directly to the selling shareholders upon the issuance of the Merger Certificate. The lenders and borrower groups will need to liaise closely to discuss and agree logistics in advance.
Upon the Merger Certificate being issued, the merger will be effective. From this date onwards the Target is the surviving company. As the surviving company it will take on the liabilities of the MergerCo in the loan agreement. Sometimes lenders may require the Target (as surviving company) to accede the loan agreement. Corporate records, such as registers of members and directors will need to be updated promptly and lenders will require certified copies. Often these documents can be prepared in advance and provided to lenders to be held in escrow until the merger is effective. If any security is taken in relation to the Target and its subsidiaries, such security should be registered promptly.
As it is likely the Target is a listed company, there will be local listing requirements to comply with and lenders will want to ensure the Target attends to these promptly. After the merger, the Target (as surviving company) will no longer have public shareholders and will therefore needs to be delisted, again there may be specific requirements in relation to this.
OFFSHORE LAWYER ROLE FOR LENDERS
MergerCo and Target will appoint offshore counsel and likewise lenders will require their own offshore counsel. Offshore counsel for the lenders will assist in reviewing all the merger documents and drafting any offshore law governed security documents. They will liaise closely with offshore counsel of MergerCo and Target to ensure drawdown and the merger proceeds smoothly. In addition offshore counsel will need to issue legal opinions on the financing and the merger.
Appleby has acted for lenders in several take privates, including in relation to NASDAQ listed Shanda Interactive Entertainment Limited, NYSE listed Giant Interactive Group Inc and NASDAQ listed China Hydroelectric Corporation.
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.