Cayman Islands: "Take-Private" Transactions: The Cayman Islands Merger Regime

With the recent establishment of Carey Olsen's offices in Hong Kong and Singapore, we have prepared this article reviewing the Cayman Islands merger regime, "fair value" and dissenting shareholder rights for the information of our Asia-based clients. As the law in this emerging field develops, we will continue to provide regular updates.

Introduction

Mainland PRC businesses owned by holding companies listed on overseas stock exchanges, commonly in New York or London, have increasingly been utilizing the Cayman Islands company merger laws to take the listed company into private hands and de-list, with a view to re-listing the business on a PRC stock exchange.

A principal commercial driver for these transactions is the significant increase in share price often attainable on a PRC stock exchange for the same business. Financial commentators suggest that this phenomenon may be attributable to: (i) Chinese money being forced to stay in the PRC; (ii) relatively few attractive investment alternatives in the PRC; (iii) an incomplete understanding of PRC businesses by Western investors; and (iv) increased costs and regulatory requirements associated with listings on major overseas stock exchanges.

That this is a prevalent and expanding practice is born out by the figures: there were 37 such de-listings in the US alone in 2015 and 2016, with a combined deal value in excess of US$33 billion. 2017 has seen a continuation of this trend.

Merger regime: overview of the legal framework

The favoured method of taking listed Cayman Islands holding companies private is by invoking the Cayman Islands statutory merger regime in Part XVI of the Companies Law (as revised) (the "Law").

In summary, a new Cayman Islands company is established to merge with the listed Cayman target company. The terms of the merger are embodied in a formal plan of merger. The board (or a special committee of the board) will consider the plan and engage a financial expert to advise them on the "fairness" of the offer price for the shares. Following board approval, two-thirds of the shareholders of the company must vote in favour of the merger.

Listed companies seeking to go-private are attracted by the two-thirds shareholder approval threshold under the merger regime. Take-privates may also be achieved by way of a takeover and "squeeze out" process or implementation of a scheme or arrangement, but these avenues involve higher shareholder support thresholds and/or involvement of the Court.

Keys requirements for a successful take-private merger include the following:

  • Development of a merger plan in consultation with appropriate advisors.
  • Appointment of a financial expert to advise the board (or a special committee of the board) as to the appropriate offer price.
  • The directors of the company must approve a written plan of merger.
  • The plan must be approved by a special resolution of the shareholders of the company (requiring a two-thirds majority).
  • The consent of holders of fixed or floating security interests granted by the company must be obtained.
  • The directors of the company must make a declaration that (among other things) it is solvent, the post-merger company will be solvent and the merger is bona fide not intended to defraud unsecured creditors.

Upon obtaining all necessary authorisations and consents, the plan may be filed with the Registrar of Companies and will become effective.

Rights of dissenting shareholders

Shareholders of take-private target companies opposed to a planned merger are afforded certain rights under the Law. First, they may apply to the Court for relief on the ground that the merger is void or unlawful. This ground rarely arises in practice, but in effect, the merger may be stopped if the parties supporting the merger do not comply with applicable legal requirements.

Secondly, if certain preconditions are met, they may invoke a process which at its core alleges that the offer price for their shares is at an undervalue. Unless the company and the shareholders subsequently agree upon the "fair value" of the shares, the Court will be called upon to make that determination.

The "dissenting shareholder" / "fair value" provisions

The "dissenting shareholder" / "fair value" provisions are contained in section 238 of the Law and are supplemented by a growing body of case law. The gateway to activating section 238 - one which transforms an unhappy shareholder in a proposed take-private transaction into a "dissenting shareholder" entitled to payment of "fair value" for his shares – is the requirement that the shareholder properly notify the company of his objection to the merger before the merger vote. Once this is done, the shareholder qualifies as a dissenting shareholder under section 238.

The statutory procedure may be summarised as follows:

  • The dissenting shareholder must lodge an objection in writing prior to the vote on the proposed merger stating that he will demand payment for his shares if the merger is authorised by the vote.
  • Within 20 days of the vote (if approved), the company must give notice to dissenting shareholders of the approval.
  • The dissenting shareholder then has 20 days within which to give notice to the company of his decision to dissent and of the particulars of his shareholding, together with a demand for payment of the fair value of his shares.
  • The company must then, within 7 days, make a written offer to purchase the shares at a specified price.
  • If the dissenting shareholder and the company do not agree upon the price to be paid within the following 30 days, the company must (and the shareholder may) file a petition under section 238 of the Law to have the fair value of the shares determined by the Court.

The costs to a shareholder of activating the fair value determination process (points 1 to 4 above) are relatively modest in the early stages, but will increase once formal Court proceedings are initiated (point 5 above).

Determination of "fair value" by the Court

There have been two fair value trials in the Cayman Islands.8 The judgments in these cases, together with a number of important interlocutory judgments in cases which did not proceed to trial or are currently before the Court, have established in quite some detail, the legal framework, principles and procedures applicable to fair value cases.

The Cayman Islands regime follows similar legislation to that in Canada and Delaware. For this reason, the considerable body of case law available in those jurisdictions assists where appropriate in the development of Cayman Islands jurisprudence in fair value cases.

An in-depth account of Cayman Islands fair value case law will be addressed in a succeeding Carey Olsen article. However, for the purposes of this overview, it is worth mentioning the following major principles:

  • Fair value is a shareholder's proportionate share of the value of the company's business as a going concern as at the date of the shareholder's meeting approving the merger.
  • The appropriate valuation methodology will depend upon the circumstances of the particular company having regard to generally accepted valuation techniques.
  • No discount should be applied because the shares of a minority are being valued and no premium should be applied by reason that the shares are being compulsorily acquired.
  • The company and dissenting shareholder will adduce their own expert evidence as to fair value. In addition, the experts may prepare a joint report and they may be cross-examined on their evidence.
  • The company must provide discovery of sufficient information to enable the experts to opine on value.
  • The dissenting shareholder may be entitled to pre-payment by the company of the merger offer price and interest in some cases.

Notably, in both fair value cases that proceeded to trial, the dissenting shareholders enjoyed a significant increase in the price paid for their shares. In our own experience, a number of other fair value cases have been resolved by mutual consent after the commencement of legal proceedings, following the exchange of expert reports, but prior to trial. It stands to reason that with the benefit of detailed information provided to the shareholder by the company and consideration of each other's expert reports, parties are often able to find common ground as to fair value without the need for a formal determination by the Court.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
20 Sep 2018, Conference, St Peter Port, Guernsey

Carey Olsen Partner Chris Griffin will be speaking at the 2018 Blockchain & Cryptocurrency Conference on 20 September.

23 Sep 2018, Conference, St Peter Port, Guernsey

ABS East 2018 brings together the biggest and brightest securitization players for three days of non-stop content, networking and deal-making opportunities.

25 Sep 2018, Conference, St Peter Port, Guernsey

We are hosting our Autumn Trusts Conference events on the following dates:

Guernsey - Tuesday 25 September

Jersey – Thursday 27 September

London – Tuesday 2 October

Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions