Cayman Islands: The Mergers & Acquisitions Law Review 11th Ed.: Cayman Islands

Last Updated: 26 October 2017
Article by Suzanne Correy and Daniel Lee
Most Read Contributor in Cayman Islands, October 2017

Suzanne Correy and Daniel Lee1

I OVERVIEW OF M&A ACTIVITY

The Cayman Islands is recognised as one of the world's leading global financial services centres. Cayman Islands M&A activity is therefore largely driven by global rather than regional or national trends. Global M&A volume declined in 2016 after a record-breaking year in 2015. The Bureau van Dijk M&A Review Global, Full Year 2016 Report records deals worth US$4.7 trillion announced during the course of 20162 (2016 Bureau van Dijk M&A Review Global Report). Consequently, Cayman Islands M&A-related activity also declined during 2016. According to the 2016 Bureau van Dijk M&A Review Global Report, announced M&A deals in the Cayman Islands in 2016 had an aggregate value of US$68.8 billion, down from the high of 2015 but ahead of 2014.

The three main types of entity used in the Cayman Islands are the exempted company, the exempted limited partnership and the limited liability company (LLC). During 2016, 9,812 exempted companies, 3,277 exempted limited partnerships and 205 LLCs were incorporated or registered in the Cayman Islands, with 80,658 exempted companies, 20,122 exempted limited partnerships and 192 LLCs being active as at 31 December 2016.3

II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

The key sources of regulation of M&A in the Cayman Islands are the Companies Law (2016 Revision) (Companies Law) and common law.

The Companies Law includes provisions permitting mergers and consolidations between one or more companies, provided that at least one constituent company is incorporated under the Companies Law. The Limited Liability Companies Law (LLC Law), discussed further below, also provides for a similar framework for Cayman Islands LLCs.

Mergers, amalgamations and reconstructions by way of a scheme of arrangement approved by the requisite majorities of shareholders and creditors and by an order of the Cayman Islands court under Section 86 or 87 of the Companies Law are still available for complex mergers (and are mirrored in the LLC Law). The Companies Law provides a limited minority squeeze-out procedure (which, again, is mirrored in the LLC Law).

The Cayman Islands does not have a prescriptive set of legal principles specifically relevant to 'going private' and other acquisition transactions (unlike other jurisdictions such as, for example, Delaware). Instead, broad common law and fiduciary principles will apply. While there are no specific statutes or government regulations concerning the conduct of M&A transactions, where the target company's securities are listed on the Cayman Islands Stock Exchange (CSX), the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares, which exists principally to ensure fair and equal treatment of all shareholders, may apply.

III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT

i LLCs

In June 2016, the LLC Law came into force creating a new Cayman Islands vehicle: the LLC. This vehicle takes its inspiration, in part, from the Delaware LLC. The flexible nature of the vehicle means that it will be well-suited to a broad range of general corporate and commercial applications. The introduction of the LLC is expected to further strengthen the Cayman Islands' position as the domicile of choice for offshore investment funds and corporate structuring vehicles. During the first 12 months that the new vehicle has been available, approximately 400 LLCs have been registered.

An LLC is essentially a hybrid vehicle, combining certain characteristics of a Cayman Islands exempted company with those of a Cayman Islands exempted limited partnership. In developing the vehicle, certain Delaware concepts were taken into consideration and adapted, where appropriate, to mesh with Cayman Islands law and concepts. An LLC is a body corporate with separate legal personality, like a Cayman Islands exempted company, but without the constraint of having share capital.

Equivalent to the Delaware statute, the LLC Law provides a set of default rules as to how an LLC operates. However, the members of an LLC are free to legislate their own arrangements in the vehicle's LLC agreement (the constitutional document of the LLC), which is not publicly filed.

Generally, the liability of a member of an LLC is limited to the amount a member has contractually agreed to contribute to the LLC. There is a limited statutory clawback, which applies only where a member receives a distribution when the LLC is insolvent and the member has actual knowledge of such insolvency at the time the distribution is made. There is great flexibility in how LLCs are managed. They may be governed by the members themselves or appointed managers who need not be members (such as a board of managers).

Unless otherwise expressly specified in the LLC agreement, the default duty of care in managing an LLC is to act in good faith. The good faith duty may be expanded or restricted, but not eliminated, by the express provisions of the LLC agreement. In an M&A context, we consider this feature may be of particular interest for management buyout investors who may wish to have the right to appoint a representative as a director or manager of that vehicle. In a traditional exempted company, any investor representative (in a company context, as a director) has a duty to act at all times in the best interests of the company when participating in company decisions: the representative cannot solely consider the interests of the investor that has appointed him or her (to do so would expose him or her to potential personal liability). Contrast this with an LLC, where the members have the freedom to contractually agree in the LLC agreement the duty of care that the managers of the LLC owe.

Although dependent on the required structuring for particular deals, we anticipate that the vehicle will be used in a broad range of corporate and commercial applications, including acquisition and joint venture structures, acting as corporate blockers and holding vehicles, as preference share issuing vehicles (in a venture capital financing arrangements), employee incentive vehicles and in structured finance transactions.

ii Merger regime and dissenting rights

Since its introduction in 2009, the merger regime of Part XVI of the Companies Law has become a popular tool for facilitating mergers involving Cayman Islands companies. Under this regime, two or more companies may merge, with their property and liabilities vesting in one of such companies as the surviving company.

Similar to other jurisdictions with equivalent regimes, the Companies Law provides for a right of dissenting shareholders to object to a merger and be paid a payment of the fair value of their shares upon their dissenting to the merger if they follow a statutory procedure. If the dissenting shareholders and the relevant company are unable to agree in accordance with the statutory procedure, the Grand Court of the Cayman Islands has the power to determine the fair value of the shares, together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value.

These rights of a dissenting shareholder are not available in certain circumstances. For example:

a to dissenters holding shares of any class in respect of which an open market exists on a recognised stock exchange or recognised interdealer quotation system at the relevant date; and

b where the consideration for such shares to be contributed are shares of the surviving or consolidated company (or depositary receipts in respect thereof ), are shares of any other company (or depositary receipts in respect thereof ) that is listed on a national securities exchange or designated as a national market system security on a recognised interdealer quotation system, or are held of record by more than 2,000 holders.

In 2015, the Grand Court ruled for the first time on fair value in the context of a merger of Cayman Islands companies (Maples and Calder acted for the successful dissenting shareholders). The decision of the Court (in Integra Group) sets out important guidance as to how, where a shareholder has dissented to a statutory merger, the 'fair value' of the dissenter's shares will be determined. The following guidance can be taken from the Court's decision: a Fair value is the value to the shareholder of his or her proportionate share of the business as a going concern: it is a value that is 'just and equitable' and provides adequate compensation consistent with the requirements of justice and equity. Fair value does not include any premium for forcible taking of shares, and a minority discount cannot be applied. In determining fair value, neither the upside nor downside of the transaction being dissented from should be taken into account (for example, any costs savings obtained by a company going private).

b Assessing fair value is a fact-based exercise, which requires an important element of judgment by the court.

c Where a company's shares are listed on a major stock exchange, this does not mean that a valuation methodology based upon its publicly traded prices is necessarily the most reliable. Whether this valuation methodology is appropriate will depend on whether there is a well-informed and liquid market with a large, widely held, free float.

d The date for determining fair value was the date that the shareholders approved the transaction: this was the date on which the offer could be accepted. Importantly, the Court concluded that dissenting shareholders could not take advantage of the cost savings going forward as a result of the merger. The Court's view was that dissenting shareholders should not benefit from any enhancement in the value of their shareholding attributable directly to the transaction from which they have dissented.

Interestingly, in reaching its decision, the Court took into account guidance concerning similar statutory merger processes that exist in the States of Delaware and Canada. In view of the litigious nature of United States M&A, there is a significant volume of case law on this topic in Delaware. We believe this may be the first time that the Court has specifically considered Delaware precedent.

Shareholders are continuing to seek to enforce their dissenter rights, and case law is developing in this area. Early in 2017, in Re Qihoo 360 Technology Co Ltd, the Court clarified that it may make an interim payment order after a dissenting petition is filed but before trial, meaning that a dissenting shareholder may be entitled to receive an interim payment effectively relating to its merger consideration prior to the final determination by the Court of fair value.

iii Global transparency

Already recognised by the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF) and other international bodies for its transparency and standards consistent with those of other major developed countries, the Cayman Islands is acknowledged as a first class jurisdiction for conducting international business. The government has also now implemented or confirmed a number of further transparency steps it is willing to take, including:

a the introduction in July 2017 of a beneficial ownership register regime, discussed further below;

b a willingness to commence discussions with those jurisdictions that are participating in the G5 initiative (for the exchange of beneficial ownership information with law enforcement agencies) on entering into bilateral agreements with the Cayman Islands, similar to the beneficial ownership regime now in place with the UK;

c the repeal of the Confidential Relationships (Preservation) Law and its replacement by the Confidential Information Disclosure Law, which offers more understanding and definition with regard to the mechanisms in place for sharing confidential information with the appropriate authorities;

d acknowledging privacy as a basic human right, introducing new data protection legislation (this legislation will be on par with what is in place in the European Union); and

e the abolishment of bearer shares (completed in May 2016).

These measures demonstrate the Cayman Islands' continued efforts to comply with and promote transparency through close collaboration and compliance with the relevant global regulatory bodies, tax authorities and law enforcement agencies in line with international standards, while simultaneously respecting the legitimate right to privacy of law-abiding clients.

The Cayman Islands has agreements to share tax information with authorities in over 90 other countries, including the US under FATCA, and is in the 'early adopter' group for the Common Reporting Standard, the OECD's global tax information exchange standard. In July 2017, the Cayman Islands introduced a new beneficial ownership register regime. Exemptions mean that certain Cayman Islands companies and LLCs are not in scope of the regime. Where a company or LLC is in scope, it must take 'reasonable steps' to identify its beneficial owners and certain intermediate holding companies, and to maintain a beneficial ownership register at its registered office in the Cayman Islands with a licensed and regulated corporate service provider.

This register must generally record details of the individuals who ultimately own or control more than 25 per cent of the equity interests, voting rights or rights to appoint or remove a majority of the company directors, or LLC managers, together with details of certain intermediate holding companies through which such interests are held.

The corporate service providers must facilitate access to such information extracted from the register through a centralised IT platform operated by a competent authority designated by the government. The information will not be held on a central register by either the government or the competent authority; nor will it be publicly accessible or searchable. Only Cayman Islands and UK authorities will have rights to request information on an individual (and not automatic) request basis only. The information on the beneficial ownership register can already be requested by UK authorities under existing information exchange gateways, so in essence the new regime merely seeks to streamline the process to provide for quicker and more discrete search accessibility.

Download >> The Mergers & Acquisitions Law Review 11th Ed.: Cayman Islands

Footnotes

Suzanne Correy is a partner and Daniel Lee is an associate at Maples and Calder.

2 Total announced deal value, The Bureau van Dijk M&A Review Global, Full Year 2016.

3 Cayman Islands Registrar of Companies and Registrar of Exempted Limited Partnerships annual statistics.

This article was first published in The Mergers and Acquisitions Review, - Edition 11

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.

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