Nick Miles and Ciara Brady authored the Bermuda chapter of ICLG's Private Equity Laws and Regulations 2020. The chapter provides a helpful overview of Bermuda's laws and regulations relevant to private equity transactions, as well as on the private equity structures typically employed in Bermuda transactions and the attractiveness of Bermuda as a jurisdiction for the same. Private equity investment in Bermuda commercial insurers has more recently become a frequent event and we highlight some examples in the chapter. With growing private equity interest in the insurance-linked securities asset class, the chapter is likely to be of increasing relevance to those operating in the private equity arena.
1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions?
Private equity investment in Bermuda largely originates from the United States, Canada and Europe and, as fund managers are typically located in these jurisdictions, Bermuda's private equity transactions will follow the investment trends of major onshore markets. Bermuda is seeing an increasing trend in private equity investors taking stakes in Bermuda insurers and reinsurers, whether in new ventures or in participation in the insurance business consolidation and run-off. This trend is not surprising given Bermuda's position as the world's premier offshore insurance and reinsurance jurisdiction.
1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?
Bermuda is recognised as a premier offshore jurisdiction for domiciling private equity groups. Bermuda's robust and dynamic legislative and regulatory framework, common law legal system offering familiarity to UK and US investors, political stability, tax neutrality, OECD white list designation, choice of flexible structures which are easily set up, experienced service providers, proximity to major financial centres and favourable time zone together make Bermuda an attractive domicile of choice.
The Bermuda Monetary Authority (BMA), the regulatory body responsible for Bermuda's financial services sector, proactively consults with industry regarding its needs and the development of new laws and regulation. This has proven critical in establishing and maintaining a healthy relationship between business, government and the regulator and in fostering the continued development of robust industries, including private equity. Collaboration between the BMA and the industry has been most recently evidenced by the enactment of legislation providing for the incorporation of incorporated segregated accounts companies (facilitating the establishment of separate cells or sub-funds with separate legal personality), and legislation supporting the incorporation and regulation of fintech-related businesses. Such legislative changes are addressed, along with others, in greater detail in response to question 10.1 below.
1.3 What are going to be the long-term effects for private equity in your jurisdiction as a result of the COVID-19 pandemic?
While the long-term impact of COVID-19 on private equity in Bermuda will require more time to assess, we have seen an immediate impact of tightening of credit availability, completion dates being pushed out and break fees renegotiated. Having said that, the market turbulence resulting from COVID-19, along with hardening of rates in the insurance sector as a result of the estimated $100 billion of additional insured losses arising from the pandemic, have also presented opportunities in an area where private equity, understood to have a large volume of "dry powder", has recently shown much interest (see our answer to question 1.4 below). For example, a number of Bermuda insurers have engaged in significant capital-raising exercises to fund new acquisitions, presenting considerable opportunities, with Fidelis raising $800 million and RenaissanceRe $900 million, to name but two.
1.4 Are you seeing any types of investors other than traditional private equity firms executing private equity-style transactions in your jurisdiction? If so, please explain which investors, and briefly identify any significant points of difference between the deal terms offered, or approach taken, by this type of investor and that of traditional private equity firms.
Bermuda has witnessed a significant uptick in business involving private equity fund managers with a presence in the USA, Canada and Europe doing significant business in, or from, Bermuda, with Bermuda insurance and reinsurance companies. A large number of substantial private equity fund managers with a presence in the USA, Canada and Europe do significant business in, or from, Bermuda, such as Apollo Global Management and Onex Partners, which participate in the Bermuda insurance and reinsurance industry through companies like Athene Holding, Aspen Insurance and Convex Re. Athene Life Re's sidecar vehicle for life and retirement investment opportunities, Athene Co-Invest Reinsurance Affiliate, has recently raised $3 billion of capital. The Carlyle Group and Japan's T&D Holdings recently increased their holding of ex-AIG legacy reinsurance entity, Fortitude Re, to 76.6%. Runoff reinsurance also continues to be an area of interest for private equity, with Bermuda seen as an attractive domicile. 2019 saw Aquiline Capital Partners partner with others in a $500 million capital raise for Armour Group Ltd., a Bermuda-based property and casualty runoff acquirer, and Carlyle's stake in Fortitude Re as examples, not to mention investments in closed books of life business.
2 Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?
There is a broad choice of private equity vehicles in Bermuda, namely exempted companies limited by shares, exempted limited partnerships (LP), limited liability companies (LLC), segregated accounts companies, incorporated segregated accounts companies and unit trusts.
Private equity acquisition structures vary depending on whether the target entity is a privately or publicly held entity and whether the acquisition involves the whole, or only a minority position, of the target. For privately held Bermuda entities, acquisition may be by direct or indirect investment. Direct investment involves the issue of new shares (or partnership or membership interests or units) or the transfer of shares (or partnership or membership interests or units) to the private equity investors. Indirect investment structures typically involve the incorporation of an acquisition vehicle to acquire the target by way of share purchase, merger, amalgamation or share exchange. The acquisition vehicle may be the borrower under related debt facilities or other intermediary entities may be incorporated for such purpose or to accommodate other structuring needs of the acquirer, such as security arrangements and tax considerations.
Where the target is a listed entity, the acquisition structure may involve a merger or amalgamation, an offer to purchase the shares of the target, a compulsory acquisition, or a scheme of arrangement. While the requirements for a merger or amalgamation are the same for private and public targets (generally, the boards of the respective companies must approve the merger or amalgamation and agreement and their respective shareholders must approve the merger or amalgamation agreement, such approval, for any Bermuda entities, being 75% of the shareholders present and voting at a special general meeting at which two or more persons are present in person or by proxy, unless the bye-laws provide otherwise. All shares have the right to vote in an amalgamation, including non-voting shares, and classes may be entitled to a separate vote if the merge or amalgamation agreement contains a provision that would constitute a variation of the rights attaching to any such class of share. Shareholders who do not vote in favour of the merger or amalgamation and who are not satisfied that they have been offered fair value for their shares may, within one month of the notice of the special general meeting, apply to court to have the fair value of their shares appraised.
2.2 What are the main drivers for these acquisition structures?
Acquisitions structures are driven largely by onshore tax and commercial considerations, including requirements of lenders.
2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
The structuring of equity in a private equity transaction varies but would typically involve private equity investors subscribing for shares (common and/or preference) and possibly being issued loan notes, and key management similarly subscribing for shares (common or another class) and possibly being issued performance-triggered share options.
Where the structure employs LPs, private equity investors will subscribe for partnership interests and, though less common, management may participate through a carried interest.
2.4 If a private equity investor is taking a minority position, are there different structuring considerations?
Taking a minority position will often necessitate the private equity investor to focus on protections that can be established in the bye-laws and shareholders agreements. Typical minority shareholder protections include voting rights (whether through unanimous, weighted, veto or voting thresholds or requirements), anti-dilution rights, drag-along and tag-along rights, director nominations or appointments, information rights, and change of control provisions.
2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory acquisition provisions?
The typical allocation of equity to management would be in the range of 5–20%, but generally follow the trend of onshore markets.
Management's options would typically be subject to conditions tied in with performance and length of tenure, with options being exercisable on reaching targets and/or vesting on sale of the target within parameters. It would be expected that management shares would be subject to repurchase on termination of employment, with options being exercisable after employment termination depending on good and bad leaver scenarios.
2.6 For what reasons is a management equity holder usually treated as a good leaver or a bad leaver in your jurisdiction?
What constitutes a good or a bad leaver will be agreed contractually rather than by reference to Bermuda employment laws. Bad leavers would include those who voluntarily resigned, breached non-competition or other covenants or were otherwise terminated for cause. Good leavers would include those leaving employment due to death, injury or retirement or any other reason that does not fall under the category of a bad leaver.
3 Governance Matters
3.1 What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?
A Bermuda private equity portfolio company would be governed by its board of directors, typically composed of executive directors, investor-appointed directors and independent directors. In private equity transactions, a shareholders agreement (or investor rights agreement) would set out the rights of the investors and other shareholders (or a group of them) vis-à-vis each other and the company as regards, among other things, the appointment of directors and voting rights and thresholds. Neither the bye-laws nor the shareholders agreement are publicly available documents. However, due to changes to the Companies Act 1981 in 2018, certain provisions of the bye-laws are required to be filed with the Registrar of Companies (ROC), namely provisions on share transfer and registration of estate representatives, duties of the secretary and quorum requirements for general meetings. However, these filed bye-law provisions are not publicly available.
An LP is managed by its general partner (which need not be a Bermuda entity or resident) and the rights and obligations of the partners are largely agreed in the LP agreement, rather than statutorily mandated. The LPA is not publicly available and is not required to be filed with the BMA or the ROC.
Bermuda's limited liability legislation was modelled on that of Delaware and, as such, a Bermuda LLC will share many of the same attributes, including the significant degree of flexibility when it comes to management and shareholder arrangements, that are agreed in the LLC agreement. A private equity portfolio company that is an LLC is afforded great latitude in its governance structure – it may be member-managed or non-member-managed. As with an LP agreement, the LLC agreement is not a public document, nor it is filed with the BMA or ROC.
3.2 Do private equity investors and/or their director nominees typically enjoy veto rights over major corporate actions (such as acquisitions and disposals, business plans, related party transactions, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?
Whether and what veto rights a private equity investor will enjoy is a matter for negotiation in each transaction. It would not be usual to see veto powers (whether requiring the director or shareholder vote or requiring an agreed voting threshold be met whilst a benchmark shareholding is met) at a shareholder or director level regarding changes to share capital, debt, constitutional documents, the composition of the board or management, the nature of business and as regards anti-dilution (whether by the issue of new issues or share transfers), major acquisitions or dispositions and change of control.
Veto rights of limited partners are not typically seen where the private equity entity is an LP. In such cases, the general partner exercises its powers within the confines of the negotiated LPA.
3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?
The Companies Act 1981 expressly provides that certain powers of the company reserved to shareholders can be fettered (including name changes, alteration of the constitutional documents, alteration of share capital and removal of directors). Fettering of the powers of the company reserved to shareholders in a shareholder agreement or investors rights agreement that go beyond those expressly permitted would not be upheld by a Bermuda court.
As noted in response to question 3.6 below, directors owe fiduciary and statutory duties to the company. Any purported fettering of the discretion of the directors and their ability to act in the best interests of the company in the bye-laws or a shareholders/investor rights agreement may not be upheld by a Bermuda court. To avoid such issues, voting and veto powers should, to the extent possible, be at the shareholder level in the shareholders agreement. Similarly, the general partner of an LP owes a duty of good faith and must act in the interests of the LP and not in the interests of one limited partner.
3.4 Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?
Fiduciary duties are not owed by a private equity investor to minority shareholders under Bermuda law or vice versa (unless contractually agreed). Members have absolute discretion to exercise voting rights in their own sectoral interests, subject to limited exceptions relating to resolutions to approve and adopt modification and/or restatement of bye-laws, where resolutions to make such modifications or restatements can be attacked if shown to be of a type that no rational member could have approved.
3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?
There are no limitations or restrictions on the contents or enforceability of shareholders agreements, save if contrary to public policy (noting, as provided above, it would not be permissible for a shareholders agreement to fetter the powers of the company beyond that expressly permitted in the Companies Act 1981). Shareholders agreements governed by the laws of other jurisdictions are similarly enforceable to the extent they are not illegal or contrary to Bermuda public policy. Non-competition and non-solicitation provisions are enforceable under Bermuda law provided the restraint is reasonable and necessary to protect the legitimate business interests of the private equity investor and reasonable as to other factors.
3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies?
While directors of a Bermuda company may be appointed or elected by a particular shareholder or shareholder group, they each owe a fiduciary to act in good faith (including a duty to avoid conflicts of interest) in dealing with or on behalf of the company, and a statutory duty to act honestly and in good faith with a view to the best interests of the company. Such duties are owed to the company as a whole, which includes all its shareholders. As such, directors cannot put the interests of the shareholder who appointed or elected them in priority to the interest of the company and need to be particularly mindful that their duties are owed to the company as a whole and not to the shareholders who nominated or appointed them. Similarly, where a director is a director for multiple companies of the same group, while a group benefit may be considered, he must nonetheless act in the best interests of each company he serves individually and not sacrifice any one such company's interests to those of the group as a whole.
The bye-laws of a Bermuda company would typically provide (i) for the indemnification and exculpation of its directors and offices acting in relation to the affairs of the company and its subsidiaries, except in respect of any fraud or dishonesty, and (ii) that the company may purchase, for the benefit of its directors and officers, insurance in respect of losses arising out of a breach of their duty of care, diligence and skill or insurance indemnifying for losses in respect of negligence, default, breach of duty or trust. See also question 3.7 below regarding conflicts of interest.
The general partner of a Bermuda LP is responsible for managing the business of the LP and has a statutory duty to act in good faith and, subject to the express provisions of the limited partnership agreement (LPA), in the interest of the LP. With amendments made to Bermuda's partnership legislation in 2015, members of boards and committees of an LP will have the benefit of indemnity and exculpation clauses in the LPA (unless such agreement states otherwise).
As the express intent of Bermuda LLC legislation is to give maximum effect to the principle of freedom of contract, considerable flexibility is permitted as regards managers' duties to the LLC. Such duties are agreed in the LLC agreement and to the extent, at law or in equity, a member, manager or other person has duties (including fiduciary duties) to a LLC or member, manager or other party to the LLC agreement, the LLC agreement may expand, restrict or eliminate such duties (except that the LLC agreement may not permit fraud or dishonesty). The LLC agreement may also provide for indemnity and exculpation provisions for it members and managers (except in respect of their fraud or dishonesty) and provide for the purchase of insurance for the benefit of its officers, members and managers for liabilities incurred in acting in such capacities. See question 3.7 regarding conflicts of interest.
See also the response to question 10.5 regarding situations giving rise to shareholders, member and limited partner liabilities.
3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?
Directors are required by the Companies Act 1981 to disclose, at the first opportunity, at a meeting of the directors (or by writing to the directors), his interests in any material or proposed material contract with the company or its subsidiaries and in any person a party thereto. Failure to disclose a conflict of interest can render the director liable to a fine of $1,000. Subject to the bye-laws, a director is not prohibited from voting on any matter in relation to which he has disclosed an interest.
The Bermuda LLC Act expressly permits members and managers to vote in their own self-interest even if not in the best interests of the LLC, unless otherwise provided in the LLC agreement. Where the private equity fund is an LP, an advisory committee may be established for the purposes of approving/disallowing conflicts.
4 Transaction Terms: General
4.1 What are the major issues impacting the timetable for transactions in your jurisdiction, including antitrust, foreign direct investment and other regulatory approval requirements, disclosure obligations and financing issues?
Bermuda offers an efficient, streamlined approach to incorporation, formation and organisation of private equity vehicles. The ROC and the BMA are the two regulatory bodies that approve incorporation or formation of private equity vehicles. Once submission of the required beneficial ownership information is complete, a company can be incorporated or a partnership formed in a matter of days.
For private equity funds that are closed-ended investment funds, please see the response to question 10.1 which addresses recent amendments to the Investment Funds Act 2006 of Bermuda (IFA) bringing within its scope closed-ended investment funds and overseas investment funds, requiring registrations or designation. Where the private equity vehicle is a closed-ended investment fund, the registration process can be prompt, although consideration should be given to the time required to prepare the application which includes, among other things, a copy of the offering document complying with the IFA and details of the fund's service providers to satisfy the BMA that they are fit and proper persons.
There are no antitrust or foreign direct investment approvals to be obtained or filings to be made in Bermuda. The timetable for transaction could be impacted if the target is a regulated entity, such as a financial institution, investment business, regulated fund or insurance company where regulatory approvals or notification and confirmation of no objection may be required.
Unless a general permission of the BMA applies, all transactions involving the transfer or issue of shares to non-residents will first require the customary customer due diligence and vetting of the new ultimate beneficial owners. Once provided with satisfactory information, approval for the issue or transfer is typically a perfunctory matter.
Offers of securities to the public are subject to prospectus rules under the Bermuda Companies Act 1981. However, it is often possible to disapply these on the basis that the offer can be certified on behalf of the board of directors as not calculated to result, directly or indirectly, in the shares becoming available to more than 35 people and, if greater, they are likely to have an offering document as a matter of course. Prospectus rules are also disapplied where the securities are to be listed on an "appointed stock exchange" (being a foreign stock exchange approved by the ROC.)
4.2 Have there been any discernible trends in transaction terms over recent years?
Private equity transactions in Bermuda follow the trends in North America and Europe.
5 Transaction Terms: Public Acquisitions
5.1 What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?
For the most part, Bermuda companies in privatisation transactions are likely to be listed on exchanges outside of Bermuda, so one would need to look to the particular exchange to ascertain the relevant features and/or challenges to the privatisation.
Bermuda does not have a takeover code. The rules of the applicable exchange (being the Bermuda Stock Exchange listing rules if the target is listed in Bermuda), the Companies Act 1981, any other applicable legislation (which will be dependent on the business of target company) and the constitutional documents of the target will all be relevant in a privatisation. As noted in response to question 2.1 above, where the target is a public company, the transaction will be structured in one of the manners outlined in response to question 2.1 above.
5.2 What deal protections are available to private equity investors in your jurisdiction in relation to public acquisitions?
Break fees and "no shop" provisions are available, provided the break fee is based on a genuine pre-estimate of compensation for losses and not a penalty, and with the "no shop" being subject to exemption where necessary to permit directors to comply with their fiduciary duties in relation to a competing offer. Break fees tend to be in the range of 2–4% of the deal value.
6 Transaction Terms: Private Acquisitions
6.1 What consideration structures are typically preferred by private equity investors (i) on the sell-side, and (ii) on the buy-side, in your jurisdiction?
Consideration is most commonly subject to a holdback for adjustments based on post-closing valuations of the target. The use of a locked box consideration structure is increasing.
6.2 What is the typical package of warranties/indemnities offered by (i) a private equity seller and (ii) the management team to a buyer?
It would be expected that management provide the usual commercial warranties, and sellers push to limit their representations to title, capacity and authority, with knowledge and materiality qualifiers and short survival periods. Indemnification for losses resulting from breaches of representations and warranties are customary (to the extent not otherwise captured in post-closing adjustments), with trigger and cap thresholds.
6.3 What is the typical scope of other covenants, undertakings and indemnities provided by a private equity seller and its management team to a buyer?
Sellers would be expected to provide pre-completion covenants to assist with any regulatory filings or approvals, and exiting management may be required to provide non-solicitation and non-compete covenants (see response to question 3.5 for further considerations on non-compete and non-solicitation clauses).
6.4 To what extent is representation & warranty insurance used in your jurisdiction? If so, what are the typical (i) excesses / policy limits, and (ii) carve-outs / exclusions from such insurance policies, and what is the typical cost of such insurance?
Warranty and representation insurance is seldom purchased in connection with Bermuda private equity transactions.
6.5 What limitations will typically apply to the liability of a private equity seller and management team under warranties, covenants, indemnities and undertakings?
While negotiating terms, a seller may limit its liabilities under warranties, covenants and its indemnity by limiting their scope, employing knowledge qualifiers, restricting the period for claims, employing threshold amounts for triggering payment (whether for individual items or in the aggregate), and seeking an individual or aggregate cap.
6.6 Do (i) private equity sellers provide security (e.g. escrow accounts) for any warranties / liabilities, and (ii) private equity buyers insist on any security for warranties / liabilities (including any obtained from the management team)?
No, it is not usual for sellers to provide security for warranties or liabilities. While warranty and representation insurance may be used in transactions, it remains a common approach for a portion of total consideration to be withheld and subject to adjustment based on post-completion adjustments to the value of the target, capturing losses resulting from breaches of warranties certain and/or covenants.
6.7 How do private equity buyers typically provide comfort as to the availability of (i) debt finance, and (ii) equity finance? What rights of enforcement do sellers typically obtain in the absence of compliance by the buyer (e.g. equity underwrite of debt funding, right to specific performance of obligations under an equity commitment letter, damages, etc.)?
Sellers obtain comfort as to equity or debt financing in the transaction agreement, be it a purchase or implementation agreement, whose obligations would become enforceable on the satisfaction of agreed conditions. Representations and warranties as to financing and/or comfort letters would also be customary.
6.8 Are reverse break fees prevalent in private equity transactions to limit private equity buyers' exposure? If so, what terms are typical?
While reverse break fees are seen in Bermuda transactions, their prevalence is deal-driven, with an increased prevalence in deals involving US investors.
7 Transaction Terms: IPOs
7.1 What particular features and/or challenges should a private equity seller be aware of in considering an IPO exit?
IPOs on the Bermuda Stock Exchange are not a common exit strategy for private equity transactions. If an IPO is the chosen exit strategy, it is more likely that the entity would be conducting an IPO on an onshore exchange and, as such, the rules of such exchange would be relevant. The BMA has given its permission for the issue and transfer of "equity securities" of Bermuda-exempted companies to and from non-residents of Bermuda where such company's equity securities are listed on an "appointed stock exchange". (An equity security is a share conferring the right to vote for or appoint a director (or security convertible into such a share) and there are 59 appointed stock exchanges, including NASDAQ, NYSE, the LSE and HKSE.)
7.2 What customary lock-ups would be imposed on private equity sellers on an IPO exit?
The terms of lock-ups would be negotiated by onshore parties and, in particular, the underwriters, to the IPO. Private equity sellers should expect a lock-up on all or some of their shares for a period of approximately six months post-IPO.
7.3 Do private equity sellers generally pursue a dual-track exit process? If so, (i) how late in the process are private equity sellers continuing to run the dual-track, and (ii) were more dual-track deals ultimately realised through a sale or IPO?
Private equity sellers seeking the highest return on their investment will generally pursue a dual-track exit.
8.1 Please outline the most common sources of debt finance used to fund private equity transactions in your jurisdiction and provide an overview of the current state of the finance market in your jurisdiction for such debt (particularly the market for high yield bonds).
Private equity investors are typically based outside Bermuda, as is their source of financing transactions. As it is necessary to look to onshore markets to understand the debt sources and state of finance in those markets.
8.2 Are there any relevant legal requirements or restrictions impacting the nature or structure of the debt financing (or any particular type of debt financing) of private equity transactions?
No, there are no legal requirements or restrictions impacting the nature of structure of debt financing in Bermuda.
8.3 What recent trends have there been in the debt financing market in your jurisdiction?
As debt financing for private equity transactions is not typically obtained in Bermuda, there are no discernible trends to speak of.
9 Tax Matters
9.1 What are the key tax considerations for private equity investors and transactions in your jurisdiction? Are off-shore structures common?
Private equity vehicles and their investors, shareholders, partners or unit holders, as the case may be, that are non-residents of Bermuda are not subject to any tax computed on profits, income, capital assets, gains or appreciation or any tax in the nature of estate duty or inheritance tax. For a nominal fee, an assurance from the Minister of Finance may be obtained confirming that, in the event any legislation is enacted imposing any of the aforementioned taxes in Bermuda, such taxes will not be applicable to a private equity vehicle, its operations or to its shares or interests, debentures or other obligations (except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable in respect of real property owned or leased in Bermuda). Currently, such an assurance may be obtained for a period until 31 March 2035.
Exempted undertakings are exempt from Bermuda stamp duty.
Bermuda has entered into Model 2 intergovernmental agreements with the United States and the United Kingdom, requiring Bermuda financial institutions to report to the US IRS or UK HMRC on accounts held by US or UK citizens, respectively. Bermuda has implemented the OECD's Common Reporting Standard, permitting the automatic exchange of information among numerous countries to assist tax authorities to develop a clearer understanding of their residents' financial assets and income outside of their jurisdiction. Bermuda has further implemented the OECD Country-by-Country reporting, which permits tax administrations to perform high-level transfer pricing risk assessments and to evaluate other BEPS-related risks).
9.2 What are the key tax-efficient arrangements that are typically considered by management teams in private equity acquisitions (such as growth shares, incentive shares, deferred / vesting arrangements)?
Please see the response to question 9.1 above. Structuring to achieve tax efficiencies is driven by onshore considerations.
9.3 What are the key tax considerations for management teams that are selling and/or rolling-over part of their investment into a new acquisition structure?
Please see the response to question 9.1 above. Structuring to achieve tax efficiencies is driven by onshore considerations.
9.4 Have there been any significant changes in tax legislation or the practices of tax authorities (including in relation to tax rulings or clearances) impacting private equity investors, management teams or private equity transactions and are any anticipated?
Please see the response to question 9.1 above.
10 Legal and Regulatory Matters
10.1 Have there been any significant legal and/or regulatory developments over recent years impacting private equity investors or transactions and are any anticipated?
More recently, key stakeholders, including the Government of Bermuda, the BMA, industry and professionals have collaborated to make legislative changes aimed at improving Bermuda's private equity product that serves to further bolster its position as a premier offshore jurisdiction for private equity fund transactions. Among the recent legislative changes is the introduction of the Incorporated Segregated Accounts Companies Act 2019, which adds to the range of vehicles available for private equity structuring. An incorporated segregated account is an attractive vehicle as it blends the benefits of a company with that of a segregated account of a segregated accounts company. They are cost-efficient as they avoid the expense of incorporating several separate companies and can be used for multi-strategy platforms.
As an enhancement to Bermuda's new Economic Substance regime, in January 2020, the IFA was amended to bring within its scope closed-ended investment funds (being Bermuda funds in which the participants are not, at their election, entitled to have their units redeemed) and overseas investment funds (being funds established outside of Bermuda but are managed or carry on promotion in or from within Bermuda). A number of private equity vehicles may fall within the new IFA definition of "investment fund", namely, any arrangement with respect to property of any description, including money, the purpose or effect of which is to enable a person taking part in the arrangement to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income. Such arrangements must meet the following characteristics: (i) the participants do not have day-to-day control over the management of the property (whether or not they have the right to be consulted or give directions); and (ii) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled and/or the property is managed as a whole by or on behalf of the operator of the fund.
The amendments to the IFA require overseas investments funds to, among other things, be designated by the BMA, and closed-ended investment funds to be registered with the BMA (unless an exclusion applies). Of the available categories in which a closed-ended investment fund may register, many private equity vehicles will likely register as "Professional Closed Funds". The notable requirements of Professional Closed Funds include that: its securities are only to be made available to "qualified participants"; it must appoint an auditor and a Bermuda-resident, licensed service provider (e.g. a fund administrator or corporate service provider) or officer, trustee or resident representative having access to the books and records of the fund; it must provide an investment warning in a form satisfactory to the BMA to participants prior to the sale of units; and it must prepare audited financial statements in accordance with International Financial Reporting Standards (IFRS) or recognised generally accepted accounting principles (GAAP). The definition of "qualified participants" has changed such that the value of the individual's residence and benefits or rights under contracts of insurance are excluded from the calculation. Professional Closed Funds must annually certify that they meet the BMA registration requirements and provide the BMA with information on net asset value (NAV) and underlying assets, the latest audited financial statements and a statement of any material changes to the fund's terms of offering.
In keeping with Bermuda's aim to align with the global trend towards transparency, the Companies Act 1981 was amended to require a register of directors be publicly available and filed with the ROC. Such register is available on the Government of Bermuda website and contains the company name and registration number and the names and addresses of its directors (or company name and registered address for corporate directors). Similarly, the memorandum of association (and all amendments thereto), which sets out the powers and objects of the company, is publicly available. Additionally, Bermuda companies and partnerships must use reasonable efforts to identify their "beneficial owners" (and the beneficial owners of relevant entities) and maintain an up-to-date register thereof at their registered office. A beneficial owner is a natural person who directly or indirectly owns or controls more than 25% of the shares, voting rights or interest in a company or who control a company by other means or, failing the existence of such persons, the company's senior managers. Certain of the beneficial owner information must be filed with the BMA (namely, name, address, date of birth, and nature and extent of interest in the company or partnership); however, such information is not publicly available.
The Government of Bermuda has long been committed to ensuring Bermuda anti-money laundering (AML) and anti-terrorist financing (ATF) requirements are aligned with the international standards, and has implemented recent legislative changes to further strengthen this regulatory regime. The scope of entities that fall within the definition of an AML/ATF Regulated Financial Institution, and therefore fall under the AML/ATF regulation and supervision umbrella of the BMA, has been expanded to include corporate service providers and fund administrators.
10.2 Are private equity investors or particular transactions subject to enhanced regulatory scrutiny in your jurisdiction (e.g. on national security grounds)?
Investors and transactions are not, solely by reason of being private equity investors or private equity transactions, subject to enhanced regulatory scrutiny. Such investors and transactions, however, may attract enhanced regulatory scrutiny where the target is an insurance company, a bank, a telecommunications or utility company, investment business or other regulated entity and if the private equity vehicle is an investment fund. In such circumstances, the enhanced regulatory scrutiny would typically require transactional approval of the BMA, including the vetting of proposed shareholder controllers, officers and operators and service providers as fit and proper persons. See response in question 4.1 regarding closed-ended funds. The BMA also requires officers, operators and service providers to carry on business in a prudent manner and, in making such determination, the BMA may take into account any failure to comply with the IFA and other laws, codes of conduct and international sanctions.
10.3 How detailed is the legal due diligence (including compliance) conducted by private equity investors prior to any acquisitions (e.g. typical timeframes, materiality, scope etc.)?
Private equity investors will engage in detailed legal due diligence, including material business contracts, key employee contracts, confirming corporate compliance and searching charges and litigation filings. The timeframe, materiality and scope will differ depending on the target and the investors' risk tolerance, with smaller transactions typically involving less due diligence and larger transactions requiring more investor scrutiny with higher materiality thresholds. Legal due diligence can be expected to take several weeks, with the time depending, in large part, on the size of the transaction and the nature of the target.
10.4 Has anti-bribery or anti-corruption legislation impacted private equity investment and/or investors' approach to private equity transactions (e.g. diligence, contractual protection, etc.)?
Bermuda enacted new anti-bribery and anti-corruption legislation in 2016 which is modelled on the UK Bribery Act 2010. The Bribery Act 2016 criminalises private-sector bribery, makes it an offence to bribe a public official and a corporate criminal offence of failing to prevent bribery by an associated person. The scope of the Bribery Act 2016 is such that companies and partnerships incorporated or created outside of Bermuda are caught if they carry on business (or part of a business) in Bermuda. The only defence to the new corporate criminal offence of failing to prevent bribery is that the entity had "adequate procedures" to prevent persons associated with it from undertaking acts of bribery.
Given the seriousness of the offences and the potential for economic and reputations repercussions, private equity investors are apt to require seller warranties as to compliance with Bermuda's Bribery Act 2016 and all other applicable anti-bribery and anti-corruption laws.
10.5 Are there any circumstances in which: (i) a private equity investor may be held liable for the liabilities of the underlying portfolio companies (including due to breach of applicable laws by the portfolio companies); and (ii) one portfolio company may be held liable for the liabilities of another portfolio company?
The doctrines of the separate legal personality of Bermuda companies, and the limitation of liability of the shareholders of companies limited by shares to the unpaid amounts in respect of their shares, are foundational principles of Bermuda company law that are invariably upheld by Bermuda courts. It is inconceivable that they would not be upheld by Bermuda courts except in very rare instances where it can be shown that the company was improperly interposed by a controller to evade, conceal or frustrate enforcement of a liability. Investors should take note that if the directors are accustomed to acting in accordance with their directions or instructions of certain investors, such investors would fall within the definition of "officers" for the purposes of the Companies Act 1981 provision regarding offences by officers of companies in liquidation.
A limited partner is only liable for the unpaid amounts agreed to be contributed to the partnership. A limited partner must be mindful not to engage in management activities as it would risk losing its limited liability and could become liable for the debts and obligations of the partnership. However, subject to the LPA, a limited partner's membership on a board or committee of the LP will not in and of itself result in such limited partner owing a fiduciary duty to the partnership or other partners therein.
This limitation on liability typically remains in place even if LLC members actively participate in the management of an LLC. In fact, the ability of the members to both manage the day-to-day operations of an LLC while retaining their limited liability are two cornerstones of this structure and are particularly attractive to business owners.
If the directors are accustomed to acting in accordance with their directions or instructions of certain investors, such investors would fall within the definition of "officers" for the purposes of the Companies Act 1981 provision regarding offences by officers of companies in liquidation.
11 Other useful facts
11.1 What other factors commonly give rise to concerns for private equity investors in your jurisdiction or should such investors otherwise be aware of in considering an investment in your jurisdiction?
Bermuda remains an attractive jurisdiction for investors as a well-regulated, politically stable and business-orientated jurisdiction. With market and regulatory uncertainties continuing to unfold globally – and in the UK, Europe and Hong Kong in particular – Bermuda remains well positioned to promote and to take advantage of its comparative state of certainty, stability, ﬂexibility, creativity and responsiveness. The recent implementation of the Economic Substance regime in Bermuda means that Bermuda is enjoying a strategic advantage that this and its recent "white-listed" status give it over certain of its competitors.
Bermuda also has entities that offer corporate concierge services to international business, assisting new start-ups to find premises, helping staff with relocation arrangements, and providing introductions to local law firms and corporate service providers and offering serviced offices.
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. Kennedys operates in Bermuda in association with Kennedys Chudleigh Ltd.