First published in Law 360, October 2019.
With onshore M&A procedures often cumbersome and time consuming, the British Virgin Islands continue to offer a range of flexible yet familiar structuring options to facilitate takeover transactions.
With over 400,000 active companies in the BVI, estimated to hold USD .5 trillion of assets, the BVI is keen to retain its place as a leading jurisdiction for M&A by offering solutions that overcome the high approval thresholds and mandatory waiting times which commonly impact onshore jurisdictions. The use of a BVI bidder or the insertion of a BVI holding company upon English or other European structures opens up a range of options for acquisition structuring.
In this article we provide an overview of four potential structuring options for acquisitions in the BVI, an overview of the processes involved and their advantages.
1. Mergers or Consolidations
Mergers and consolidations both involve the target and the purchasing entity merging into one surviving single entity, held by the purchaser. A merger results in one of the constituent companies being the surviving entity, whereas a consolidation results in the target and the purchasing entity being consolidated into a new company.
To effect a merger or consolidation between two BVI entities, the board of each company must approve a written plan of merger or consolidation, circulated to all shareholders. There is a great deal of flexibility as to how the existing shares of the target can be treated upon the merger or consolidation, including the ability to exchange target shares for shares in the purchaser, for debt obligations or to cancel target shares in exchange for payment. Shares of the same class can be treated differently — allowing, for example, for certain key stakeholders' or managers' shares to be converted into shares in the purchasing or new entity, whilst other shares are exchanged for cash.
Subject to the constitutional documents of the companies, the plan must be approved by a simple majority (being over 50% of those issued shares represented at a general meeting or, if by written resolution, of the issued shares entitled to vote) of each class of shareholder entitled to vote. A minimum of seven days' notice must be given for any shareholder meeting (unless waived by 90% of the shareholders), subject to any longer notice period (or higher waiver threshold) set out in the company's constitutional documents or, if listed, the rules of the relevant exchange.
Once approved, articles of merger or consolidation must be filed at the BVI registrar for registration. The plan becomes effective when registered or at such later date as specified in the plan (which can be up to 30 days after approval).
Provided that it is permitted under the laws of the relevant jurisdiction, a BVI entity may merge or consolidate with or into an entity incorporated outside of the BVI. Where the surviving entity is based outside the BVI, the merger or consolidation will be effective as provided by the laws of that other jurisdiction. This flexibility allows for the redomiciliation of an entity as part of the takeover process, if so desired by the purchaser.
Where a takeover occurs through a merger or consolidation, shareholders who object to the merger or consolidation will be able to exercise dissent rights. This right is excluded in the case of a merger where the BVI target is the surviving entity, and the shareholder continues to hold the same or similar shares in that entity.
Compared to many jurisdictions, the dissent process is quick and finite. Upon giving formal notice of their intent to dissent, shareholders cease to have any shareholder rights, save for the right to be paid the fair value for their shares by the company. Importantly, provided that the requisite consent is obtained from shareholders stated above, dissenters will not be able to block the merger or consolidation, and will not hold onto their shares following the merger or consolidation coming into effect.
The fair value is to be agreed between the company and shareholder within a statutory time frame or, if no agreement can be reached, by jointly appointed appraisers. The obligation to pay the fair value, should this prove greater than the original offer, can be shared between the seller and the purchaser through indemnities or post-closing price adjustments.
There are no restrictions under BVI law on obtaining prior undertakings from shareholders to commit to a transaction, providing the purchaser with greater comfort that any required approval threshold can be met prior to announcement. Such undertakings can be irrevocable, or softer (e.g. falling away in the event of a more attractive bid), depending on the purchaser's bargaining power, and could include an undertaking not to exercise dissent rights.
The low threshold for approval makes a merger or consolidation an attractive option for takeovers. The flexibility for treating shareholders differently is also beneficial in certain acquisition structures where certain shareholders wish to be retained and incentivized.
2. Tender Offer and Squeeze-Out
A tender offer is a contractual offer between the purchaser and some or all shareholders of a target to acquire the shares they hold. Where a purchaser manages to acquire 90% of the outstanding shares entitled to vote, subject to the constitutional documents of the BVI target, it can proceed to squeeze out the remaining minority.
The exact form of the tender offer contract will often be driven by the number of shareholders involved. Shares will be transferred by stock transfer form or, where listed on a recognized exchange, by such permitted electronic means.
Once 90% of the outstanding shares or relevant class of shares have been obtained by the purchaser, the purchaser may direct the company to redeem the shares held by the remaining shareholders or class of shareholders. The company must comply with such direction, whether or not the remaining shares are, by their terms, redeemable and irrespective of whether the directors agree with this approach.
A BVI company is required to give written notice to each shareholder whose shares are to be redeemed, but the law does not specify any further requirements for the redemption (for instance, the minimum length of notice or the price at which shares are to be redeemed).
Where the squeeze-out procedure is used, shareholders are able to exercise dissent rights, as detailed above, but this will not delay the point at which control is transferred.
Whilst the high threshold may present difficulties in takeovers with a large number of shareholders, the flexibility in contractual terms means purchasers can tailor contractual deals for different participants. In addition, a flexible timetable means that, once the requisite 90% approval is met, complete control can be transferred quickly. In addition to undertakings from shareholders, stake-building and break fees may also provide further certainty to purchasers.
3. Schemes and Plans of Arrangement
Schemes of arrangement and plans of arrangement are both court-sanctioned procedures which allow flexibility in their terms and structuring.
A scheme of arrangement requires the sanction of the BVI court and the approval of a majority in number of shareholders representing 75% in value present and voting.
A plan of arrangement (which follows the Canadian model) also requires the sanction of the BVI court, but can be proposed to the court with only the prior approval of the directors (and not shareholders) of the BVI company. The court will then prescribe which persons the company is to notify and obtain consent. Given the court's conservative stance, plans of arrangement are likely only feasible where all concerned parties (including shareholders) have approved the plan in advance, but where a court sign-off is desired to give legitimacy to any complicated structuring issues. Once approved, the scheme or plan of arrangement is binding on all members.
The requirement to obtain court approval can significantly lengthen the takeover process. Depending on court availability, arrangements can take up to four months to complete.
Dissent rights detailed above only apply to a court-sanction arrangement if expressly permitted by the court.
Whilst hostile takeovers are rare in the BVI, we would expect purchasers who do not have target backing to follow a scheme of arrangement, if the squeeze-out threshold cannot be reached. Although court involvement increases costs, the court's ability to restrict dissent rights provides additional certainty to the takeover process and the court's sanction may give a welcome comfort in any deal where terms are particularly unusual or complex.
4. Asset Sale
A purchaser wishing to cherry pick certain assets from the target, rather than assuming all assets and liabilities of the business (which would be the case under the above methods) will likely structure the acquisition as an asset sale.
Whilst the process for the transfer of each asset will depend on the nature of such asset, the sale would usually be governed by an overarching asset purchase agreement. The governing law of such agreement may be BVI, but is likely to be determined in accordance with the location of the assets being transferred.
Under the BVI Business Companies Act 2004 (as amended), any disposal by a BVI company of more than 50% in value of its assets requires shareholder approval by a simple majority. This does not apply to any disposals made in the usual or regular course of the business of the company (which may be the case, for instance, for private equity funds or other entities in the business of buying and selling assets), and the obligation for shareholder approval may be overridden by an express provision in the company's constitutional documents.
Where a BVI company disposes of more than 50% in value of its assets outside the ordinary course of business, shareholders are entitled to dissent, save that no right arises, among other things, where the disposition is for money on terms that require all or substantially all of the net sale proceeds to be distributed to shareholders pro rata within a year of the sale. As above, the exercise of dissent rights will not prohibit or delay the transfer of assets.
An asset sale allows a purchaser to concentrate on the assets it wants, and not concern itself about the transfer of liabilities or assets which it does not. An asset sale only requires shareholder approval in certain circumstances and, depending on the nature of the assets being transferred, can be carried out in relatively short order.
The BVI's laws offer a great deal of flexibility to purchasers and sellers. Many of the concepts listed above will be familiar to onshore lawyers and market participants, but have often been simplified in the BVI to ease procedures. The multiple methods provide a persuasive argument to groups looking to structure an acquisition through a BVI holding company. Where an acquisition is already contemplated and the laws of the current jurisdiction do not provide the flexibility afforded by the BVI, purchasers or sellers may be wise to consider inserting a BVI holding company to benefit from the flexibility and stability of BVI laws.
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.