Bermuda
Answer ... Private equity funds are typically formed as exempted limited partnerships; however, funds or special purpose vehicles can be set up as Bermuda incorporated companies with limited liability. A closed-ended fund may also benefit from a Bermuda segregated accounts company (SAC) or incorporated segregated accounts company (ISAC) structure, which is ideal for deal-by-deal and multi-strategy platforms.
Most of the private equity funds established in Bermuda have fund managers which are located onshore. As such, market trends in Bermuda track major onshore markets, and in particular we see mirroring of investment strategies of US, European and Asian fund managers.
Private equity transaction structures vary widely, but will often involve private equity investors taking ordinary shares, preference shares and/or loan notes in the target. Management will usually hold ordinary shares and/or employee share options or restricted shares.
Acquisition structures involving private Bermuda companies may involve direct investment in the target (through the issue of new shares to the private equity investor or by secondary transfer) or the formation of a holding company (Topco) into which the private equity investor will invest, alongside management and other shareholders. Intermediate holding companies between Topco and the ultimate target may be inserted to facilitate debt financing or security structures, or for tax or other commercial reasons. The relevant holding company will acquire the shares in the target typically by way of a share purchase, a share-for-share exchange or a merger or amalgamation with the target.
If the shares in the target are publicly held, the structure of a private equity acquisition will typically be by way of:
- a tender offer to purchase the shares of target (which must generally be accepted by the holders of at least 90% of the shares that are the subject of the offer);
- compulsory acquisition of the remaining shares where the acquirer holds 95% or more of the shares;
- a court-sanctioned scheme of arrangement; or
- a merger or amalgamation with the target.
Bermuda
Answer ... Bermuda exempted limited partnerships are widely used and have many benefits, not least because they are usually regarded as fiscally transparent. A Bermuda partnership may elect to have a separate legal personality to enable it to:
- own assets;
- be sued in its own name; and
- register a charge over its assets in order to preserve priority over any unregistered charges or subsequently registered charges in respect of the assets that are subject to the relevant charge.
Bermuda partnerships offer a great degree of flexibility in terms of management (including safe harbour provisions) and structure, making them an attractive option to private equity investors, investment funds and financiers. In addition, the general partner of a Bermuda partnership can be incorporated in a foreign jurisdiction, such as a Delaware limited liability company (LLC); and there is no requirement for the general partner to register in Bermuda to act in such a role.
Bermuda LLCs are another flexible option. They are based on the Delaware LLC model, so will be familiar to entities and advisers who are based or do business in the United States. The LLC is a hybrid entity, with aspects that are similar to both limited companies and partnerships. An LLC is a separate legal person, so members are not personally liable for the debts and obligations of an LLC, similar to shareholders of a company or limited partners in a limited partnership. However, unlike limited partners, members of an LLC will not be personally liable for the debts and obligations of the LLC if they participate in the management and operations of the LLC. In addition, the governing instrument – the LLC agreement – may include provisions that expand, restrict or eliminate the duties (including fiduciary duties) that are owed to the LLC by a person, or to another member or manager (except in the case of fraud or dishonesty).
The fundamental advantage of an SAC or ISAC are the segregation or ‘firewalling’ of assets so that the assets and liabilities of one account are ring-fenced from the assets and liabilities of a separate account and are not available to creditors of separate accounts. It also allows for different strategies/assets to be pursued under one vehicle, therefore benefiting from administrative efficiencies.
In terms of the various methods to structure the acquisition transaction, the rationale for choosing the structure will depend on the nature of the target’s securities (listed or unlisted), as well as tax and commercial drivers. The advantages of a share purchase, share-for-share exchange or merger are that the acquisition is clean and there are no issues regarding apportionments of pre-payments and receivables. These are more common. An assets acquisition can be more complex, but enables the purchaser to ‘cherry pick’ the relevant assets.
Bermuda
Answer ... The most common funding structures are drawdowns of investor capital and term loan or revolving credit financing from a traditional bank (which may or may not incorporate a junior or mezzanine layer). Term loans will typically be arranged for a special purpose vehicle bidco subsidiary of the fund, where lender recourse will be to the target, its subsidiaries and their respective assets; whereas revolving facilities are more commonly made available for the fund itself, with lender recourse in such cases being to uncalled investor capital and to the proceeds of capital calls. Increasingly, deal structures may involve alternative financing arrangements from funds and other institutional investors. High-yield bond financing transactions are very popular, especially in Bermuda companies that are listed in Asia.
There are no requirements or restrictions for funding private equity transactions arising under Bermuda law.
Typically, the financing documents will be governed by foreign law; while any security that is provided over Bermuda assets or shares in a Bermuda company will be governed by Bermuda law.
Structuring is determined almost exclusively by onshore tax and regulatory considerations, and the manager’s own deal assessment and risk appetite. Save in rare instances, there are no Bermuda-specific factors to take into account.
Bermuda
Answer ... Given that structuring is ultimately determined by the factors described in question 3.3, there are no advantages or disadvantages that are specific to Bermuda law.
Bermuda
Answer ... Where the target is a Bermuda entity, Bermuda counsel will typically be engaged in a due diligence project to:
- review the corporate structure, regulatory compliance and annual filings; and
- confirm that there is no outstanding litigation or registered charges in Bermuda.
Typically, the assets of a Bermuda company will be located outside of the jurisdiction.
Choice of law of the relevant documents will be an important issue. It is common in private equity investments for the investment agreement or shareholders’ agreement to be governed by foreign law (typically the law of the jurisdiction in which the investors are located or otherwise as preferred by the investors). Foreign law-governed documents are generally enforceable in the Bermuda courts, subject to the usual rules against the infringement of public policy or with respect to provisions which operate as penalties.
When dealing with a partnership, it will be important to be satisfied that the proposed deal is permitted by the target limited partnership agreement and falls within the partnership’s stated purpose.
Bermuda
Answer ... Considerations will include:
- pre-emption rights (protecting against dilution) on new issues as well as share transfers;
- drag/tag-along rights; and
- other change of control provisions.
An investor taking a minority position will usually seek veto rights over certain matters, including:
- any changes to the company’s share capital, debt position or constitutional documents; and
- a change of control of the company or of the nature of the business it conducts.