With deals valued at over USD 60 billion in the first half of 2018 alone and Cayman Islands companies being the target of 421 transactions, the Cayman Islands, by deal volume, ranks as the number one offshore jurisdiction for M&A transactions.
So what makes the Cayman Islands so attractive to dealmakers? One reason is undoubtedly the structuring flexibility that the jurisdiction offers.
This article considers the four principal methods of acquiring a company (or its assets) incorporated in the Cayman Islands. These being: a statutory merger/consolidation, a scheme of arrangement, a tender offer and an asset purchase.
A statutory merger or consolidation under Cayman Islands law is the process whereby one or more constituent companies is/are subsumed into another constituent company (or a new company in the case of a consolidation), the latter of which becomes the surviving entity. Provided that the merger is permitted by, or is not contrary to, the laws of the jurisdiction of incorporation of the overseas company, Cayman Islands companies can also merge or consolidate with overseas companies where either a Cayman Islands company or an overseas company is the surviving entity.
Cayman Islands law requires that the directors of each constituent company must first approve and sign a plan of merger/consolidation. The shareholder approval threshold for a statutory merger/consolidation (subject to any higher threshold or additional requirements in the relevant constitutional documents) is a two-thirds majority of those shareholders attending and voting at the relevant shareholder meeting. Grand Court approval is not required (contrast with a scheme of arrangement) but the consent of any secured creditors of each constituent company must be obtained.
Dissenters in a merger/consolidation scenario have the right to be paid the fair value of their shares and can compel the company to institute court proceedings to determine that fair value. Minority dissenters however will not be able to block the merger/consolidation if the relevant approvals and thresholds have been satisfied.
Scheme of arrangement
A scheme of arrangement is a court approved compromise or arrangement entered into between the target company and its shareholders (or any class of them) that can be used to effect a takeover of a Cayman Islands company. The procedure requires both shareholder and Grand Court approval. The three key steps in the process are as follows:
- an application for a scheme of arrangement is commenced by petition, filed at the Grand Court together with a summons seeking an order for the convening of the relevant shareholder meeting(s), at which the shareholders will be asked to consider the proposed scheme of arrangement;
- if the Grand Court makes an order convening the meeting(s) and having determined the constitution of the relevant classes for voting purposes, the meeting(s) will be held, at which a majority in number representing 75% in value of the shareholders or each class of shareholders, as the case may be, present and voting at the meeting, must vote in favour of the proposed scheme of arrangement in order to proceed to the sanction hearing; and
- if at the second court hearing the Grand Court sanctions the scheme of arrangement, all of the shareholders, or classes of shareholders as applicable, and the company, will be bound by the scheme of arrangement (regardless of whether any shareholders voted against the scheme or voted at all).
A tender offer is a contractual offer to acquire some or all of the shares in a company. Cayman Islands law provides for a “squeeze-out” of minority shareholders holding 10% or less of the shares where the relevant statutory thresholds have been met. The offer must be approved by not less than 90% in value of the shares subject to the offer, excluding any shares held or contracted to be acquired before the date of the offer. Notice must then be given to the dissenting shareholders that the offeror wishes to compulsorily acquire their shares. If the dissenters do not apply to the Grand Court for relief from the compulsory squeeze-out within the relevant time periods, then the offeror will be entitled and bound to acquire their shares.
If an acquiror desires to purchase certain assets of a target, rather than the shares in the target, then the acquisition could be structured as an asset purchase. Such an arrangement would be documented in an asset purchase agreement (which could be Cayman Islands law governed but does not need to be) with each asset transferred pursuant thereto and in accordance with the particular transfer mechanics specific to the assets in question.
The continued growth of the Cayman Islands as a leading global jurisdiction for M&A activity will come as no surprise to market observers. Much of the deal flow has originated in the financial services sector as private equity funds continue to deploy capital particularly in the fiduciary administration space. High profile examples of transactions of this nature include Bank of N.T. Butterfield & Son Limited’s acquisition of Deutsche Bank’s Global Trust Solutions business and CVC Capital Partners’ acquisition of the TMF group for EUR 1.75bn, both of which the author’s firm advised on. The jurisdiction, with its sophisticated yet flexible regulatory and legal framework, appears well placed to continue to dominate the offshore M&A landscape.
First published in 2019 Cayman Finance Magazine.
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.