1 Relevant Authorities and Legislation
1.1 What regulates M&A?
The primary sources of regulation of M&A in the Cayman Islands are the Companies Law (2016 Revision) (the "Companies Law") and common law.
Part XVI of the Companies Law facilitates 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, 2016 (the "LLC Law") also provides for a similar framework for Cayman Islands limited liability companies.
- 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); and
- section 88 of the Companies Law provides a limited minority squeeze-out procedure (and, 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). Rather, broad common law and fiduciary principles will apply.
While there are no specific statutes or government regulation 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 (the "Code"), which exists principally to ensure fair and equal treatment of all shareholders, may apply.
1.2 Are there different rules for different types of company?
Except to the extent described above with respect to companies listed on the CSX, there are no different rules for different types of company.
1.3 Are there special rules for foreign buyers?
There are no foreign investment restrictions or exchange control legislation in the Cayman Islands. However, any company with an established physical presence in the Cayman Islands must be structured so as to comply with local licensing laws, including with respect to ownership. Any company engaging in business locally requires to be licensed under the Trade and Business Licensing Law (2018 Revision) and the applicant must either be beneficially owned and controlled at least 60% by persons of Caymanian Status, or hold a licence under the Local Companies (Control) Law (2015 Revision). However, foreign investment, if considered beneficial to the Cayman Islands' economy, is generally encouraged.
1.4 Are there any special sector-related rules?
There are change-of-control rules applicable to entities regulated by the Cayman Islands Monetary Authority under the Banks and Trust Companies Law (2018 Revision), the Insurance Law, 2010 or (with respect to licensed mutual fund administrators) the Mutual Funds Law (2015 Revision). In addition, ownership and control restrictions apply to certain entities regulated by the Information & Communications Technology Law (2017 Revision).
1.5 What are the principal sources of liability?
Pursuant to common law rules, the directors of Cayman Islands companies owe fiduciary duties (generally described as being those of loyalty, honesty and good faith) to the company. While it is common for directors of Cayman Islands companies to be indemnified for certain breaches of this duty, as a matter of public policy, it is not possible for directors to be indemnified for conduct amounting to wilful default, wilful neglect, actual fraud or dishonesty.
To the extent that consent to a merger or acquisition is procured via an information memorandum or proxy statement, civil liability in tort may arise for negligent misstatement or fraudulent misrepresentation. In addition, the Contracts Law (1996 Revision) gives certain statutory rights to damages in respect of negligent misstatements. There are certain criminal sanctions under the Penal Code Law (2018 Revision) for deceptive actions, including for any officer of a company (or person purporting to act as such) with intent to deceive members or creditors of the company about its affairs, who publishes or concurs in publishing a written statement or account which to their knowledge is or may be misleading, false or deceptive in a material particular.
Any disposition of property made at an undervalue by or on behalf of a Cayman Islands company and if an intent to defraud its creditors, shall be voidable: (i) under the Companies Law at the instance of the company's official liquidator; or (ii) under the Fraudulent Dispositions Law (1996 Revision) at the instance of a creditor thereby prejudiced.
If the consideration is to be shares in a Cayman Islands company, the Companies Law prohibits an exempted company that is not listed on the CSX from making any invitation to the public in the Cayman Islands to subscribe for any of its securities.
2 Mechanics of Acquisition
2.1 What alternative means of acquisition are there? Since the
introduction of the regime in the Cayman Islands in 2010, statutory
merger has become by far the most common method of structuring a
more complex acquisition or business combination. In certain cases,
however, the statutory merger regime may not be suitable, and the
traditional options, such as contractual equity or asset
acquisition, remain. The threshold for a statutory merger (subject
to the relevant constitutional documents of the company) requires
only a special resolution passed in accordance with the articles of
association (typically, a two-thirds majority of those shareholders
attending and voting at the relevant meeting). Dissenters in a
merger have the right to be paid in cash the fair value of their
shares, and may compel the company to institute court proceedings
to determine that fair value. This can be a factor where the offer
involves a share-for-share swap as opposed to a cash buyout, or
where the bidder anticipates issues with minority
Schemes of arrangement under section 86 or 87 of the Companies Law are appropriate in certain circumstances, such as where a capital reduction is required as part of the acquisition structure. A scheme of arrangement transaction will involve the production of a circular, typically a detailed disclosure document which must provide stakeholders with all information required to make an informed decision on the merits of the proposed scheme. The principal benefit of a scheme is that if all the necessary majorities are obtained and hurdles are cleared, and the court approves the scheme, then the terms of the scheme become binding on all members of the relevant class(es) of shareholders or creditors, whether or not they: (a) received notice of the scheme; (b) voted at the meeting; (c) voted for or against the scheme; and (d) changed their minds afterwards.
In a tender offer, private contractual acquisition, or public takeover, where control of the majority of the voting equity is required, the statutory squeeze-out remains available where the relevant statutory thresholds are met. Where a bidder has acquired 90% or more of the shares in a Cayman Islands company, it can compel the acquisition of the shares of the remaining minority shareholders, and thereby become the sole shareholder. Such a "squeeze-out" requires the acceptance of the offer by holders of no less than 90% in value of the shares to which the offer relates, excluding shares held or contracted to be acquired prior to the date of the offer. Shares held by the bidder or its affiliates are typically not counted for purposes of the 90% requirement. Dissenters have limited rights to object to the acquisition, and in the case of a tender offer which is not on an exclusively cash basis, dissenters have no right to compel a cash alternative.
Contractual asset acquisitions, where the target ceases doing business and is liquidated after the consummation of the sale, are becoming less popular given the flexibility and ease of use of the statutory merger regime, but remain a useful option.
2.2 What advisers do the parties need?
Parties should engage Cayman Islands counsel alongside onshore legal advisers. Generally, auditors, tax and financial advisers are also involved in deal structuring.
2.3 How long does it take?
Depending on the complexity of the transaction, the structure and regulatory status of the target, and the method employed, anywhere from a matter of weeks to a number of months. For example, straightforward mergers of Cayman Islands companies, where the shareholder base is relatively limited, and where there are no secured creditors and no applicable public listing, may be accomplished in a few weeks. Where the target company is listed (either in the Cayman Islands or elsewhere) or the merger is a crossborder transaction, a longer deal time is required.
Schemes of arrangements can, depending on their complexity and given the requirements for court approval, run for many months, as can complex merger transactions.
2.4 What are the main hurdles?
Both a statutory merger and a squeeze-out transaction provide for certain dissenter rights, which, in the merger context, essentially provides for dissenting shareholders to make application to the court for the payment of fair value for their shares. Similar considerations apply for statutory squeeze-outs; however, where there is a tender offer which is not on an exclusively cash basis, dissenters have no right to compel a cash alternative. For schemes of arrangement, the key challenge is achieving the high approval majorities required of each class of shareholders.
2.5 How much flexibility is there over deal terms and price?
Parties are generally free to contract as they wish as to terms and price, subject to the directors of a Cayman Islands company discharging their fiduciary duties, including the duty to act bona fide in the best interests of the company.
2.6 What differences are there between offering cash and other consideration?
Again, parties are generally free to contract as they wish with regards to terms and price. However, in the context of a statutory merger, where dissenters have the right to be paid in cash the fair value of their shares, a share-for-share deal may add complexity.
2.7 Do the same terms have to be offered to all shareholders?
Where an acquisition is structured by way of a statutory merger or scheme of arrangement, differing consideration can be paid to shareholders. For tender offers utilising a statutory squeeze-out, the same "offer" must be made to all shareholders.
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Originally published in ICLG
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.