Introduction
The Cayman Islands continues to be a leading international offshore financial centre and a significant player in the global corporate landscape. Its well-developed legal system, supported by a business-friendly and adaptable environment, makes it a preferred jurisdiction for offshore transactions. The availability of various legal structures including companies, partnerships and limited liability companies has provided the flexibility for continued growth and adaptability to ever-changing challenges driven by global demands.
Owing in part to recent buoyant economic markets, there has been continued growth in corporate restructurings, mergers and acquisitions, joint ventures and financing deals involving both debt and equity.
Mergers under Cayman Islands law
The statutory merger regime under the Companies Act has continued to be the most popular mechanism through which to acquire Cayman Islands entities. This regime allows two or more companies to merge, with the rights and obligations of each merging party vesting in one of them as the surviving company. The merger provisions of the Companies Act are substantially similar to those under Delaware law and are therefore familiar to those involved in M&A transactions in the United States.
In addition to traditional industries, there has been notable growth in technology, fintech and cryptocurrency-related M&A transactions. This trend has run in tandem with the Cayman Islands becoming an increasingly popular and trusted hub for entities connected to the world of digital assets.
The Companies Act grants shareholders a statutory right to dissent in the merger of a Cayman Islands incorporated company and to be paid a judicially determined fair value for their shares in lieu of the merger consideration being offered by the merging company. The rights of a dissenting shareholder are not available in certain limited circumstances – notably for shareholders holding shares for which an open market exists on a recognised stock exchange where certain forms of consideration are received.
Consistent with previous years, the threat of dissenting shareholders' claims (particularly relating to opportunistic arbitrage plays) has remained ever constant and a broader body of case law has evolved in the jurisdiction as a by-product of such claims. Recent decisions heard in the courts of the Cayman Islands have focused on:
- the determination of the fair value of a dissenter's shares;
- confirmation that dissention rights apply to short-form mergers (where a parent company holding 90% or more of the voting rights of its subsidiary mergers with such subsidiary);
- considerations as to the rate of interest payable on a judgment awarded in respect of fair value; and
- whether a change (or no change) in the share price of a merger target should be taken into consideration in a judgment as to fair value for such dissention claims.
Amendments to the Companies Act
The Companies (Amendment) Act (as amended) ("Amendment Act") was passed by the Cayman Islands Parliament in March 2024 but will not come into force until a subsequent Cabinet order is made. Consistent with the business-friendly nature of the Cayman Islands legal framework, these amendments to the Companies Act are intended to provide greater flexibility and utility in a number of important areas of corporate law.
Such amendments include the following key changes.
- Reduction of share capital – under the existing law, in order to reduce share capital, the members of a Cayman Islands company must pass a special resolution and obtain court approval. The Amendment Act will allow for the Companies Act to establish a new procedure for an "out-of-court" reduction of capital, noting that the court-sanctioned reduction of capital will remain in place. This new "out-of-court" procedure will permit a company to reduce its share capital by special resolution, provided that the directors of the company deliver a supporting solvency statement to the Registrar of Companies of the Cayman Islands ("Registrar"). It is anticipated that this procedure will provide further flexibility to effect corporate transactions in the Cayman Islands, particularly where a reduction of capital is to be used to eliminate accumulated losses and enable the payment of dividends.
- Continuation out of an entity with no share capital – under the Companies Act, a body corporate incorporated, registered or existing under the laws of any jurisdiction outside the Cayman Islands may apply to the Registrar to be registered by way of continuation as an exempted company limited by shares. It is currently a requirement that any such overseas body corporate must have a share capital. This requirement will be removed when the Amendment Act comes into force, allowing for an overseas body corporate to be continued into the Cayman Islands regardless of whether or not it has a share capital.
- Conversion of LLCs and foundation companies to exempted companies – the Companies Act will introduce new conversion procedures allowing Cayman Islands LLCs and foundation companies to be re-registered as exempted companies. Conversions of exempted companies to Cayman Islands LLCs are already permitted under the Limited Liability Companies Act (as amended), and these amendments will provide further flexibility for entities to convert to the most suitable corporate form. This may be of particular use for the growing number of foundation companies initially being formed in the jurisdiction by those operating in the fintech industry.
Once in force, these upcoming changes will seek to ensure that the Cayman Islands remains a jurisdiction that is dynamic in nature and able to adapt to the changing corporate landscape.
Cayman Islands entities – listings on US stock exchanges
Entities registered in more than 40 jurisdictions are currently listed on the New York Stock Exchange (NYSE) and Nasdaq. Among these different jurisdictions, outside of the United States, there are more Cayman Islands registered listed entities than any other foreign jurisdiction. At the end of 2024, there were approximately 430 Cayman Islands entities listed on NYSE and Nasdaq, accounting for approximately 35% of listed entities formed outside of the United States.
With the expectation that the number of initial public offerings (IPOs) will increase, the Cayman Islands is well placed in 2025 to build upon its established reputation as the jurisdiction of choice for prospective issuers.
Still a jurisdiction of choice for SPACs and IPOs
The most significant factor in the increase in the number of Cayman Islands listed entities is the volume of Special Purpose Acquisition Companies (SPACs) launched since 2020. Although the "SPAC mania" has settled since the boom times of 2021, it has been pleasing to see that Cayman Islands entities remain the preferred choice for domiciling SPACs. The proportion of SPACs listed in the Cayman Islands has increased from approximately 33% in 2020 to approximately 95% of the SPACs launched in 2024.
A material influence on the dominance of the Cayman Islands as the jurisdiction of choice for new SPACs has been the increase in SPAC litigation in the Delaware courts. Cayman Islands SPACs and their directors have not been exposed to this litigation to the same extent. Although the non-SPAC IPO market has been subdued in recent years, there is increasing recognition of the advantages that incorporation in the Cayman Islands has to offer in terms of mitigating litigation risk.
The majority of the SPAC-related activity has continued to focus on de-SPAC transactions or liquidations. These have been most apparent in the extension of the terms of existing SPACs to allow more time to consummate a business combination (failing which these entities would otherwise need to liquidate pursuant to the terms of their constitutional documents). This procedure requires an amendment to the SPAC's constitutional documents to extend the term and to address other requisite updates to ancillary provisions, all by way of shareholder approval.
Unlike previous years, where such extensions may have been achieved in the form of one-off transactions with business combinations ultimately successfully consummated thereafter, during 2024 rolling extensions or extensions based on certain conditions were more common. Any extension will invariably require additional funding of the SPAC's trust account by the sponsor and/or its affiliates in order to incentivise public shareholders to remain invested, which has often been a difficult ask in the current SPAC market.
During 2024, there was a continued trend of new management teams being appointed to existing SPACs. This approach through the acquisition of a sponsor interest in an existing SPAC (and the subsequent appointment of a new management team) offered an effective means for a new sponsor to enter the SPAC market and a clean exit for the incumbent sponsor without a need to liquidate the SPAC. This process is most commonly achieved by transferring the outgoing sponsor's shares and private placement warrants issued by the SPAC to the new sponsor, effecting a change in the directors and officers of the SPAC, and co-ordinating an injection of working capital into the SPAC. These steps commonly occur simultaneously with an extension of term.
Notwithstanding a reduced application of SPACs in global deal-making, it has been clear that these vehicles will continue to occupy a unique place in the transactional environment in the Cayman Islands.
Series financing transactions
The anticipated increase in series financing transactions throughout 2024 was less prominent than may have been expected. However, venture capital deals generally showed resilience, with aggregate deal values increasing for the first time since 2021. There was also an uptick in the use of Cayman Islands entities in venture capital and series financing transactions, which has been pleasing to see after the number of these transactions decreased significantly during 2023.
Many of the deals involved clients in the technology space as investors sought to take advantage of opportunities in artificial intelligence (AI) and related industries.
With a change of government in the United States and the expectation of a gradual reduction in interest rates, this upward trend is expected to continue and build over the course of 2025.
Mergers and acquisitions – outlook
With global equity markets at near record highs, strong corporate balance sheets and improved access to capital, the volume of M&A involving Cayman Islands entities is expected to continue to grow in 2025.
This trend may be largely correlated with the anticipated favourable tailwinds for the United States business environment, including what are generally considered business-friendly policies of the US government and continuing downward pressure on the US interest rates. It is unclear at this time whether government policy and domestic activity in the US will have an effect on Latin America economies, but to the extent that this does have an impact, it is likely to influence M&A activity in the Cayman Islands in connection with Latin America-based transactions.
The significant amount of dry powder held by investment funds, combined with an anticipated increase in public offerings in capital markets, is expected to drive the continued use of Cayman Islands structures. The jurisdiction's robust regulatory frameworks and lack of direct taxes will likely attract an influx of transactions as investors seek efficient jurisdictions in which to deploy capital and support emerging opportunities.
Private equity firms are increasingly looking for offshore opportunities and strategic partnerships, which should support continued momentum for both take-private and public M&A transactions. The anticipated rise in cross-border transactions – especially in technology (notably AI), healthcare, and energy and resources – is expected to bolster the region's utilisation.
Conclusion
The Cayman Islands benefits from an established business environment, with experienced service providers and a robust regulatory framework that is dynamic and compliant with international standards. Further growth is expected in the use of Cayman Islands entities in transaction structuring, largely benefitting from favourable economic conditions in the United States. However, the Cayman Islands economy is closely tied to markets in the US, Europe and Asia, and will not be immune to continuing geopolitical risks and global economic volatility.
Originally published by Chambers and Partners, 17 April 2025
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.
