1. TRENDS

1.1 M&A Market

The global M&A market showed significant growth in 2021 compared to 2020, with deal values reaching all-time highs of USD5.9 trillion in 2021.

As a preferred offshore jurisdiction for crossborder M&A transactions, unsurprisingly, the Cayman Islands also saw aggregate M&A deal values increase from approximately USD71 billion in 2020 to approximately USD223 billion in 2021.

The COVID-19 pandemic did not impede the pace of deal activity in 2021. To the contrary, it appeared to have a positive impact on deal activities in certain sectors such as healthcare, biotech and pharmaceuticals.

The main types of entity incorporated or registered in the Cayman Islands are the exempted company, the exempted limited partnership (ELP) and the limited liability company (LLC). According to the annual statistics issued by the Cayman Islands Registrar of Companies, the Registrar of Exempted Limited Partnerships and the Registrar of Limited Liability Companies, the number of new incorporations and formations increased as compared to 2020:

  • 13,412 exempted companies (9,360 in 2020);
  • 5,778 exempted limited partnerships (4,510 in 2020); and
  • 1,460 limited liability companies (918 in 2020).

1.2 Key Trends

One of the key trends evident in the Cayman Islands in 2021 was the proliferation of formation of special purpose acquisition companies (SPACs), with over 450 Cayman Islands SPACs established during the course of 2021. This ultimately led to an increase in M&A activity in connection with business combination deals.

Private equity firms continue to lead take-private transactions and companies looking for growth in or through technology and digital transformation.

Some notable deals in 2021 involving Cayman Islands vehicles included the following reverse merger transactions:

  • the USD48.6 billion acquisition by Grab Holdings Inc. of Altimeter Growth Corp from Altimeter Capital Management, LP and others;
  • the USD12.2 billion acquisition by Owl Rock Capital Group LLC and Dyal Capital Partners of Altimar Acquisition Corporation; and
  • the USD10.8 billion acquisition by Aurora Innovation, Inc of Reinvent Technology

1.3 Key Industries

In the past 12 months, M&A activity in the Cayman Islands was largely concentrated in the legal and financial services industry on a crossborder basis. Financial services, technology, e-commerce, biotech, pharma and healthcare were the primary industries involved in M&A activity with Cayman Islands companies.

The hospitality and tourism industry was the most affected by the COVID-19 pandemic due to, among other things, applicable travel and gathering restrictions.

2 . O V E R V I E W O F REGULATORY FIELD

2.1 Acquiring a Company

The primary legal structures for acquisition a Cayman Islands company are set out in the Companies Act (As Revised) (the "Companies Act"), which provides mechanisms for the acquisition of a company by:

  • a merger or consolidation under Part XVI of the Companies Act;
  • mergers, amalgamations and reconstructions by way of scheme of arrangement under section 86 or 87 of the Companies Act; and
  • a minority squeeze-out procedure under section 88 of the Companies Act.

The Limited Liability Companies Act (As Revised) (the "LLC Act") also provides for a similar framework for Cayman Islands LLCs.

At present, there is no statutory mechanism by which a Cayman Islands ELP (which is frequently used as part of offshore holding structures) can merge with and/or into another entity. Where an ELP holds the target assets to be acquired in a statutory merger, a "spin out" or "spin off" will often be implemented whereby the general partner of the ELP will incorporate a company or LLC and contribute the assets to the subsidiary for the purposes of the merger.

The Cayman Islands does not have a set of prescriptive legal principles specifically relevant to acquisition transactions and instead broad common law and fiduciary principles apply.

Statutory Merger

The statutory merger under Part XVI of the Companies Act is the most common mechanism for completion of an acquisition or business combination. Under the statutory merger regime, two or more companies (including at least one Cayman Islands company) may merge. Upon the completion of the merger, the rights, property, liabilities and other obligations of each of the companies immediately vest in the surviving company.

In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation. Subject to the relevant constitutional documents of the company, the shareholders of each constituent company must also approve the plan of merger by special resolution (typically, two-thirds majority of those shareholders attending and voting at the relevant meeting).

Merger of Parent and Subsidiary

No special resolution is required for a merger between a parent company and its subsidiary. In order for this to apply, the parent must hold issued shares that together represent at least 90% of the votes at a general meeting of the subsidiary.

Dissenters' Rights

A dissenting shareholder in a merger is entitled to payment of the fair value of all their shares upon dissenting, if they follow the statutory procedures. The Companies Act also provides that dissenters' rights are not available in certain circumstances, including in respect of the shares of any class of a constituent company for which an open market exists on a recognised stock exchange or recognised inter-dealer quotation system at the expiry of the period allowed for notice of an election to dissent.

Scheme of Arrangement

A scheme of arrangement is a flexible form of corporate restructuring and is a commonly used option for more complex mergers. A scheme is approved by the requisite majorities of shareholders and creditors and by a court order. A scheme of arrangement also involves the production of a circular, which must be sufficiently detailed to allow shareholders and creditors to make an informed decision in relation to the merits of the proposed scheme. There are no statutory dissenters' rights under a scheme of arrangement. If, however, such rights are thought desirable then the terms of the scheme itself may make such provision.

Squeeze-Out

A statutory squeeze-out under Section 88 of the Companies Act is available where the applicable statutory thresholds are met. Where a bidder has acquired or obtained the approval of 90% of the shares in a Cayman Islands company, it may compel the acquisition of the remaining shares in the company and thereby become the sole shareholder of the company.

2.2 Primary Regulators

The primary sources of Cayman Islands law relevant to M&A transactions are the Companies Act, the LLC Act and common law. See 2.1 Acquiring a Company.

There are no specific statutes or government regulation concerning M&A transactions in the Cayman Islands.

However, if 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") may apply. Such rules exist principally to ensure fair and equal treatment of all shareholders.

In addition, there are change-of-control rules applicable to entities that are regulated by:

  • the Cayman Islands Monetary Authority (the "Authority") under the Banks and Trust Companies Act (as revised), the Insurance Act (as revised);
  • with respect to licensed mutual fund administrators, the Mutual Funds Act (as revised); and
  • the Information and Communications Technology Authority under the Information and Communications Technology Act (as revised).

2.3 Restrictions on Foreign Investments

There are no restrictions on foreign investment in the Cayman Islands. However, a company conducting certain business locally in the Cayman Islands must be structured so as to comply with local licensing laws, including with respect to ownership and control.

The main such requirement is to be licensed under the Trade and Business Licensing Act (As Revised) and the company must either be beneficially owned and controlled at least 60% by persons of Caymanian status, or hold a licence under the Local Companies (Control) Act (As Revised).

2.4 Antitrust Regulations

The Cayman Islands does not have any antitrust legislation applicable to M&A transactions involving Cayman Islands entities.

2.5 Labour Law Regulations

The majority of M&A transactions in the Cayman Islands involve entities that do not have employees in the Cayman Islands and are not conducting business in the Islands. Consequently, the legislation applicable to labour law matters are often not relevant to M&A transactions.

Labour laws in the Cayman Islands include:

  • the Labour Act (as revised);
  • the Health Insurance Act (as revised);
  • the National Pensions Act (as revised);
  • the Workmen's Compensation Act (as revised); and
  • any ancillary regulations thereto.

These laws establish minimum employment standards, but do not preclude an employer from setting conditions that are above the minimum.

The Companies Act also provides that, subject to any specific arrangements entered into by the parties to a statutory merger, following the merger, a surviving Cayman Islands company will be liable for all contracts, obligations, claims, debts, and liabilities of each constituent company, which would invariably include all employment/labour related contracts, obligations, claims, debts, and liabilities.

2.6 National Security Review

There is no national security review of acquisitions in the Cayman Islands.

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Originally published by Chambers and Partners in 2022

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.