Against global trends, gradual growth in both the Cayman Islands and the British Virgin Islands ("BVI") merger and acquisition ("M&A") activity continued through 2013, led by flagship deals in both established and emerging markets. The flexibility, certainty and efficiency of the statutory merger regimes make both of these leading offshore jurisdictions very attractive for cross-border M&A deals and this activity is expected to continue throughout 2014 and beyond.
Cayman Islands M&A activity
The Cayman Islands legal framework – background and developments As a jurisdiction, the Cayman Islands has long established itself as one of the leading international financial centres. There are a number of factors which make the Cayman Islands an attractive jurisdiction for cross-border transactions including a creditor- and investor-friendly legal system, based upon English common law with a good court system, (including a separate division within the Grand Court to deal with financial services and commercial disputes).
The Cayman Islands also offers a stable political environment with adherence to international regulatory standards including, in relation to antimoney laundering legislation, exchange of information with respect to tax matters and cross-border regulator to regulator information. A lack of direct taxation makes the Cayman Islands particularly attractive as an incorporation jurisdiction for international holding companies, and Cayman Islands companies are listed on stock exchanges worldwide, including the LSE, AIM, NYSE, NASDAQ, TSX and HKSE.
Complementary deal structures – mergers vs Schemes
The Cayman Islands offers two complementary business combination methods, being a court-supervised scheme of arrangement (which is very closely related to its counterpart in other Commonwealth jurisdictions) or a statutory merger regime for companies limited by shares. As in other merger jurisdictions, all the assets and liabilities of the merging company or companies become assets or liabilities of the surviving company.
The Cayman Islands is therefore in the relatively unique position of being able to accommodate takeover transactions structured as both schemes of arrangement and statutory mergers. It will always be important to consult counsel in the Cayman Islands in order to take full advantage of this flexibility as a number of factors will inform the choice of the appropriate structure. However, Figure 1 sets out a number of factors that may be relevant.
Recent M&A activity
M&A activity involving Cayman Islands companies increased during 2013. In a flagship deal, Cayman Islands company Shuanghui International Holdings acquired Smithfield Foods, the largest US publicly-traded pork processor and hog producer.With a deal value of US$7.1bn, the transaction is reportedly the biggest takeover of a US company by Chinese interests. Also, Cayman-incorporated and NASDAQ-listed Chinese search engine, Baidu, has been particularly active, acquiring mobile app-store operator 91 Wireless Websoft Ltd., with a deal value estimated at US$1.9bn, and a majority stake in Nuomi Holdings Inc., an e-commerce website operator, from social network company Renren.
Whilst global M&A activity was reduced both in number and value in 2013, the Cayman Islands merger regime has continued to be particularly popular in structuring take-private transactions of US-listed, Cayman Islands incorporated holding companies, particularly for China-based businesses. A combination of management and private equity led deals have closed, including:
- The previously announced US$3.66bn management/Carlyle Group take-private of Focus Media which closed in early 2013.
- A management/TPG led buyout of ShangPharma Corporation which closed in the first quarter of 2013.
- The Blackstone Group's take-private of Chinese tech company Pactera.
- CITIC's take-private of Chinese biotech firm 3SBio.
- The management led buyout of China Nuokang Bio-pharmaceutical Inc., a China-based biopharmaceutical company.
- The take-private of NYSE listed 7 Days Group Holdings Limited, China's second largest economy hotel chain.
- The US$3.7bn take-private of NASDQAQ listed Simcere Pharmaceutical Group.
- A management take-private bid for Charm Communications announced in October 2013.
The trend has continued into 2014, with NewQuest Capital related funds entering into definitive Agreement and Plan of Merger to acquire China HydroElectric Corporation in January 2014, and the Baring's led buy-out of gaming company Giant Interactive gaining momentum.
The general process for such deals is for the listed target to be delisted following the closing of the merger transaction, and the Cayman Islands merger regime has proven a cost-effective and efficient mechanism to privatise public companies. Common drivers for delistings include the increased costs and regulatory and compliance burden associated with maintaining listings, and, in some cases, low trading volumes. However, more recently, costs of take private deals for emerging market-based enterprises have increased significantly, due to recognition by bidders of the need for detailed due diligence work on target companies.
The Cayman Islands merger regime also facilitated strategic acquisitions, for example, the US$1.6bn acquisition of Edwards Group Limited by Swedenbased Atlas Copco AB, Accenture's acquisition of digital marketing company Acquity Group, and the acquisition by Tsinghua Unigroup Ltd of NASDAQ listed Spreadtrum Communications Inc., a fabless semiconductor developer and design business, in the largest semiconductor deal announced in more than a year.
Straight equity investors were also actively using Cayman Islands acquisition vehicles following the global increase in buy-side private equity M&A activity – including, the SK Capital fund's acquisition of Chemtura Corporation's antioxidant business, and textile chemicals, paper specialties, and emulsions businesses from Clariant.
On the flip side, as a mechanism for private equity houses to exit and realise investments and to facilitate corporate reorganisations, Cayman Islands companies continue to be a popular choice for listings on leading exchanges around the world. Worldwide IPO volume in 2013 was the highest since the financial crisis, and the trend is expected to continue in 2014, especially as private equity firms exit a period of portfolio improvement and look for exit opportunities. In particular, Speedy Global Holdings, a People's Republic of China ("PRC") based apparel retailer, and Chinalco Mining Corporation International, the world's second largest aluminum producer and the third largest primary aluminum producer, listed on the HKSE in early 2013, LightIntheBox Holding Co., Ltd, a global online retailer, listed on the NYSE in mid-2013 and Qunar Cayman Islands Ltd., a search-based commerce platform for the travel industry in China, backed by Baidu, listed on NASDAQ in late 2013.
A number of venture-backed IPOs of Cayman Islands holding vehicles previously delayed due to market conditions are now expected to price in 2014.
Special purpose acquisition companies and business combinations
Although a limited number of Cayman Islands special purpose acquisition vehicles ("SPACs") completed business combinations in 2013, the combination of Tecnoglass and Andina Acquisition Corporation in late 2013 into Tecnoglass Inc., a NASDAQ-listed manufacturer of hi-spec, architectural glass and windows was a highlight.
After a quieter 2012, the number of SPACs looking to list and commence their search for an acquisition target has also increased during the latter half of 2013, a trend which should continue into 2014.
BVI M&A activity
The BVI legal framework – background and developments The BVI remains at the forefront of international corporate structuring for cross-border transactions. Whilst the size and complexity of the transactions in the last year reflect the jurisdiction's core strengths of providing reliable and flexible holding structures, the BVI continues to add value, enacting new legislation to establish the BVI as a centre for commercial arbitration and modern trademarks legislation recognising the global importance of brand and intellectual property protection.
The BVI securities regulations are recognised by regulators worldwide, enabling owners and investors to exit investments through a private sale or a listing on major stock exchanges. Advantages of listing through a BVI vehicle include the fact that the BVI does not impose a double layer of regulation on a listed BVI company. For example, there is no BVI takeover code or public filing requirement applicable to listed companies. BVI companies are extremely flexible in their structure and handling.Whilst the constitution of a BVI listed company can be easily amended to reflect any required shareholder protection provisions (for example, disclosure of director interests, authority for issuance of shares, independent valuation for issuance of shares for non-cash consideration and retirement of directors by rotation), these are not required as a matter of BVI law and can be tailored to suit the client, the target investor base and the requirements of the relevant stock exchange. The fact that there is no additional layer of tax and regulation ensures that the incorporation and ongoing costs of using a BVI company are low, whilst high standards are maintained as required by the International Organisation of Securities Commissions (IOSCO), of which the BVI is a member.
BVI law has codified the traditional common law basis for members' remedies. BVI company law provides statutory dissent and appraisal rights for shareholders who object to certain corporate actions, such as in the case of a merger, compulsory acquisition, or disposition of major assets. BVI law has departed from the concept of share capital in favour of a solvency based regime, which allows greater flexibility when a company proposes to declare distributions, carry out reverse share splits, change the par value of its shares and/or effect redemptions.
The London Stock Exchange proved a popular destination for BVI companies listing in 2013. A total of seven BVI companies were admitted onto the main market and the Alternative Investment Market (AIM) of the London Stock Exchange in 2013. One of those was Falanx Group Limited, the holding company of the Falanx Group, which offers general security consultancy, physical security technology, business intelligence, political and security risk analysis and crisis management to large corporates and some governments operating in sensitive regions. Falanx Group Limited is incorporated in the BVI, operates internationally and was founded to respond to a heightened need for security consultancy and asset protection by large corporates and some governments operating in sensitive regions, such as those affected by the Arab Spring and increased risk from civil unrest, terrorism and ethnic tensions.
The BVI is a familiar jurisdiction for players in the mining and energy sectors, and other BVI companies listing on the London Stock Exchange in 2013 included mining company Golden Saint Resources Ltd, which was admitted to listing following its acquisition of 75% of the issued share capital of Golden Saint Resources (Africa) Limited, ("GSR Africa"), from Golden Saint Australia Limited. GSR Africa is an early stage diamond and gold exploration company which holds gold and diamonds exploration licences in Sierra Leone. US focused oil and gas company, Northcote Energy Ltd, also listed on the London Stock Exchange in 2013 through a BVI listing vehicle. Its primary focus is on Mississippi Lime formation in Oklahoma, where new technologies and techniques including horizontal drilling have re-opened the oil play.
SPACs have in the past decade found the flexibility of BVI corporate law advantageous and this has allowed the vehicle to evolve. Following the successful listing of Justice Holdings Limited on the main market of the London Stock Exchange, and its business combination with Burger King Worldwide Holdings, Inc., in 2013 SPAC Atlas Mara Co Invest Ltd raised gross proceeds of US$325m on the main market, including the founders' investment of US$20m.
2014 promises to see continued use of BVI companies as listing vehicles in London and on other exchanges. For example, Russian hypermarket chain Lenta has announced plans to sell up to US$1bn worth of shares through a dual listing in Moscow and London. Lenta Ltd, a BVI company, is part owned by private equity group TPG, Russian bank VTB and the European Bank for Reconstruction and Development, who will all remain investors. Such plans are heralded as a sign of the success of Russia's newer business sectors, diversifying from the natural resources companies which have dominated Russian listings to date.
Competing mechanisms – mergers, schemes of arrangement, plans of arrangement
When a bidder is considering a potential acquisition of a publicly listed BVI company (the "Target"), there are various ways in which such an acquisition could be effected. BVI law offers two principal methods to achieve the possible acquisition: (i) a takeover bid accepted by the Target's shareholders (or, more likely, a majority of the Target's shareholders); and (ii) a shareholder approved transaction, such as a merger or court approved plan of arrangement. There are alternative ways to achieve the acquisition where the board of the Target approves the offer, without a shareholder vote (or with a simple majority shareholder vote only) which would need to be considered under the applicable Stock Exchange rules. BVI law does not set down rules or a timetable for an offer process between a bidder and the Target's shareholders. The rules and timetable applicable to a company listed on the applicable Stock Exchange will apply.
BVI law offers a statutory process under which a bidder that has acquired 90% or more of the voting shares in a BVI company can require the BVI company to forcibly redeem or "squeeze out" the shares of the remaining minority shareholders, in order to become the sole shareholder. It should be noted that the Target may amend its memorandum and articles of association to disapply or vary these provisions as part of its takeover protection plans. The minority shareholder has the right to dissent to the redemption price offered, and there is a statutory timetable for the procedure for dissenting and assessing the fair value of the shares to be redeemed.
BVI law offers several routes to structure a shareholder approved transaction. For example, the acquisition could be structured by way of a statutory merger or a scheme of arrangement which operate substantively as in the Cayman Islands, described above.
The plan of arrangement is an additional alternative under BVI law to the more prescriptive scheme of arrangement, and there is great potential for a wide variety of restructuring transactions to be effected by way of plan of arrangement. Almost any type of restructuring, reorganisation or reconstruction of a BVI company could be effected under the plan of arrangement process. In particular, it should be noted that reorganisation and reconstruction are not defined and should be given a wide interpretation. If the directors of a company determine that it is in the best interests of the company or the creditors or members of the company, the directors may approve a plan of arrangement that contains details of the proposed arrangement and make application to the BVI court for approval of the proposed arrangement.
It is an important feature of the plan of arrangement that the court is not restricted to the approval of a "majority in number representing seventy five percent in value" as required for a scheme of arrangement, and this flexibility makes the plan of arrangement an attractive alternative. It is also important to note that there are no dissenters rights in relation to a plan of arrangement other than as may be ordered by the BVI court (if the BVI court considers a right to dissent is appropriate). The BVI court has recently confirmed that it has no power to approve plans of arrangement involving the forfeiture or confiscation of property. Guidance has also been given by the BVI court on how to approach holders of securities and structure the plans before asking the BVI court for approval.
Recent M&A activity
LJ International Inc. ("LJ"), listed on NASDAQ, was acquired by a consortium led by the chairman. LJ is a leading coloured gemstone and diamond jeweller with retail and wholesale businesses in the PRC. The deal value was approximately US$64m. The transaction shows the flexibility and adaptability of the BVI merger legislation and reinforces the suitability of BVI companies as listing vehicles. Tonic Industries Holdings Limited acquired operating subsidiaries from its holding company and undertook an HK$1.92bn placing of shares. The subsidiaries own 11 property development projects in the PRC. The acquisition constitutes a very substantial acquisition and a reverse takeover for Tonic under the Listing Rules of the Hong Kong Stock Exchange. Upon completion of the acquisition, Tonic changed its company name to China Merchants Land Limited.
Online dating company Cupid plc sold its "casual dating" business to a firm run by one of its co-founders in a deal worth £45.1m. The Edinburgh-based firm sold the business to Grendall Investment Limited, which is registered in the BVI, in order to focus on its niche and mainstream sites. The deal included casual dating sites such as Benaughty.com and Flirt.com. It also included a separate software licensing agreement with Grendall, worth £2m.
Natural resources deals
In one of the largest BVI transactions ever, Russian state-owned oil giant Rosneft completed its US$55bn acquisition of 100% of the TNK-BP joint venture. This high profile transaction highlighted the appeal of the BVI for structuring joint ventures, with the BVI Business Companies Act allowing directors of joint venture platform companies to act in the best interests of the joint venture party they represent, and giving statutory recognition to voting agreements.
In another recent major energy deal, Videocon Group sold its 10% stake in a giant Mozambique gas field to ONGC Videsh Ltd (OVL) and Oil India Ltd (OIL) for US$2.475bn. The buyers acquired 100% of the shares of Videocon Mozambique Rovuma 1 Ltd, the BVI incorporated company holding the 10% interest in the Rovuma Area 1 offshore block, Mozambique, from Videocon Mauritius Energy Ltd. Area 1 covers approximately 2.6 million acres in the deepwater Rovuma Basin offshore Mozambique and represents the largest gas discovery offshore East Africa. This investment is expected to further enhance the strong business and cultural links between Mozambique and India.
Local M&A activity
The BVI has seen further changes in the international financial services and trust company sector of which it is at the heart. 2011 saw the business combination of Vistra, a leading provider of fund administration, trust and corporate services in Europe, and Offshore Incorporations Group, the Asian market leader in company formation and associated services, in which IK Investment Partners acquired from the Carlyle Group the Offshore Incorporations group of companies. Then in 2012, Intertrust Group Holding SA acquired Walkers Management Services, a provider of corporate, company secretarial and fiduciary services, from Walkers Global. In 2014, offshore firm Ogier has sold its fiduciary business in a management buy-out backed by private equity company Electra Partners. Also at the start of 2014, Investec Bank plc sold its Investec Trust group of companies to Salamanca Group, the merchant banking and risk management business. Investec Trust Services currently has over £4.5bn in assets under administration. These changes reflect the significance to the global financial services market of the company and fiduciary services provided in the BVI.
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