This Q&A on the Mergers & Acquisitions (M&A) laws and regulations applicable in the Isle of Man provides an overview of the main themes and issues impacting M&A activity in the jurisdiction. Topics covered include the key laws and regulatory authorities of the Isle of Man, due diligence procedures, deal protection, public disclosure, director duties, shareholder rights and the current state of the M&A market in the jurisdiction more generally.
1. WHAT ARE THE KEY RULES/LAWS RELEVANT TO M&A AND WHO ARE THE KEY REGULATORY AUTHORITIES?
The Companies Act under which a company is incorporated and contract law will provide the legal framework for Isle of Man M&A transactions. A company may be incorporated under either the Companies Act 2006 (2006 Act) or the Companies Acts 1931-2004 (1931 Act) or.
The United Kingdom City Code on Takeovers and Mergers (Takeover Code) extends to the Isle of Man and applies in relation to certain Isle of Man target companies. The Takeover Code will apply to a company which has its registered office in the Isle of Man in the following situations:
- if the company has its securities admitted to a regulated market or multilateral trading facility (for example, AIM) in the UK or on any stock exchange in the Channel Islands (CI) or Isle of Man;
- where the company is a public or private company and is considered by the Panel on Takeovers and Mergers to have their place of central management and control in the UK, CI or Isle of Man (the Residency Test).
In situations where the Residency Test is met, a further set of requirements would then need to be satisfied in order for the Takeover Code to apply if the company was a private company. The requirements are:
- that the company's securities have been admitted to trading on a regulated market or a multilateral trading facility in the UK or on any stock exchange in the CI or the Isle of Man at any time during the 10 years prior to the relevant date; or
- dealings and/or prices at which persons were willing to deal, in any of the company's securities have been published on a regular basis for a continuous period of at least six months in the 10 years prior to the relevant date; or
- any of the company's securities have been subject to a marketing arrangement (as described under the Companies Act 2006 (of Parliament);
- it has filed a prospectus for the offer, admission to trading or issue of securities with the registrar of companies or any other relevant authority in the UK, the CI or the Isle of Man at any time during the 10 years prior to the relevant date.
As companies incorporated under the 2006 Act cannot be classified as public or private in the same way as under most other companies legislation, the Takeover Code treats these as private companies. A company incorporated under the 2006 Act will only be treated as being subject to the Takeover Code when the above criteria set out at paragraph i – iv above apply.
2. WHAT IS THE CURRENT STATE OF THE MARKET?
In line with the market globally, the Isle of Man has continued to see high levels of M&A activity in 2021 and early 2022. This has included public and private deals, including share and asset sales across a broad range of sectors.
3. WHICH MARKET SECTORS HAVE BEEN PARTICULARLY ACTIVE RECENTLY?
There have been deals in sectors including financial services, technology, real estate, aviation, construction, entertainment, cryptoassets and gaming.
4. WHAT DO YOU BELIEVE WILL BE THE THREE MOST SIGNIFICANT FACTORS INFLUENCING M&A ACTIVITY OVER THE NEXT 2 YEARS?
A host of interrelated factors will affect M&A activity, including:
- global investor confidence, influenced by geopolitical matters and economic developments such as changes in currency values, inflation and interest rates;
- continued transformation of businesses including financial services firms; and
- UK, EU and US regulatory reforms.
5. WHAT ARE THE KEY MEANS OF EFFECTING THE ACQUISITION OF A PUBLICLY TRADED COMPANY?
An acquisition of a publicly traded Isle of Man company will usually be effected by way of court sanctioned scheme of arrangement or by takeover offer, the former being prevalent in recent years.
6. WHAT INFORMATION RELATING TO A TARGET COMPANY WILL BE PUBLICLY AVAILABLE AND TO WHAT EXTENT IS A TARGET COMPANY OBLIGED TO DISCLOSE DILIGENCE RELATED INFORMATION TO A POTENTIAL ACQUIRER?
Publically available information for a 1931 Act company includes:
- memorandum and articles of association;
- filed annual returns;
- details of current directors and shareholders;
- shareholder special resolutions;
- register of charges; and
The information publically available for a 2006 Act company is more limited but includes:
- memorandum and articles of association;
- filed annual returns; and
- registered agent details.
Other information may be available for both types of company through other sources such as public announcements issued by the target.
With regard to disclosure of information, save where the target is listed on a foreign stock exchange, in which case the rules of the foreign stock exchange will apply, there is no regime applicable for compulsory disclosure.
If the Takeover Code applies, a bidder will be entitled to receive, upon request, the same information that has been provided to a competing bidder.
7. TO WHAT LEVEL OF DETAIL IS DUE DILIGENCE CUSTOMARILY UNDERTAKEN?
This will depend upon the nature of the transaction (with due diligence generally more detailed on private transactions). Legal practice in the Isle of Man follows the legal practice in England and Wales.
8. WHAT ARE THE KEY DECISION‐MAKING ORGANS OF A TARGET COMPANY AND WHAT APPROVAL RIGHTS DO SHAREHOLDERS HAVE?
In an asset sale, subject to the provisions of the target's constitutional documents, the board of directors have legal power to act without shareholder consent, however in practice, the directors would often seek the approval of the shareholders.
9. WHAT ARE THE DUTIES OF THE DIRECTORS AND CONTROLLING SHAREHOLDERS OF A TARGET COMPANY?
The directors must continue to act in the best interests of the target.
The duties of a director of an Isle of Man company are governed by both common law and statute. Directors have a duty at common law to act in what they consider in good faith to be the best interests of the company.
Directors should also act in accordance with the Takeover Code, if this is applicable, and the rules of any stock exchanges upon which the company's shares are listed.
A controlling shareholder will not be subject to the same duties as those owed by a director. However, it should be borne in mind by both the directors and shareholders that a minority shareholder could bring a claim against the company if they believe that the actions of the company are unfairly prejudicial or oppressive to any minority shareholders.
10. DO EMPLOYEES/OTHER STAKEHOLDERS HAVE ANY SPECIFIC APPROVAL, CONSULTATION OR OTHER RIGHTS?
Generally, there are no specific obligations to consult with, or obtain approval from, employees or other stakeholders on the acquisition of the shares of an Isle of Man target company, subject to any considerations relating to matters such as defined benefit pension schemes.
If applicable, the Takeover Code contains provisions relating to engagement with employee representatives and the provision of information.
If the target is a regulated business, regulatory notification or approval will be required.
11. TO WHAT DEGREE IS CONDITIONALITY AN ACCEPTED MARKET FEATURE ON ACQUISITIONS?
Conditionality is accepted standard practice in accordance with practice in the UK and often includes regulatory consent requirements.
For a private acquisition, the conditions are a matter of negotiation between the parties.
Conditions on public takeover bid must comply with the requirements of the Takeover Code – in particular the requirement that the circumstances are of material significance to the bidder in the context of the offer.
12. WHAT STEPS CAN AN ACQUIRER OF A TARGET COMPANY TAKE TO SECURE DEAL EXCLUSIVITY?
The use of exclusivity agreements is common practice in the Isle of Man and follows market practice in the UK.
13. WHAT OTHER DEAL PROTECTION AND COSTS COVERAGE MECHANISMS ARE MOST FREQUENTLY USED BY ACQUIRERS?
All deal protection measures used in the UK may be used in the Isle of Man.
If the Takeover Code applies, it prohibits “offer-related arrangements” between a bidder, or any person acting in concert with it, and the target.
14. WHICH FORMS OF CONSIDERATION ARE MOST COMMONLY USED?
The forms of consideration most commonly used are cash and shares.
If the Takeover code applies with respect to a mandatory offer, the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
15. AT WHAT OWNERSHIP LEVELS BY AN ACQUIRER IS PUBLIC DISCLOSURE REQUIRED (WHETHER ACQUIRING A TARGET COMPANY AS A WHOLE OR A MINORITY STAKE)?
Except where the target is listed on a foreign stock exchange, in which case the rules of the foreign stock exchange will apply, there are no specific requirements in the Isle of Man for public disclosure during an acquisition.
If the Takeover Code applies, Rule 8 requires the following public disclosure:
- a bidder must make a public Opening Position Disclosure following the start of an offer period or an announcement first identifying it as the bidder or identifying a competing securities exchange offeror.
- the target must make a public Opening Position Disclosure following the commencement of the offer period and, if later, after the announcement that first identifies any securities exchange offeror.
- any person interested in 1% or more of any class of relevant securities of a target or of any securities exchange offeror must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified.
In the Isle of Man, ownership of shares of a 1931 Act becomes a matter of public record upon transfer. Under the 2006 Act, the register of shareholders is not currently a matter of public record.
16. AT WHAT STAGE OF NEGOTIATION IS PUBLIC DISCLOSURE REQUIRED OR CUSTOMARY?
There is no requirement under the 1931 Act or the 2006 Act for public disclosure. If the target is listed on a foreign stock exchange, in which case the rules of the foreign stock exchange will apply.
If the Takeover Code applies, Rule 8 requires public disclosure, as set out at question 15 above.
17. IS THERE ANY MAXIMUM TIME PERIOD FOR NEGOTIATIONS OR DUE DILIGENCE?
There is no maximum time period for negotiations or due diligence.
18. ARE THERE ANY CIRCUMSTANCES WHERE A MINIMUM PRICE MAY BE SET FOR THE SHARES IN A TARGET COMPANY?
If the Takeover Code applies, Rule 6 specifies that the bid price must not be less than the highest price paid by the bidder (or person acting in concert) for any interest in shares in the target during the period commencing three months prior to the offer period.
Rule 6 also specifies circumstances in which the offer price must also not be less than the highest price paid by the bidder for shares in the 12 months prior to the offer period and during the offer period.
Separate rules apply to mandatory offers under Rule 9 of the Takeover Code.
19. IS IT POSSIBLE FOR TARGET COMPANIES TO PROVIDE FINANCIAL ASSISTANCE?
There is no prohibition of financial assistance for companies incorporated under the 2006 Act.
With respect to 1931 Act Companies, it is unlawful for a public company or its subsidiaries to give financial assistance for the acquisition of shares in that public company. Equally it is unlawful for a public company to give financial assistance for the acquisition of shares in its private holding company. However there is no prohibition against a private company giving financial assistance for the acquisition of shares in itself or its private holding company.
20. WHICH GOVERNING LAW IS CUSTOMARILY USED ON ACQUISITIONS?
Acquisitions in the Isle of Man are most commonly governed by either the laws of the Isle of Man or the laws of England and Wales.
21. WHAT PUBLIC‐FACING DOCUMENTATION MUST A BUYER PRODUCE IN CONNECTION WITH THE ACQUISITION OF A LISTED COMPANY?
The requirements for public facing documentation will be determined by the rules of the stock exchange on which the target is listed.
22. WHAT FORMALITIES ARE REQUIRED IN ORDER TO DOCUMENT A TRANSFER OF SHARES, INCLUDING ANY LOCAL TRANSFER TAXES OR DUTIES?
Subject to any restrictions contained within a company's constitutional documents, shares in 1931 Act and 2006 Act companies are transferable by a written instrument of transfer. Uncertificated shares must be transferred in accordance with the relevant uncertificated securities regulations on a system operated by an approved operator (currently limited to CREST and a small number of other prescribed systems). There is no stamp duty on transfer of shares payable under Isle of Man law.
23. ARE HOSTILE ACQUISITIONS A COMMON FEATURE?
Hostile acquisitions are not common in the Isle of Man.
24. WHAT PROTECTIONS DO DIRECTORS OF A TARGET COMPANY HAVE AGAINST A HOSTILE APPROACH?
There are no specific provisions contained in Manx law for the protection of directors of a target company against a hostile approach.
To the extent that the target's constitutional documents do not include anti-takeover provisions, the directors of the target will be limited in their ability to resist a change of control by their fiduciary duties to the company – the directors will be obliged to consider the terms of the acquisition in good faith and act bona fide in the best interests of the company as a whole in relation to any acquisition proposal.
25. ARE THERE CIRCUMSTANCES WHERE A BUYER MAY HAVE TO MAKE A MANDATORY OR COMPULSORY OFFER FOR A TARGET COMPANY?
If the Takeover Code applies, Rule 9 specifies that a mandatory offer must be made where the bidder (and parties acting in concert):
- acquires shares carrying 30% or more of the voting rights of a target; or
- is interested in shares carrying not less than 30% but not more than 50% of the target's voting rights, and that person acquires an interest in any other voting shares in the target.
26. IF AN ACQUIRER DOES NOT OBTAIN FULL CONTROL OF A TARGET COMPANY, WHAT RIGHTS DO MINORITY SHAREHOLDERS ENJOY?
Directors must call a meeting of the Company if requested in writing to do so by a shareholder or shareholders holding at least 10% (or such smaller percentage as may be specified in the constitutional documents) of the voting rights in relation thereto.
A shareholder of a 1931 Act company may apply to the Court for an order if the affairs of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or some part of the members (including himself), or in disregard of his or their proper interests as shareholder(s).
A shareholder of a 2006 Act company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or have been, or are, likely to be oppressive or unfairly prejudicial to such member in that capacity, may apply to the Court for an order.
The target's constitutional documents may provide additional rights for its minority shareholders.
If the acquirer obtains at least 90% in value of the target's shares and gives notice for the acquisition of share from a dissenting shareholder, the dissenting shareholder may, within one month from the date on which the notice was given, make an application to the Court for an order.
27. IS A MECHANISM AVAILABLE TO COMPULSORILY ACQUIRE MINORITY STAKES?
Both the 1931 Act and the 2006 Act contain provisions for the compulsory acquisition of shares from minority shareholders which apply to all takeover offers that constitute a scheme or contract (which expression includes a series of contracts) involving the transfer of shares to another person. If the bidder has had its offer approved within a specified period of time by not less than 90% in value of the shares affected the bidder may compulsorily acquire the remaining shares.
There is no bar on the shares owned by an affiliate of a bidder being taken into account when determining whether the 90 per cent threshold has been crossed.
A takeover by way of scheme of arrangement requires the approval of a majority in number representing at least 75% in value of the shareholders or class of shareholders present and voting at the relevant shareholder meeting, together with the approval of the Court.
Originally Published by Legal 500's Country Comparative Guide to Mergers & Acquisitions, 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.