1 DEAL STRUCTURE
1.1 HOW ARE PRIVATE AND PUBLIC M&A TRANSACTIONS TYPICALLY STRUCTURED IN YOUR JURISDICTION?
At present, a substantial portion of the entities formed in Bermuda are companies limited by shares incorporated under the Companies Act 1981, as amended. As such, the discussion in this Q&A focuses primarily on M&A transactions involving Bermuda companies.
M&A transactions in Bermuda typically proceed by way of statutory merger, amalgamation or scheme of arrangement under the Companies Act. The Companies Act also provides for compulsory acquisitions ('squeeze-outs') of minority shareholders in connection with M&A transactions structured by way of direct tender offer to the target's shareholders.
If the target is a regulated entity – for example, under the Insurance Act 1978, as amended – the specific legislation applicable to such entities may also be relevant to the transaction and its structure.
The regulatory authority responsible for registering a merger or amalgamation pursuant to the Companies Act is the Bermuda Registrar of Companies (RoC). In addition, the Bermuda Monetary Authority (BMA) may:
- be required to give permission from an ultimate beneficial ownership and exchange control perspective in the event there is an issue or transfer of shares in connection with the M&A transaction, unless a general permission already exists; and/or
- if such target or subsidiary (as applicable) is a BMA regulated entity, be required either to be notified of or to provide its approval for the change of control for the target or parent entity (as applicable).
1.2 WHAT ARE THE KEY DIFFERENCES AND POTENTIAL ADVANTAGES AND DISADVANTAGES OF THE VARIOUS STRUCTURES?
Statutory merger/amalgamation: The Companies Act provides for both mergers and amalgamations of Bermuda companies, in both cases with other Bermuda companies or foreign corporations. Pursuant to a merger, one or more companies are merged with and into a single company, which becomes the surviving entity. In the case of an amalgamation, one or more companies join together to create an entirely new company. The key features and advantages and disadvantages of a merger and amalgamation include the following:
- Flexibility: Amalgamations and mergers are flexible structures allowing for the parties to structure the transaction in a way that reflects the commercial deal while allowing the Bermuda portion of the transaction to align and harmonise with the requirements of other jurisdictions. The Companies Act does not legislate as to whether a transaction should be structured as a merger or an amalgamation. Commercially and optically, companies might proceed by way of an amalgamation if structuring the business combination as a 'merger among equals', given that neither company is deemed to be the survivor. However, where one party is the 'purchaser', a merger may be the preferred choice.
- Approvals: Neither an amalgamation nor a merger requires the approval of the Bermuda courts (unlike a scheme of arrangement) or the approval of the Bermuda company's creditors. The Companies Act requires shareholder approval of the amalgamation or merger agreement and provides all classes of share with the ability to vote. While the Companies Act sets a default shareholder approval threshold of 75%, it does allow for a company's bylaws to set a lower approval threshold.
- Effectiveness: Once an amalgamation or merger has been approved by the requisite majority of shareholders, and subject to the satisfaction of any other conditions, the amalgamation or merger must be registered with the RoC in order to become effective. The effective date will be evidenced on the certificate of amalgamation or merger issued by the RoC. Where required by the parties – for example, in the context of a cross-border transaction with multiple steps that need to be effected – an effective time can be included in the certificate.
- Dissent rights: The Companies Act provides shareholders that do not vote in favour of the amalgamation or merger with the right, within one month of the notice regarding the general meeting in respect of the amalgamation or merger, to apply to the Bermuda courts to appraise the fair value of their shares. In such cases, the dissenting shareholders are entitled to be paid the fair value of their shares as appraised by the court, but cannot block the amalgamation or merger itself. Additionally, dissenting shareholders cannot bring class actions in respect of their appraisal rights and must proceed on an individual basis. All shares carry the right to vote in an amalgamation or merger (and exercise dissent rights) notwithstanding that they would otherwise not be entitled to do so.
Tender offer: Tender offers may be used in both friendly and hostile transactions. The Companies Act does not prescribe the requirements of a tender offer. It is open for a potential acquirer, subject to compliance with the rules and regulations of any applicable stock exchange, to present an offer to the shareholders of a Bermuda company, which may or may not be recommended by the board of the target. The key features and advantages and disadvantages of a tender offer include the following:
- Offeror: A company (whether incorporated in Bermuda or not) can make an offer to the target's shareholders to acquire all of their shares in the target.
- 90% squeeze-out: In the event that the offer reaches 90% approval, the purchaser has certain rights and obligations under Section 102 of the Companies Act regarding the remaining minority shareholders. The key features are as follows:
- Compulsory transfer: The purchaser may require the remaining 10% minority to sell their shares on the terms of the offer where:
- there is a scheme or contract for the transfer of shares or any class of shares in a Bermuda company to another company (typically by way of offer to all shareholders);
- the offer is approved by not less than 90% in value of the shares subject to the offer (and so excludes shares held or contracted to be acquired prior to the date of the offer by the purchaser or its subsidiaries) within four months of the offer being made; and
- one month's notice is given to dissenting shareholders (ie, shareholders that refuse the offer) that the bidder wishes to acquire their shares and such dissenting shareholders have not applied to the Bermuda courts for an order against the acquisition.
- Compulsory acquisition: If the purchaser acquires at least 90% in value of the target's shares (and has not previously implemented the compulsory transfer provisions described above), the purchaser must, within one month of such acquisition, provide the remaining 10% shareholders with notice of their 90% acquisition. The remaining 10% shareholders may then, within three months, require the purchaser to acquire their shares on the same terms as they acquired the 90%.
- 95% squeeze-out: Section 103 of the Companies Act provides that holders of 95% or more of the shares of a company may compulsorily acquire the remainder. The principal difference between Section 103 and Section 102 is that a dissentient in Section 103 can only apply to court to appraise the value of its shares. It cannot seek to vitiate the compulsory acquisition. The English case law on equivalent statutory provisions will be persuasive in the Bermuda courts. English case law is such that a minority shareholder will ?nd it very dif?cult to persuade the court that an offer accepted by a majority of 95% is not reasonable and fair.
Scheme of arrangement: A scheme of arrangement is a court-sanctioned compromise between a company and its creditors (or any class of them) or its members (or any class of them). In the context of an acquisition, a Bermuda company or any member may apply to the Bermuda court requesting that it order a meeting at which the members (or any class of them) are asked to consider the scheme. If the approval is obtained of a majority in number representing three-quarters in value of members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, the court may sanction the scheme. If it does so, the scheme becomes binding (subject to delivery of the requisite order of the court to the RoC) upon all of the company's members (or any class of them, as the case may be). The key features and advantages and disadvantages of a scheme of arrangement include the following:
- Flexibility: A scheme of arrangement need not fit into any of the existing business combination methods provided in the Companies Act (eg, merger or amalgamation), and can include any or all of such methods features, allowing for great flexibility for both target and purchaser to structure the commercial terms of the acquisition and their implementation.
- Approval threshold and binding nature: A scheme of arrangement requires a lower approval threshold of 75% of the value of the members or class of members, as applicable, versus the 90% or 95% required for a squeeze-out. Additionally, once sanctioned by the court and filed with the RoC, a scheme of arrangement is binding on all of the arranged company's members.
- No dissent rights: Unlike a merger or amalgamation, the Companies Act does not provide members with dissent rights in respect of a scheme of arrangement.
- Timing: Being a court-sanctioned process, schemes of arrangement often take longer than tender offers, mergers or amalgamations.
1.3 WHAT FACTORS COMMONLY INFLUENCE THE CHOICE OF SALE PROCESS/TRANSACTION STRUCTURE?
Transaction structures are typically driven by factors that influence the speed and approvals necessary to close the acquisition. The primary drivers of these matters are:
- the rules of the stock exchange on which the acquirer and/or target are listed, if any, and the applicable securities laws in such jurisdiction; and
- approval thresholds and other requirements contained in the Companies Act or the target's bylaws. For example, the Companies Act provides that the default approval threshold and quorum requirements contained in the Companies Act merger and amalgamation provisions may be overridden by specific provisions of the target's bylaws.
Structure choices may also be driven by non-Bermuda factors that arise as a result of the fact that the parties may have international footprints that dictate or influence requirements or preferences. For example, while some jurisdictions may seek to amalgamate or merge a Bermuda company with one in their home jurisdiction, such a transaction may not be possible under the laws of another jurisdiction.
2 INITIAL STEPS
2.1 WHAT DOCUMENTS ARE TYPICALLY ENTERED INTO DURING THE INITIAL PREPARATORY STAGE OF AN M&A TRANSACTION?
Initial documents typically include:
- non-disclosure agreements;
- letters of intent/term sheets (with or without exclusive negotiating periods); and
- engagement letters and agreements with those advising or providing services in connection with the transaction.
2.2 ARE BREAK FEES PERMITTED IN YOUR JURISDICTION (BY A BUYER AND/OR THE TARGET)? IF SO, UNDER WHAT CONDITIONS WILL THEY GENERALLY BE PAYABLE? WHAT RESTRICTIONS AND OTHER CONSIDERATIONS SHOULD BE ADDRESSED IN FORMULATING BREAK FEES?
The inclusion of break fees is relatively common. When setting a break fee, care must be taken so that the party seeking to recover the fee can demonstrate that it is a contractually agreed method of termination rather than a contractual consequence of a breach of the agreement between the parties seeking to serve as an alternative to a damages claim. Even if it is found to be the latter, such a break fee may be justifiable if it represents a proportionate way in which to protect legitimate interests of those impacted as a consequence of having invested in the negotiation of a transaction that has ultimately been aborted.
More innovative approaches to break fees may also be considered. We have seen consideration being given to the granting of options to prospective purchasers which would be triggered by a potential third-party acquisition of the target. The issuance of those additional shares would make it more expensive and less appealing for the third-party offeror to acquire the target.
When agreeing to break fees or any other deal protection mechanisms, particularly those that stand to make a company materially unattractive (eg, the granting of options) or potentially compromise its future (eg, by the sale of one of its 'crown jewels'), there is a risk that the target's directors could be found to be in breach of their ?duciaries because such measures are not in the best interests of the company. However, there is no bright-line test and the acceptability of such provisions will turn on their facts. Notwithstanding this, there is a range which is generally seen to be within a band of tolerance and the risks of a challenge would be considered to be greater the further outside that band one goes.
2.3 WHAT ARE THE MOST COMMONLY USED METHODS OF FINANCING TRANSACTIONS IN YOUR JURISDICTION (DEBT/EQUITY)?
In our recent experience, acquirers use a mixture of:
- available cash;
- debt (whether pure acquisition facilities or other available facilities); and
- equity (including private investment in public equity financings in 'de-SPACing' transactions).
2.4 WHICH ADVISERS AND STAKEHOLDERS SHOULD BE INVOLVED IN THE INITIAL PREPARATORY STAGE OF A TRANSACTION?
Typical advisers and stakeholders involved at the initial preparatory stage include financial advisers, accountants, lawyers and PR advisers (in the case of hostile transactions). Depending on the nature of the transaction, targets often establish special committees that frequently engage their own financial and legal advisers. If there are shareholders that individually or together hold a meaningful portion of equity, they may also become involved with a view to ascertaining whether they would support a transaction.
2.5 CAN THE TARGET IN A PRIVATE M&A TRANSACTION PAY ADVISER COSTS OR IS THIS LIMITED BY RULES AGAINST FINANCIAL ASSISTANCE OR SIMILAR?
Financial assistance was historically formally prohibited in Bermuda and the prohibition was only removed following a 2011 amendment to the Companies Act.
While that prohibition no longer applies, the bylaws of any company established prior to the amendment should be reviewed to con?rm that no provisions remain which would – notwithstanding the general ability to provide ?nancial assistance under Bermuda law – act to prevent a target from being able to do so without taking steps to have such bylaws amended.
3 DUE DILIGENCE
3.1 ARE THERE ANY JURISDICTION-SPECIFIC POINTS RELATING TO THE FOLLOWING ASPECTS OF THE TARGET THAT A BUYER SHOULD CONSIDER WHEN CONDUCTING DUE DILIGENCE ON THE TARGET? (A) COMMERCIAL/CORPORATE, (B) FINANCIAL, (C) LITIGATION, (D) TAX, (E) EMPLOYMENT, (F) INTELLECTUAL PROPERTY AND IT, (G) DATA PROTECTION, (H) CYBERSECURITY AND (I) REAL ESTATE.
We advise buyers to conduct typical commercial and legal due diligence. Legal diligence will include, but is not limited to, reviewing the following:
- the target's constitutional documents, including bylaws and private incorporating act, as applicable;
- material contracts for change of control and other material provisions involving obligations to third parties (eg, indemnification);
- materials regarding material intellectual property or IT assets (trademarks, patents and commercial agreements);
- employee-related matters, such as:
- executive officer employment contracts;
- employee handbooks;
- work permit approvals; and
- employee long-term incentive programmes;
- material ongoing or threatened litigation, arbitration and other similar disputes (with commercial parties, government or regulatory bodies);
- if the target is regulated by the Bermuda Monetary Authority (BMA), any regulatory filings, audits and other material correspondence and interactions with the BMA, including evidence of licensing (eg, under the Insurance Act, the Investment Business Act 2003, as amended or the Digital Asset Business Act 2018, as amended) and other materials (including governance documents) required pursuant to such licences; and
- records with respect to compliance with Bermuda's:
- economic substance requirements;
- beneficial ownership reporting requirements; and/or
- anti-money laundering and anti-terrorist financing requirements, as applicable.
There are no Bermuda-specific points regarding financial due diligence.
The Supreme Court Causes Book at the Registry of the Supreme Court should be reviewed for any entries and ?lings shown in respect of the target. Such information will include any pending legal proceedings or judgments in Bermuda.
Currently, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, or estate or inheritance tax. In respect of a Bermuda exempted company, no stamp duty, registration, documentary or any similar tax or duty of any kind is payable in Bermuda in connection with the signature, performance or enforcement by legal proceedings of any Bermuda law-governed document.
A Bermuda exempted company may obtain an assurance from the Ministry of Finance of Bermuda granting an exemption, until 31 March 2035, from the imposition of tax under any applicable Bermuda law computed on profits or income or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, in each case in respect of such company or any of its operations, or the shares, debentures or other obligations of such company. However, such an exemption will not:
- prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda and holding such shares, debentures or other obligations of such company; or
- prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to land in Bermuda leased to such company.
A purchaser should engage employment counsel to review the material terms of the target's employment arrangements, employee handbooks, work permit approvals and long-term incentive plans. Bermuda's Employment Act 2000 governs employment in Bermuda.
(f) Intellectual property and IT
A purchaser should engage counsel to review the material documents regarding a target's intellectual property.
Copyright: Predominately based on the UK Copyright, Designs and Patents Act 1988, the protection of copyright in Bermuda is provided for by the Copyright and Designs Act 2004. Registration is not required, as IP protection for copyrights is automatic in Bermuda. The principal IP right that protects software, for example, is copyright – the right to prevent others from, among other things, copying the software. The Copyright and Designs Act expressly includes computer programs, preparatory design materials for computer programs and databases within the definition of a 'literary work'. For computer-generated works, the copyright expires at the end of the period of 50 years from the end of the calendar year in which the work was made.
Trademarks: The Trade Marks Act 1974 affords IP protection to trademarks and service marks, which can carry one of two levels of protection: Part A or Part B. Trademarks and service marks can be registered and renewed repeatedly or unregistered. Unregistered trademark rights are enforced through the law of passing off. Trademarks are registered locally at the Registry General for a fee, which generally takes 18 months.
Patents: Currently, patent protection in Bermuda is provided by the Patents and Designs Act 1930, which is largely based on the UK Patents and Designs Act 1919. The Registry General offers three types of patent applications:
- a national patent;
- a provisional (national) patent; or
- registration of a UK-granted patent or a European patent with a UK designation to Bermuda.
A patent granted in the United Kingdom or a European patent that designates the United Kingdom can be registered in Bermuda within three years of its original grant and will remain in force for as long as the original patent is in force. As with patents globally, patents are non-renewable.
(g) Data protection
Bermuda's Personal Information Protection Act 2016 (PIPA) received royal assent in July 2016 and applies to all organisations in Bermuda that use personal information. With significant ties to both sides of the Atlantic, PIPA was drafted as a bespoke privacy framework, designed to meet Bermuda's unique requirements. Its provisions are drawn from privacy legislation in multiple jurisdictions, including Canada and the European Union. As at the time of writing, PIPA remains only partially in force.
PIPA is bespoke legislation drafted around a set of EU-style data protection principles with the express intention of securing EU 'adequacy' status to enable personal information to move freely between the European Union and Bermuda.
Pending the full implementation of PIPA, it is likely that the Bermuda courts will follow English common law principles regarding breach of confidence and the misuse of confidential or private information.
The Bermuda government and regulators (including the BMA) have been establishing cybersecurity requirements and cyber risk management frameworks in accordance with the Bermuda government's Cybersecurity Strategy 2018–2022. Between 2020 and 2022, the BMA has released Cyber Risk Management Codes of Conduct for various regulated industries, including insurance and digital assets. These codes establish for registrants certain duties, requirements, standards, procedures and principles to be complied with in relation to operational cyber risk management. Additionally, targets that are licensed under the Digital Asset Business Act must have a cybersecurity programme that meets the requirements of the Digital Asset Business (Cybersecurity) Rules 2018.
(i) Real estate
Title to real estate is evidenced by registration at the Bermuda Land Title Registry Office, which is open to public inspection and is the primary source of information on any real estate due diligence in Bermuda.
3.2 WHAT PUBLIC SEARCHES ARE COMMONLY CONDUCTED AS PART OF DUE DILIGENCE IN YOUR JURISDICTION?
Information can be obtained by way of a search of the entries and ?lings shown in respect of a company in the Register of Companies at the of?ces of the Registrar of Companies, which will include:
- the certi?cate of incorporation, certificate of continuance, amalgamation or merger (as applicable) and memorandum of association, together with alterations thereto;
- the address of the registered of?ce;
- any prospectus or offer document if required to be ?led pursuant to the Companies Act; and
- certain other ?lings required pursuant to the Companies Act, including any charges registered against the company under the Companies Act.
The following information, among other things, can be obtained from the registered of?ce of the company:
- details of directors and of?cers on the register of directors and of?cers. The register of directors and of?cers is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day be allowed for inspection); and
- the register of members, which will include:
- the names and addresses of the shareholders, in the case of a company having a share capital;
- details of the number of shares held by each shareholder (distinguishing each share by its number so long as the share has a number);
- the amount paid up on the shares; and
- the date on which the person was entered in the register of members as a shareholder.
- The register of members of a company is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day are allowed for inspection). However, shares can be held by, and registered in the name of, a nominee.
If the company is listed on the Bermuda Stock Exchange (BSX), certain information will also be available at or from the BSX. Such information will include any ?lings with or announcements to the BSX, including published accounts and auditors' reports.
Entries and ?lings in respect of the company can also be found in the Supreme Court Causes Book at the Registry of the Supreme Court. Such information will include any pending legal proceedings or judgments.
3.3 IS PRE-SALE VENDOR LEGAL DUE DILIGENCE COMMON IN YOUR JURISDICTION? IF SO, DO THE RELEVANT FORMS TYPICALLY GIVE RELIANCE AND WITH WHAT LIABILITY CAP?
Due diligence, as in most established and recognised jurisdictions, is customarily and commonly undertaken. It would be a very rare occurrence if due diligence were not undertaken, unless a competing bidder forgoes due diligence as a completive advantage. However, if the bid is hostile, the only information which might be available for due diligence will be that in the public domain. Also, in friendly transactions, the target may look to limit the scope of due diligence undertaken and, in particular, withhold sensitive ?nancial and business information until it is clear that the bidder has a genuine interest in proceeding with the transaction.
Reliance and liability caps are determined on a case-by-case basis.
4 REGULATORY FRAMEWORK
4.1 WHAT KINDS OF (SECTOR-SPECIFIC AND NON-SECTOR SPECIFIC) REGULATORY APPROVALS MUST BE OBTAINED BEFORE A TRANSACTION CAN CLOSE IN YOUR JURISDICTION?
In typical M&A transactions involving exempted Bermuda companies, the Bermuda Monetary Authority (BMA) may be required:
- to give permission from an ultimate bene?cial ownership and exchange control perspective in the event that there is an issue or transfer of shares in connection with the M&A transaction, unless a general permission already exists; and/or
- if such target or subsidiary (as applicable) is a BMA regulated and registered entity, either to be noti?ed of, or to provide its approval for, the change of control for the target or parent entity (as applicable).
Additional regulatory approvals may be required in respect of the acquisition of local Bermuda companies.
4.2 WHICH BODIES ARE RESPONSIBLE FOR SUPERVISING M&A ACTIVITY IN YOUR JURISDICTION? WHAT POWERS DO THEY HAVE?
While not specifically mandated with supervising M&A activity, the BMA regulates many specific aspects of M&A transactions, including exchange control matters and regulated entities.
The BSX regulates public M&A transactions involving entities that are listed on the BSX. The BSX's powers are broad and include the ability to suspend or cancel a listing and impose sanctions (in addition to or instead of a suspension in trading or cancellation of a listing) if any of the listing rules are breached.
4.3 WHAT TRANSFER TAXES APPLY AND WHO TYPICALLY BEARS THEM?
No registration, documentary or any similar taxes or duties of any kind are payable in Bermuda. The decision as to who bears stamp duty when payable is typically determined on a deal-by-deal basis.
No stamp duty is payable on the issue or transfer of shares of an exempted Bermuda company (other than those of a company that holds an interest in Bermuda real estate).
5 TREATMENT OF SELLER LIABILITY
5.1 WHAT ARE CUSTOMARY REPRESENTATIONS AND WARRANTIES? WHAT ARE THE CONSEQUENCES OF BREACHING THEM?
The primary M&A transaction documents are typically governed by the law of preference for the contracting parties, which will often be dictated by who their lead counsel is, and whether there is anything speci?c about the underlying business or assets effectively being acquired that would merit a departure from the law upon which the lead counsel advises.
As such, customary representations and warranties are typically driven by market practice of the governing law jurisdiction.
In respect of Bermuda law-governed documents, typical representations and warranties include:
- confirmation that:
- the parties have corporate authority and all necessary corporate actions have been taken to duly enter into the transaction and transaction agreements, and that all such transaction agreements are legal, valid, binding and enforceable;
- all required consents, approvals, licences and so on have been obtained;
- entry into the transaction does not violate any constitutional documents, laws or regulations; and
- the seller is the owner of the target property; and
- deal-specific representations and warranties regarding the features of the target property and/or company.
Damages is the usual remedy for a breach of warranty; they are calculated on a contractual basis and aim to put the claimant in the position it would have been in if the warranty had been true. A claim for misrepresentation may also be brought in the event of a breach of a representation; the remedies for such claim include rescission of the contract and damages. It is common for the transaction agreement to impose caps and/or hurdles on a seller's liability for warranty claims.
5.2 LIMITATIONS TO LIABILITIES UNDER TRANSACTION DOCUMENTS (INCLUDING FOR REPRESENTATIONS, WARRANTIES AND SPECIFIC INDEMNITIES) WHICH TYPICALLY APPLY TO M&A TRANSACTIONS IN YOUR JURISDICTION?
It is common for the transaction agreement to impose caps, baskets and/or hurdles on a seller's liability for warranty claims.
5.3 WHAT ARE THE TRENDS OBSERVED IN RESPECT OF BUYERS SEEKING TO OBTAIN WARRANTY AND INDEMNITY INSURANCE IN YOUR JURISDICTION?
We are increasingly seeing buyers seeking to obtain warranty and indemnity insurance in Bermuda on M&A transactions (following the onshore trend in this area).
5.4 WHAT IS THE USUAL APPROACH TAKEN IN YOUR JURISDICTION TO ENSURE THAT A SELLER HAS SUFFICIENT SUBSTANCE TO MEET ANY CLAIMS BY A BUYER?
Common approaches include:
- parental or third-party guarantees;
- holdbacks; and
- escrow arrangements.
5.5 DO SELLERS IN YOUR JURISDICTION OFTEN GIVE RESTRICTIVE COVENANTS IN SALE AND PURCHASE AGREEMENTS? WHAT TIMEFRAMES ARE GENERALLY THOUGHT TO BE ENFORCEABLE?
Restrictive covenants in M&A transactions are common in Bermuda. These typically cover matters such as restrictions on the seller competing with the target and soliciting employees, customers or suppliers of the target, with each such restriction being limited for a certain period and subject to geographic limitations. Restrictive covenants are agreed on a deal-by-deal basis.
The enforceability of restrictive covenants in Bermuda depends on a number of factors, including whether a legitimate business interest is being protected, the time period attaching to the particular restrictive covenant and its geographical scope, all measured against the public interest against restricting free commerce. These factors will be considered on a case-by-case basis. Restrictive covenant timeframes and geographic scopes which are limited to those reasonably necessary to protect a legitimate business interest are generally considered to be enforceable in Bermuda.
5.6 WHERE THERE IS A GAP BETWEEN SIGNING AND CLOSING, IS IT COMMON TO HAVE CONDITIONS TO CLOSING, SUCH AS NO MATERIAL ADVERSE CHANGE (MAC) AND BRING-DOWN OF WARRANTIES?
Conditions to closing are common on transactions where there is a gap between signing and closing. In line with the increasing onshore trend, we often see MAC clauses being heavily negotiated. The scope of closing conditions, beyond fundamental matters such as regulatory and shareholder approval, is decided on a deal-by-deal basis and will be a point of negotiation.
6 DEAL PROCESS IN A PUBLIC M&A TRANSACTION
6.1 WHAT IS THE TYPICAL TIMETABLE FOR AN OFFER? WHAT ARE THE KEY MILESTONES IN THIS TIMETABLE?
The BSX regulations provide that a listed issuer must ensure equality of treatment for all holders of listed securities of the same class, but do not otherwise regulate the process for a tender offer or other M&A transaction. The Companies Act, the target's bylaws and the rules of any other stock exchange on which the target is listed will specify any necessary rules regarding notice of shareholder meetings and other timing matters.
At a minimum, the Companies Act requires five days' notice before any shareholder meeting. In addition, the notice provisions discussed in question 1.2 will apply to squeeze-outs.
6.2 CAN A BUYER BUILD UP A STAKE IN THE TARGET BEFORE AND/OR DURING THE TRANSACTION PROCESS? WHAT DISCLOSURE OBLIGATIONS APPLY IN THIS REGARD?
Yes, buyers may build up a stake in a target before and during the transaction process. The Companies Act does not prescribe public disclosure in the context of an acquisition. Should the acquirer reach the thresholds discussed in question 1.2 regarding squeeze-outs, a notice disclosing its intention to acquire shares may be circulated to the remaining shareholder(s), as applicable.
Public disclosure may be required by the applicable stock exchange upon which the target is listed. For example, if the company is listed on the BSX, the company (but not the buyer) must keep the BSX, shareholders of the company and other holders of its listed securities informed without delay, by way of public announcements and/or circulars, of any information relating to the company (or its group) that:
- is necessary to enable them and the public to appraise the ?nancial position of the company and the group;
- is necessary to avoid the establishment of a false market in its securities; and
- might reasonably be expected materially to affect market activity in and the price of its securities.
Additionally, where an acquirer becomes a holder of 5% or more of a local company, the local company must notify the BSX.
In addition, where the target is regulated under the Insurance Act, a buyer must notify the Bermuda Monetary Authority within 45 days of its voting control of the target surpassing each threshold of 10%, 20%, 33% and 50%. However, this is not a public disclosure.
6.3 ARE THERE PROVISIONS FOR THE SQUEEZE-OUT OF ANY REMAINING MINORITY SHAREHOLDERS (AND THE ABILITY FOR MINORITY SHAREHOLDERS TO 'SELL OUT')? WHAT KIND OF MINORITY SHAREHOLDERS RIGHTS ARE TYPICAL IN YOUR JURISDICTION?
In a tender offer, contractual acquisition or public takeover, where the removal of a minority is required, the statutory squeeze-out remains available where the relevant statutory thresholds are met. Please also see question 1.2.
Typical minority protections are limited to dissent/appraisal rights in respect of squeeze-outs, amalgamations and mergers. In general, the Companies Act shareholder approvals are on an all-class basis (unless a specific class has its rights varied), and the buyer and other majority shareholders may vote in respect of transactions.
6.4 HOW DOES A BIDDER DEMONSTRATE THAT IT HAS COMMITTED FINANCING FOR THE TRANSACTION?
There are no legal requirements in Bermuda to demonstrate committed financing. In M&A transactions involving cash consideration, we typically see conditions to closing that include:
- lender confirmation of the availability of acquisition debt facilities; and/or
- cash consideration being pre-funded to payment/escrow agents that are engaged to facilitate the closing.
6.5 WHAT THRESHOLD/LEVEL OF ACCEPTANCES IS REQUIRED TO DELIST A COMPANY?
Under the BSX's listing regulations, a company may delist:
- on 90 calendar days' notice if the company either:
- has an alternative listing on another stock exchange for its listed securities; or
- has obtained the approval of the holders of each class of listed securities by way of a three-quarters majority vote either at a duly convened meeting or by prior written approval in a form pre-cleared by the BSX;
- on 60 calendar days' notice if its primary listing is on another stock exchange; or
- in such other manner as the BSX may from time to time approve. This method can be employed during going-private transactions to limit the 90-day notice requirement and requires engagement with the BSX.
6.6 IS 'BUMPITRAGE' A COMMON FEATURE IN PUBLIC TAKEOVERS IN YOUR JURISDICTION?
Bumpitrage has not been a common feature in public takeovers in recent years, although there are no Bermuda-specific reasons as to why there could not be instances of it. This will likely turn on the specific commercial context of the transaction and the parties involved, rather than as a result of it taking place in Bermuda.
6.7 IS THERE ANY MINIMUM LEVEL OF CONSIDERATION THAT A BUYER MUST PAY ON A TAKEOVER BID (EG, BY REFERENCE TO SHARES ACQUIRED IN THE MARKET OR TO A VOLUME-WEIGHTED AVERAGE OVER A PERIOD OF TIME)?
There is no 'minimum price' requirement under Bermuda law; but when the required shareholder approval of a merger or amalgamation is sought, a notice must be provided which includes a statement of what the company has determined the 'fair value' of the shares to be.
Provided that a shareholder does not vote in favour of the merger or amalgamation, it is entitled to apply to the Bermuda courts to have them appraise the value of its shares. Although such appraisal rights do not carry the ability to prevent the transaction from closing, to the extent that there is a difference between the price paid to the shareholders and the court-determined 'fair value', the shareholders will be entitled to receive the difference.
6.8 IN PUBLIC TAKEOVERS, TO WHAT EXTENT ARE BIDDERS PERMITTED TO INVOKE MAC CONDITIONS (WHETHER TARGET OR MARKET-RELATED)?
While MAC conditions are not prohibited under Bermuda law, we are not aware of any being tested in Bermuda. However, it is likely that the UK approach to MAC conditions will be followed in Bermuda.
The recent English High Court case of Travelport Ltd v Wex Inc considered the construction and interpretation of MAC clauses under English law. This judgment would be persuasive before a court in Bermuda and is of particular interest as the English court had to consider the enforceability of a MAC clause arising as a result of the COVID-19 pandemic.
As the agreement in that case had been carefully drafted and heavily negotiated, the court proceeded on the basis that the choice of language in the agreement had been deliberately chosen.
The court's approach demonstrates that parties should exercise caution when using 'boilerplate' language in a contract that may not, without careful review and amendment, sufficiently encapsulate their intended meaning. Greater specificity of the drafting about what event and/or consequence constitutes a MAC condition for the purpose of a given agreement will give the buyer an increased chance of being able to enforce it should the need arise.
However, the challenge for buyers in the current climate is that we have now been in the throes of the COVID-19 pandemic for more than two years, and there is a better understanding of the economic challenges we are faced with as a result. Due to this, an attempted reliance on a MAC clause being invoked as a result of the pandemic could be interpreted more harshly, as both parties should be aware of the potential business and economic implications and potential forecast when entering into the agreement.
The enforceability of a MAC condition will likely hinge on the precise language used throughout the agreement and, in particular, the definition of what constitutes a MAC or a MAC event. A higher burden of proof typically applies to a person seeking to establish that a MAC has occurred within the meaning of the clause in question. Linguistic precision when drafting these provisions is therefore of the utmost importance.
6.9 ARE SHAREHOLDER IRREVOCABLE UNDERTAKINGS (TO ACCEPT THE TAKEOVER OFFER) CUSTOMARY IN YOUR JURISDICTION?
Yes, shareholder irrevocable undertakings and similar voting agreements are customary in public M&A transactions in Bermuda.
7 HOSTILE BIDS
7.1 ARE HOSTILE BIDS PERMITTED IN YOUR JURISDICTION IN PUBLIC M&A TRANSACTIONS? IF SO, HOW ARE THEY TYPICALLY IMPLEMENTED?
Although not prohibited under Bermuda law, hostile takeovers are quite rare in Bermuda, although this is not to say that they are not considered as a possible method of acquiring a control of a target.
There is no prescribed structure that applies in the event of a hostile takeover. That said, a hostile bid will often be structured by way of an offer to shareholders. A target board must be careful where it does not engage with the transaction if it wants to avoid claims of a breach of fiduciary duty.
Where a target board does ultimately engage with the offer process, it may be effected by way of amalgamation or merger.
If an offer were to remain hostile, it is considered unlikely, but not impossible, that it could be effected by way of scheme of arrangement.
7.2 MUST HOSTILE BIDS BE PUBLICISED?
Other than the disclosure obligations under the Bermuda Stock Exchange's listing regulations discussed in question 6.2, Bermuda law does not require that hostile bids be publicised. Disclosure obligations will be determined by the rules of the exchange(s) on which the buyer and target are listed (and securities laws in such jurisdictions(s), if applicable).
7.3 WHAT DEFENCES ARE AVAILABLE TO A TARGET BOARD AGAINST A HOSTILE BID?
The bylaws of a Bermuda company may provide directors with the power to protect against hostile approaches. One such defence is to dispose of a company's unissued shares, as long as they are empowered to do so by the target's bylaws and these actions are supported by Bermuda common law. The bylaws of a Bermuda company may provide that the unissued shares will be at the disposal of the board, which may dispose of them to such persons and upon such terms and conditions as the board may determine.
An example of a protection which illustrates the directors' ability to protect the company against a hostile approach is the poison pill strategy. Such a strategy permits the directors to issue shares to all shareholders, except for the acquirer, at a discounted purchase price. This provides investors with instantaneous pro?ts. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more dif?cult.
A company's bylaws may be drafted to include such defensive measures as the shareholders decide are appropriate or necessary. The directors' use and application of such provisions are subject to the following considerations.
Common law and directors' duties: Under Bermuda common law, directors have wide discretion in the conduct of a company's affairs, as long as they act both in what they believe to be the company's interest and within their powers. Although the interests of the company as a separate body corporate, distinct from its shareholders, must be advanced, the interests of current shareholders will normally be the principal factor in the directors' decisions.
Directors may also take into account the long-term interests of the company, future shareholders, employees and the creditors in deciding what actions to take.
Section 97 of the Companies Act sets out the duty of care of the of?cers and directors of a company. Directors must:
- act honestly and in good faith with a view to the best interests of the company; and
- maintain a standard of care which is that of the reasonably prudent person in comparable circumstances.
This is often a subjective test. Although directors may rely on the advice of professionals, they retain a residual duty to make certain basic assessments of any given factual situation. They have a duty of loyalty and must not put themselves in con?ict with the company.
Defensive measures: Under Bermuda law, as under the laws of other jurisdictions, advance defensive preparations are more easily upheld than measures taken as a result of a takeover bid. The Bermuda courts will carefully scrutinise actions taken in response to a proposed change of control transaction, on the grounds that a company has no legitimate concern of its own with the exercise by a shareholder of the rights to sell its shares. This does not mean that directors may not resist a bid in the absence of advance preparation – although it does mean that there are relatively narrow limits to the methods by which they do so. Thus, the directors may present their views on the wisdom of accepting an offer, provided that the advice is based on full information, is fairly presented and is not in?uenced by the personal interest of management.
However, while directors must ful?l the requirements of the Companies Act by acting honestly and in good faith with a view to the best interests of the company, as a practical matter, directors must also act with a view towards value maximisation of shareholdings. Actions taken primarily for the collateral purpose of entrenching management or of maintaining the proportional interest of the shareholders via shareholders' rights plans, or for any other improper purpose, may be an abuse of the directors' powers and may not stand up in court. However, actions taken in the best interests of the company and the current shareholders will not be so sanctioned.
In general, the Bermuda courts will not interfere in directors' decision making, unless it has been proved by an aggrieved party that the directors have breached their ?duciary duty. There is no statutory provision regarding enhanced duties with respect to takeovers, so any enhancement of duty arises from the more conscious and cautious application by the directors of their ordinary duty.
8 TRENDS AND PREDICTIONS
8.1 HOW WOULD YOU DESCRIBE THE CURRENT M&A LANDSCAPE AND PREVAILING TRENDS IN YOUR JURISDICTION? WHAT SIGNIFICANT DEALS TOOK PLACE IN THE LAST 12 MONTHS?
The current landscape seems to be one of anticipation. There has been deal flow in Bermuda, with some high-value transactions, just not high volume. The insurance sector has generated many of these deals, but has been by no means alone.
The expectation is very much that as the practical restrictions felt by the COVID-19 pandemic begin to lift, there will be increased confidence from parties wishing to execute transactions. Where some businesses have suffered as a result of the effects of the past two years, others are well positioned to take advantage and complete.
Much has been said about the resurgence of special purpose acquisition companies (SPACs). Bermuda is not only well placed as a jurisdiction in which to establish a SPAC, being able to draw upon prior experience from formation to end of lifecycle, but is also the location of a number of attractive acquisition targets for SPACs, irrespective of their jurisdiction of formation. We would not be surprised if this included transactions in the (re)insurance sector, for which Bermuda enjoys such a strong reputation.
As Bermuda's technology sector continues to develop, we may begin to see entities that have established themselves and began to succeed in Bermuda also become attractive targets or find contemporaries where their synergies make a merger of equals an appealing prospect.
8.2 ARE ANY NEW DEVELOPMENTS ANTICIPATED IN THE NEXT 12 MONTHS, INCLUDING ANY PROPOSED LEGISLATIVE REFORMS? IN PARTICULAR, ARE YOU ANTICIPATING GREATER LEVELS OF FOREIGN DIRECT INVESTMENT SCRUTINY?
In line with international business centres throughout the globe, Bermuda continues to take steps to ensure that it complies with its international obligations and remains recognised as a jurisdiction in which parties can conduct business without fear of sanctions or reputational issues.
None of the foregoing is expected to specifically impact on M&A activity. There is neither an expectation of relevant legislative reform nor expected greater levels of scrutiny of foreign direct investment (which is already the subject of longstanding and well-understood legislation).
9 TIPS AND TRAPS
9.1 WHAT ARE YOUR TOP TIPS FOR SMOOTH CLOSING OF M&A TRANSACTIONS AND WHAT POTENTIAL STICKING POINTS WOULD YOU HIGHLIGHT?
Top tips for closing a Bermuda M&A transaction include the following:
- Regulatory approvals: Engage Bermuda counsel early in the M&A process to identify and coordinate any necessary regulatory approvals, and liaise with the Bermuda Monetary Authority as necessary.
- Timetables: Ensure that a realistic transaction timetable is created and communicated to all applicable stakeholders and updated as necessary.
- Closing technology: Where available, virtual closing technology and document tracking applications can facilitate version control, document tracking, electronic signatures and managing the closing checklist. These technologies are typically managed by lead counsel, but should include supporting deal counsel as appropriate to facilitate specific jurisdictional documents.
First Published in Mondaq Comparative Guide, July 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.