Caroline Williams and Theo Lefkos of Walkers assess the M&A regulatory framework in the Cayman Islands
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
After much market anticipation, the Cayman Islands recently introduced the Limited Liability Companies Bill 2015 (the LLC Bill). Once passed into law, this will permit the incorporation of Cayman Islands limited liability companies (LLCs) for the first time. A Cayman Islands LLC will be similar to a Delaware LLC and the legislation is heavily modelled on the Delaware statute. The introduction of LLCs in the Cayman Islands will provide additional flexibility in structuring M&A deals. Many of the provisions of the Companies Law that govern the acquisition of Cayman companies have been included in the LLC Bill.
For the first time, the Grand Court (the Court) recently considered and handed down some guidance on the determination of 'fair value' in the context of a claim brought by dissenting shareholders, under the Cayman Islands merger provisions of the Companies Law (2013 revision) (the Companies Law) in in the matter of Integra Group. The Court noted the significant influence of the law of both Delaware and Canada on the drafting of the Cayman Islands merger provisions, and accepted the proposition that the meaning of fair value should be determined with reference to those jurisdictions.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
The climate for M&A is cautiously favourable. There is significant so-called dry powder ready to be invested. Allied with the growth of direct lending credit funds, this means that deal-making is poised for a good few years. All that is needed in the developed economies is the catalyst of market stability. Although the exponential growth of M&A in emerging markets has slowed considerably over the last year, we expect opportunities to arise in sector specific areas, such as energy and resources. In these sectors, the decline in commodities prices is anticipated to force miners and oil producers (many of which have structures in the Cayman Islands) to sell assets and/or restructure their holdings.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Cayman Islands laws principally relevant to the conduct of public M&A are the Companies Law and the common law. The Cayman Islands will soon adopt the LLC Bill as law (the LLC Law). This will contain provisions equivalent to those contained in the Companies Law with respect to the acquisition of Cayman Islands companies.
In a small number of cases, one or more of the parties may be subject to regulatory oversight in the Cayman Islands because it has a banking, insurance or similar licence, and specific provisions in relation to change of control will be relevant. Such provisions will generally be supervised and administered by the Cayman Islands Monetary Authority (CIMA).
In the unlikely event that the target has a listing on the Cayman Islands Stock Exchange (the CSX), the Cayman Islands Code on Takeovers and Mergers and Rules Governing the Substantial Acquisitions of Shares (the Code) will apply. The application of the Code is administered by the council executive appointed by the CSX Authority.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
In addition to the authorities listed in section 2.1, the Court has a large role in enforcing dissenting shareholders' rights under the Companies Law.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
The three principal methods of making an acquisition of a target under Cayman law are: (i) a takeover offer for the entire issued share capital in the target, which may become effective without the offeror acquiring 100% of such shares; (ii) a court-supervised scheme of arrangement which, once the relevant consent thresholds are met, results in the acquisition of all of the outstanding shares of the relevant class(es); and (iii) a statutory merger, which does not require court approval and results in the acquisition of all of the outstanding shares of the relevant class(es) once the relevant consent threshold is met.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
Factors that drive the choice of acquisition structure include: whether it is a hostile or friendly bid; the bidder's intent to acquire all of the shares or simply a controlling stake; timing; flexibility in amending the offer; and the possibility of competing bids.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
There is no maximum period for completion of a takeover offer under Cayman law, although the 90% level required to effect a squeeze out of the minorities must be reached within four months of posting the offer document. Compulsory acquisition of the remaining minority cannot be commenced before the expiration of the four-month period, even if 90% of the shares are acquired before that time. There is a statutory one-month waiting period before the compulsory acquisition becomes effective but dissenting shareholders have the ability to object to the Court.
The precise timetable for a scheme will need to be agreed with the Court. In practice, it is likely to take two to three months from the date of settling the scheme documents and commencing the court-based scheme proceedings, to sanctioning of the scheme by the Court.
In our experience, most mergers are effected within a time frame of four to eight weeks depending on complexity, the notice period for the calling of a meeting of the target's shareholders and having regard to any period considered necessary to procure proxy support.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
Subject to the constitutional documents of the entity in question, there are no restrictions under any of the acquisition structures on the type of consideration offered and it can be cash, securities or a combination of both.
Where a company is listed on the CSX, the offer may generally take any form. Offers in cash, or containing a cash alternative, are required for certain types of offers.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
A takeover offer can become unconditional at any point depending on the offeror's requirements. A squeeze out of the minority requires the approval of holders of 90% of the shares in value to which the offer relates. This excludes shares held or contracted to be acquired before the date of the offer.
A scheme requires: (i) the approval of a majority in number and representing three quarters in value of the members of each class who attend and vote in person or by proxy at meetings of the holders of each class, and (ii) the sanction of the Court.
For a merger, the directors of each constituent company are to approve a written plan of the merger (a Plan). The Plan must generally be authorised by each Cayman Islands constituent company by way of a special resolution of its members and such other authorisation, if any, as may be specified in its articles of association. The consent of each holder of a fixed or floating security interest of a constituent company must also be obtained (or waived by the Court).
An offeror under a takeover offer having reached 90% acceptances can effectively shortcut the four-month waiting period to squeeze out the minority shareholders by implementing a merger. This is because the Companies Law provides that a resolution of shareholders is not required in circumstances where a parent company seeks to merge with a subsidiary company (a company in which it owns 90% of the shares).
3.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
In addition to any protections that may exist under the listing rules of the relevant exchange, a number of mechanisms exist under Cayman law. These include: (i) the ability to block special resolutions of the company where the offer results in the offeror holding less than the level required to pass a special resolution; (ii) the ability for dissenting shareholders to apply to the Court during the squeeze out process under a takeover offer or to seek fair value for their shares under a merger; and (iii) objectors who voted at a scheme meeting can be heard at the Court hearing to sanction the scheme.
Target shareholders in the same class should generally all be offered the same price for their shares. If a different price is offered to certain shareholders, this may lead to the Court to deem such shareholders to constitute a separate class for the purposes of a scheme. The relevant consent thresholds will then be calculated on a class by class basis.
The Code also contains a number of protections for minority shareholders of CSX-listed entities. These include: mandatory offer rules; acquisitions resulting in a minimum level of consideration; and offering the same terms to all target shareholders.
3.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
Under each of the acquisition structures, the offeror and the target are free to agree any terms and conditions in respect of the acquisition of the target.
We would expect that the relevant listing rules of the exchange on which the target shares are listed would include certain restrictions on conditions and rules on sufficiency of funds.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
Save in respect of nominal stamp duty in certain circumstances, there are currently no relevant taxes in the Cayman Islands applicable to an M&A transaction.
4.2 Are there special considerations in cross-border deals?
Regard should be given to any applicable tax considerations in the relevant foreign jurisdiction.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
The protections generally available to Cayman companies to prevent hostile takeovers are likely to be determined by the rules and conventions that apply to entities listed on the exchange upon which its shares may be listed. The most common protections included in the memoranda and articles of publicly listed Cayman companies are: (i) a prohibition on business combinations with any interested shareholder; (ii) blank cheque preferred shares; (iii) staggered boards; (iv) the entrenchment of directors' appointments providing for removal only for cause or by supermajority vote; (v) prohibition or severe restrictions on the ability of shareholders to call special meetings and/or to have matters added to meeting agendas.
To the extent that the target's constitutional documents do not include anti-takeover provisions, the directors of the target will be restricted in their ability to defend a hostile takeover offer by their fiduciary duties to the company.
For a CSX-listed company, the Code restricts frustrating actions by the board, without the approval of the shareholders, where there has been a bona fide offer communicated to the board of the target.
5.2 How do targets use anti-takeover defences?
If there are appropriate takeover defence provisions in its articles of association, the board of a target can use those in thwarting an offer from an unwanted suitor. However, all decisions made by the board in relation to a proposed takeover offer, need to be made in accordance with its fiduciary duties.
5.3 Is a target required to provide due diligence information to a potential bidder?
5.4 How do bidders overcome anti-takeover defences?
The tactics that a bidder may employ to overcome any anti-takeover defences include stakebuilding to effect board changes, proxy contests or by public pressure to change the board's mind.
5.5 Are there many examples of successful hostile acquisitions?
Although hostile acquisitions are possible, they are far less common than friendly transactions.
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
The main deal protections include no shop, break fees and a right to match other offers. The offeror may also obtain irrevocable undertakings from certain major shareholders. However, care must be taken in the context of a scheme so that the Court does not deem such shareholders to constitute a different class, such that those shareholders are therefore required to vote separately.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
The overriding restriction on entering into any deal protection arrangements will be the target board's fiduciary duties and whether it is in the target's best interests to do so. A so-called fiduciary out permitting the board to change its recommendation in certain circumstances is commonly included in any such arrangements.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
There is no relevant antitrust legislation in the Cayman Islands other than certain legislation regulating anti-competitive practices in the telecommunications, radio and television industries. The potential effect on existing Caymanian-owned businesses is taken into account by the business licensing board when it considers whether to permit a foreign-controlled company to trade within the Islands.
7.2 When will transactions falling below those thresholds be investigated?
See section 7.1.
7.3 Is an antitrust notification filing mandatory or voluntary?
See section 7.1.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
See section 7.1.
7.5 How long are the anti-trust review periods?
See section 7.1.
7.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
See section 7.1.
7.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
See section 7.1.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
The Cayman Islands' Anti-Corruption Law (2014 revision).
8.2 What are the potential sanctions and how stringently have they been enforced?
Offences are punishable by imprisonment (in some cases up to 14 years) and/or fines of up to CI$50,000 (approximately $60,000).
The Anti-Corruption Commission (the ACC), which oversees the administration of the Anti-Corruption Law, has broad powers to receive information regarding, and to investigate, suspected corruption offences. The ACC's power includes the ability, with the consent of the Court, to freeze bank accounts and other property for up to 21 days at the request of any anti‐corruption authority.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
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About the author
Caroline Williams is based in Walkers' Cayman Islands office and is a partner in the firm's global investment funds and global corporate groups. She has a broad private funds practice specialising in hedge funds and private equity. Williams has extensive experience advising private equity fund sponsors on the structuring and formation of funds and co-investment and alternative investment vehicles and the completion of transactions undertaken by them.
She has broad experience advising on the sale and purchase of portfolio investments and advising on secondary transactions. Her practice also encompasses advising on initial public offerings, M&A, joint ventures, corporate reorganisations and capital call financing. She acts for leading financial institutions, investment managers, including institutional sponsors of private equity and hedge funds, and also boutique and start up managers.
About the author
Theo Lefkos is an associate in Walkers' global investment funds group. Lefkos advises on a broad range of matters with a focus on private equity funds including structuring and fund formation, as well as downstream M&A transactions involving such funds. He also has experience advising on general corporate matters, including joint ventures, restructurings and the acquisition and disposal (by merger or otherwise) of Cayman Islands companies.