The Nuts and Bolts of the Cayman Islands Merger Regime
The Cayman Islands (Cayman) has been the leading offshore jurisdiction for merger and acquisition (M&A) activity over the last three (3) years. In 2015, Cayman-incorporated companies were the target of 863 transactions worth a combined value of USD116.41bn. The value was more than twice the amount of the British Virgin Islands with USD49.62bn (with 387 M&A transactions) and well in excess of Bermuda with 498 M&A transactions with a combined value of USD67.57bni. In 2016, Cayman-incorporated companies again led the way in terms of offshore M&A activity and were the target of transactions worth a combined USD68.85bn followed by the British Virgin Islands with USD41.65bn and Bermuda with USD41.25bnii. By way of comparison, Hong Kong incorporated companies were the target of transactions worth a combined USD33.19bn in 2016iii. Cayman-incorporated companies were the target of transactions worth a total USD80bn in 2017 and USD60bn in the first half of 2018.
The Cayman Merger Law regime is attractive for both companies and investors, due to the process being relatively straightforward and simpler than either a takeover offer (tender offer) under section 88 of the Cayman Islands Companies Law or a court-approved scheme of arrangement under section 86 or 87 of the Cayman Islands Companies Law. Set out below are the basic steps in the process of effecting a merger under Part XVI of the Cayman Islands Companies Law (2018 Revision).
Forming MergerCo. The most straightforward structure used for a merger take-private is that a new company ("MergerCo") is formed in the Cayman Islands by the investors adhering to the takeover group (often involving the founders/managers of the listed company, its parent and/or several private equity (PE) investors acting as sponsors for the purposes of the take-private transaction) (the "Buyout Group") to take on finance and to be ultimately merged with the company which is the target of the take-private ("Target").
Take-Private Offer. After obtaining legal and financial advice, the Buyout Group agrees on the terms of the proposed merger take-private and the consideration which would be offered to the shareholders of the Target and makes an offer to the Board of the Target (the "Initial Take-Private Offer"). Since most of the take-private transactions are initiated by or with involvement of the management or certain shareholders represented at Board level, the merger process requires that a special committee formed of independent directors (the "Special Committee") be designated to review the take-private offer and negotiate on behalf of the Target with the Buyout Group. This is both to ensure that the Board is in compliance with the fiduciary duties it owes the Target, and to avoid any accusation of self-dealing.
Negotiations. The Special Committee reviews and negotiates the offer with the help of its own independent legal and financial advice, which may lengthen the process. Overall, the typical mission of the Special Committee is to: (i) investigate and evaluate the Initial Take-Private Offer, (ii) discuss and negotiate any terms of the merger agreement (the "Merger Agreement"), (iii) explore and pursue any alternatives to the Initial Take-Private Offer as the Special Committee deems appropriate, including maintaining the public listing of Target or finding an alternative buyer, (iv) negotiate definitive agreements with respect to the take-private or any other transaction, and (v) report to the Board the recommendations and conclusions of the Special Committee with respect to the Initial Take-Private Offer.
Board Approval. The directors of each company participating in a merger (MergerCo and Target) are required to approve the terms and conditions of the proposed merger (the "Plan of Merger"), including, among other things:
- how shares in each participating company will convert into shares in the surviving company or other property (e.g. cash payable to shareholders);
- what rights and restrictions will attach to the shares in the surviving company;
- how the Memorandum and Articles of Association of the surviving company are amended; and
what are the amounts or benefits paid or payable to any director consequent upon the merger.
Shareholder Approval. For each constituent company (MergerCo and Target), the Plan of Merger is required to be authorized by a special resolution of the shareholders who have the right to receive notice of, attend and vote at the general shareholders' meeting ("EGM"), voting as one class with at least two-thirds majorityiv.
Consents. Each participating company must also obtain the consent of (i) each creditor holding a fixed or floating security interestv, and (ii) any other relevant consents or filings with relevant regulatory authorities, such as the Cayman Islands Monetary Authority or authorities in the overseas jurisdiction where the Target is registered and/or operates.
Filing and Registration. After obtaining all necessary authorizations and consents, the Plan of Merger is required to be signed by a director on behalf of each participating company and filed with the Cayman Islands Registrar of Companies, who will register the Plan of Merger and issue a certificate of merger.
Effective Date. The merger will be effective on the date that the Plan of Merger is registered by the Registrar of Companies unless the Plan of Merger provides for a later specified date or eventvi. Upon the effective date, all rights and assets of each of the participating companies shall immediately vest in the surviving company and, subject to any specific arrangements, the surviving company shall inherit all assets and liabilities of each of the participating companies (MergerCo and Target).
- Shareholder Dissent. Any shareholder of a company participating in the merger is entitled to payment of fair value of its shares upon dissenting from the merger under Section 238 of the Cayman Islands Companies Law. Fair value can either be agreed between the parties or determined by the Cayman Court.
i Figures from the M&A Latin America and Global Review published by Bureau van Dijk (Zephyr) for the year 2016.
iii Figures from the M&A Greater China Review published by Bureau van Dijk (Zephyr) for the year 2016.
iv Or such higher threshold as may be specified in the Memorandum and Articles of Association.
v Or, if the secured creditor fails to grant such consent, the company may apply to the court for a waiver.
vi If date or event is not more than 90 days after the Plan of Merger is registered by the Registrar of Companies.