1 Relevant Authorities and Legislation

1.1 What regulates M&A?

The primary sources of regulation of M&A in the Cayman Islands are the Companies Act (As Revised) of the Cayman Islands (the "Companies Act") and common law.

Part XVI of the Companies Act facilitates mergers and consolidations between one or more companies, provided that at least one constituent company is incorporated under the Companies Act. The Limited Liability Companies Act (As Revised) of the Cayman Islands (the "LLC Act") also provides for a similar framework for Cayman Islands limited liability companies.

In addition:

  • mergers, amalgamations and reconstructions by way of a scheme of arrangement approved by the requisite majorities of shareholders and creditors and by an order of the Cayman Islands court under section 86 or 87 of the Companies Act are still available for complex mergers (and are mirrored in the LLC Act); and
  • section 88 of the Companies Act provides a limited minority squeeze-out procedure (and, again, is mirrored in the LLC Act).

The Cayman Islands does not have a prescriptive set of legal principles specifically relevant to "going private" and other acquisition transactions (unlike other jurisdictions such as, for example, Delaware). Rather, broad common law and fiduciary principles will apply.

While there are no specific statutes or government regulations concerning the conduct of M&A transactions, where the target company's securities are listed on the Cayman Islands Stock Exchange ("CSX"), the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares (the "Code"), which exists principally to ensure fair and equal treatment of all shareholders, may apply.

1.2 Are there different rules for different types of company?

Except to the extent described above with respect to companies listed on the CSX, there are no different rules for different types of company

1.3 Are there special rules for foreign buyers?

There are no foreign investment restrictions or exchange control legislation in the Cayman Islands. However, any company with an established physical presence in the Cayman Islands must be structured so as to comply with local licensing laws, including with respect to ownership. Any company engaging in business locally is required to be licensed under the Trade and Business Licensing Act (As Revised) of the Cayman Islands and the applicant must either be beneficially owned and controlled at least 60% by persons of Caymanian Status, or hold a licence under the Local Companies (Control) Act (As Revised) of the Cayman Islands. However, foreign investment, if considered beneficial to the Cayman Islands' economy, is generally encouraged.

1.4 Are there any special sector-related rules?

There are change-of-control rules applicable to entities regulated by the Cayman Islands Monetary Authority under the Banks and Trust Companies Act (As Revised) of the Cayman Islands, the Insurance Act (As Revised) of the Cayman Islands or (with respect to licensed mutual fund administrators) the Mutual Funds Act (As Revised) of the Cayman Islands. In addition, ownership and control restrictions apply to certain entities regulated by the Information and Communications Technology Act (As Revised) of the Cayman Islands.

1.5 What are the principal sources of liability?

Pursuant to common law rules, the directors of Cayman Islands companies owe fiduciary duties (generally described as being those of loyalty, honesty and good faith) to the company. While it is common for directors of Cayman Islands companies to be indemnified for certain breaches of these duties, as a matter of public policy, it is not possible for directors to be indemnified for conduct amounting to actual fraud or wilful default or wilful neglect.

To the extent that consent to a merger or acquisition is procured via an information memorandum or proxy statement, civil liability in tort may arise for negligent misstatement or fraudulent misrepresentation. In addition, the Contracts Act (As Revised) of the Cayman Islands gives certain statutory rights to damages in respect of misrepresentation. There are certain criminal sanctions under the Penal Code (As Revised) of the Cayman Islands for deceptive actions, including for any officer of a company (or person purporting to act as such) with intent to deceive members or creditors of the company about its affairs, who publishes or concurs in publishing a written statement or account that, to their knowledge, is or may be misleading, false or deceptive in a material particular.

Any disposition of property made at an undervalue by or on behalf of a Cayman Islands company, and with the intent to defraud its creditors, shall be voidable: (i) under the Companies Act at the instance of the company's official liquidator; or (ii) under the Fraudulent Dispositions Act (As Revised) of the Cayman Islands at the instance of a creditor thereby prejudiced.

If the consideration is to be shares in a Cayman Islands company, the Companies Act prohibits an exempted company that is not listed on the CSX from making any invitation to the public in the Cayman Islands to subscribe for any of its securities.

2 Mechanics of Acquisition

2.1 What alternative means of acquisition are there?

Statutory mergers are by far the most common method of structuring a more complex acquisition or business combination. In certain cases, however, the statutory merger regime may not be suitable, and alternative options, such as contractual equity or asset acquisition, are appropriate. The threshold for a statutory merger (subject to the relevant constitutional documents of the company) requires only a special resolution passed in accordance with the articles of association (typically, a two-thirds majority of those shareholders attending and voting (in person or by proxy) at the relevant meeting). Dissenters in a merger have the right to be paid in cash the fair value of their shares and may compel the company to institute court proceedings to determine that fair value. This can be a factor where the offer involves a share-for-share swap as opposed to a cash buyout, or where the bidder anticipates issues with minority shareholders.

Schemes of arrangement under section 86 or 87 of the Companies Act are appropriate in certain circumstances, such as where a capital reduction is required as part of the acquisition structure. A scheme of arrangement transaction will involve the production of a circular, typically a detailed disclosure document that must provide stakeholders with all information required to make an informed decision on the merits of the proposed scheme. The principal benefit of a scheme is that if all the necessary majorities are obtained and hurdles are cleared, and the court approves the scheme, then the terms of the scheme become binding on all members of the relevant class(es) of shareholders or creditors, whether or not they: (a) received notice of the scheme; (b) voted at the meeting; (c) voted for or against the scheme; and (d) changed their minds afterwards.

In a tender offer, private contractual acquisition, or public takeover, where control of the majority of the voting equity is required, the statutory squeeze-out remains available where the relevant statutory thresholds are met. Where a bidder has acquired 90% or more of the shares in a Cayman Islands company, it can compel the acquisition of the shares of the remaining minority shareholders, and thereby become the sole shareholder. Such a "squeeze-out" requires the acceptance of the offer by holders of no less than 90% in value of the shares to which the offer relates, excluding shares held or contracted to be acquired prior to the date of the offer. Shares held by the bidder or its affiliates are typically not counted for purposes of the 90% requirement. Dissenters have limited rights to object to the acquisition, and in the case of a tender offer that is not on an exclusively cash basis, dissenters have no right to compel a cash alternative.

Contractual asset acquisitions, where the target ceases doing business and is liquidated after the consummation of the sale, are becoming less popular given the flexibility and ease of use of the statutory merger regime, but remain a useful option.

2.2 What advisers do the parties need?

Parties should engage Cayman Islands counsel alongside onshore legal advisers. Generally, auditors, tax and financial advisers are also involved in deal structuring.

2.3 How long does it take?

Depending on the complexity of the transaction, the structure and regulatory status of the target, and the method employed, this can take anywhere from a matter of weeks to a number of months. For example, straightforward mergers of Cayman Islands companies, where the shareholder base is relatively limited, and where there are no secured creditors and no applicable public listing, may be accomplished in a few weeks. Where the target company is listed (either in the Cayman Islands or elsewhere) or the merger is a cross-border transaction, a longer deal time is required.

Schemes of arrangements can, depending on their complexity and given the requirements for court approval, run for many months, as can complex merger transactions.

2.4 What are the main hurdles?

Both a statutory merger and a squeeze-out transaction provide for certain dissenter rights, which, in the merger context, essentially provides for dissenting shareholders to make application to the court for the determination of the fair value of their shares. Similar considerations apply for statutory squeeze-outs; however, where there is a tender offer that is not on an exclusively cash basis, dissenters have no right to compel a cash alternative. For schemes of arrangement, the key challenge is achieving the high approval majority required of each class of shareholders.

2.5 How much flexibility is there over deal terms and price?

Parties are generally free to contract as they wish as to terms and price, subject to the directors of a Cayman Islands company discharging their fiduciary duties, including the duty to act bona fide in the best interests of the company.

2.6 What differences are there between offering cash and other consideration?

Again, parties are generally free to contract as they wish with regard to terms and price. However, in the context of a statutory merger, where dissenters have the right to be paid in cash the fair value of their shares, a share-for-share deal may add complexity.

2.7 Do the same terms have to be offered to all shareholders?

Where an acquisition is structured by way of a statutory merger or scheme of arrangement, differing consideration can be paid to shareholders. For tender offers utilising a statutory squeeze-out, the same "offer" must be made to all shareholders.

2.8 Are there obligations to purchase other classes of target securities?

There are no statutory or common law obligations to purchase other classes of target securities.

2.9 Are there any limits on agreeing terms with employees?

There are no such limits applicable under Cayman Islands law.

2.10 What role do employees, pension trustees and other stakeholders play?

Aside from a general consideration with respect to the relevant employment contracts, there are no employee or pension-specific provisions applicable to a statutory merger, save that where the surviving company is a Cayman Islands company, it assumes all contracts, obligations, claims, debts and liabilities of each of the other constituent companies, including any employment liabilities. Secured creditor consent to a statutory merger is required.

For a scheme of arrangement, again, there are no specific employee or pension-specific provisions applicable, but where the rights of creditors are to be affected, their consent will be required.

Employee, pension or creditor consideration will not be relevant to a tender offer or statutory squeeze-out, or to an asset acquisition.

2.11 What documentation is needed?

While not strictly prescribed by the Companies Act, any complex merger will require some form of disclosure statement, whether or not required by applicable onshore listing rules or regulation. The Companies Act requires each Cayman Islands constituent company to enter into a written plan of merger, setting out certain prescribed information and, for more complex transactions, this is usually accompanied by a long-form merger or framework agreement.

For schemes of arrangement, alongside the applicable court documents, the scheme circular must be provided to the scheme participants, including sufficient information so as to allow them to make an informed decision in relation to the merits of the proposed scheme.

For a tender offer, there is no Cayman Islands prescribed documentation, but again, onshore listing rules or regulation may be applicable. For a statutory squeeze-out, the Companies Act requires that notice be given to dissenting shareholders.

For an asset acquisition, there are no specific documentation requirements, and the parties are free to contract as they see fit.

2.12 Are there any special disclosure requirements?

For schemes of arrangement, the scheme circular must be provided to the scheme participants, and must include sufficient information so as to allow them to make an informed decision in relation to the merits of the proposed scheme. For statutory mergers, the plan of merger must contain certain limited prescribed information and be approved by a special resolution of the members of each Cayman Islands constituent company.

2.13 What are the key costs?

The key costs will be service provider fees; government filing fees will generally be minimal and Cayman Islands stamp duty is only payable on documents that are executed in, or subsequently brought to, the Cayman Islands. Additional costs will also be incurred if the target is obliged to petition the Cayman Islands court to determine the fair value of the shares of the dissenting shareholders. For schemes of arrangement, court fees will also be incurred.

2.14 What consents are needed?

Other than those as set out at question 1.4 above, there are generally no authorisations, consents, approvals, licences, validations or exemptions required by law from any governmental authorities or agencies or other official bodies in the Cayman Islands in connection with M&A transactions.

Absent any contractual consents other than the consents discussed at question 1.4 above, for a statutory merger, the consent of any secured creditor is required. While the merger documents are required to be filed with the Registrar of Companies, upon the satisfaction of the statutory requirements, the plan of merger shall be registered – there is no discretion to refuse registration.

A scheme of arrangement is subject to the sanction of the court, although the court's principal role in the scheme is to ensure procedural fairness and not to assess the commercial benefits of the proposal. Any shareholders or creditors who object to the scheme are entitled to attend the relevant court hearing to object; however, an objection solely on the grounds that it is commercially a "bad deal" is usually unlikely to succeed if the scheme has the support of the requisite majorities.

2.15 What levels of approval or acceptance are needed?

Absent any special thresholds or consent required by the constitutional documents of a Cayman Islands company and the consents discussed at question 1.4 above, for a statutory merger, shareholder approval by special resolution (typically a two-thirds majority of those shareholders attending and voting (in person or by proxy) at the relevant meeting) is required.

A scheme of arrangement will require the approval of each of the relevant class(es) of members whose rights are to be subject to the scheme, and the majority that must be achieved for approval of each class of members is 75% by value of those shareholders who, being entitled to do so, attend and vote (in person or by proxy) at the relevant meeting.

2.16 When does cash consideration need to be committed and available?

There are no Cayman Islands legal considerations relevant to determining when cash consideration needs to be committed and available.

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Originally published by ICLG.

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.