Introduction
The purpose of this note is to compare, in broad terms, the two methods by which a third party might effect the acquisition of a Cayman Islands incorporated company (the "Target"). The two methods are:
- a Cayman Islands scheme of arrangement pursuant to Section 86
of the Companies Law (as amended) of the Cayman Islands (the
"Law"); or
- a takeover offer utilising the provisions contained in Section
88 of the Law to obtain 100 percent of the Target.
Both of these methods could be used for a cash offer and, if relevant, a securities exchange offer (or a combination of both).
Scheme of arrangement
A scheme of arrangement is a court-supervised procedure which would result in the acquisition of either all or none of the outstanding shares of the class to which it relates. A scheme would require:
- the approval of a majority in number representing three fourths
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
- the sanction of the Grand Court of the Cayman Islands.
The scheme would not become effective until it had been registered with the Cayman Islands Registrar of Companies.
Takeover offer
A takeover offer is an offer for the entire issued share capital of the Target which could become effective without the offeror acquiring 100 percent of such issued share capital. However, the Law would permit the offeror to acquire 100 percent of the Target if the offer is approved by holders of not less than 90 per cent in value of the shares affected.
If the Target is listed, the takeover offer may be subject to the tender offer rules of the relevant exchange and the rules and regulations thereunder.
Comparison
In the table attached to this note we have set out a technical comparison of the two routes, with a view to highlighting the differences between them. The principal matters for the offeror to bear in mind in deciding whether a scheme of arrangement or takeover is more appropriate are set out below.
Timing
A takeover offer would generally be expected to provide the offeror with control of the Target (ie a minimum holding of 50.1 percent) more quickly than a scheme owing to the necessity to follow court timetables with the latter. However, acquiring outstanding minorities would extend the timetable of the tender offer.
Flexibility
The offeror does not need to achieve any particular level of acceptances before closing the offer (compared to the approvals required for a scheme). Although it would be usual for any offeror to stipulate a certain level of acceptances that will be required this does not need to be the 90 percent threshold required to "squeeze out" minorities under the relevant legislation. The Target will want the offeror to agree that it will close the offer with a lower threshold having been reached thereby increasing the risk of resulting minorities.
The terms of the offer can be more readily revised if, for example, a competing offer arises or new information comes to light. In a scheme context, an entirely new scheme could well be required in either of these circumstances. However, depending on the market factors and the terms of any irrevocable undertakings, the risk of a competing offer may not be high.
Minorities
In a scheme the offeror obtains 100 percent of the issued share capital on the scheme becoming effective. Whilst in practice it is rare for offerors, particularly on a cash offer, to fail to achieve the 90 percent threshold needed to acquire the minority shareholdings, under the relevant "squeeze out" provisions there is a greater theoretical possibility of minorities existing at the end of the offer. Such minorities would restrict the offeror's ability to deal freely with the Target post acquisition. As stated above, the Target would expect this to be the offeror's risk, that is, that the offer is not conditional upon a high (90 percent) threshold of acceptances being received.
Irrevocables
In an offer, shares which are the subject of an irrevocable undertaking to accept the offer will normally count towards the 90 percent threshold needed to squeeze out minorities. In a scheme, irrevocables are more frequently used and will also be counted towards the statutory majority. We have received senior counsel's opinion that irrevocables would not of themselves give rise to a class issue. However, in both a takeover and a scheme the terms of the irrevocable would require particular attention and may require a "fiduciary out", in the event of a competitive counter offer arising.
Conclusion
In conclusion, provided that the Target can persuade an offeror to take the risk of not achieving the 90 percent threshold to squeeze out minorities, the flexibility afforded by a takeover offer may be more attractive to the Target and possibly the offeror. However, under a scheme offer there is greater certainty as the minority shareholders will be locked in at a lower level of acceptances than is required under the takeover offer squeeze out provisions. Irrevocables can also be obtained without giving rise to "class" issues and ultimately it may be easier to structure within any tender offer rules. There may also be tax advantages if the scheme also provides for any merger of the business of the Target into a transferee company by operation of law.
The note is not intended to provide a comprehensive guide to Cayman Islands (or other foreign law) to the extent that they are relevant to the matters discussed, but merely to provide a broad overview of such matters.
|
ISSUE |
TAKEOVER OFFER |
SCHEME OF ARRANGEMENT |
|
|
1 |
APPROVALS |
Offer can become unconditional with acceptances from 50.1 percent of ordinary shareholders. A squeeze out of the minority requires the approval of holders of 90 percent of the shares to which the offer relates excluding shares held or contracted to be acquired prior to the date of the offer (ie posting of the offer document). |
Requires the approval of a majority in number representing three-fourths in value of those members of a class who attend and vote either in person or by proxy at a meeting of the holders of the shares to be acquired to enable the whole of the class to be acquired compulsorily. Requires the sanction of the Grand Court of the Cayman Islands. Becomes effective upon registration with the Cayman Islands Registrar of Companies. |
|
2 |
TIMING |
There is no maximum period for completion of the offer although the 90 percent level required to effect a "squeeze out" must be reached within four months of the posting of the offer document. Minority shareholders can be squeezed out a month after the expiration of four months from the meeting of the offeror on achieving the 90 percent level. The month period is a statutory requirement but subject to objectors (see 10 below). It is automatic that the squeeze out take place at the end of that period. |
Precise timetable will need to be agreed with the Grand Court of the Cayman Islands. In practice, likely to take approximately two to three months from date of posting of scheme document to sanction by the Grand Court. Account would need to be taken of any applicable Court vacations. |
|
3 |
AMENDMENTS TO THE CONSIDERATION BEING OFFERED TO TARGET SHAREHOLDERS |
Amendments to consideration offered are easily accommodated; revised offer document posted and acceptances of the original offer are deemed to be acceptances of the revised offer. |
Any significant changes to the material terms of the scheme prior to shareholder approval are likely to require an amended scheme which may need further court direction in respect of the modification. |
|
4 |
AMENDMENTS TO INFORMATION DURING THE PROCESS |
Any materially new information will need to be made available to Target shareholders in order to avoid liability. |
May result in adjournment of the shareholder meeting or the Court not sanctioning the scheme without a further shareholder vote if after the shareholder meeting. |
|
5 |
EMPLOYEES |
Separate proposals would need to be made to holders of options. Early exercise rights may be triggered under any Target option schemes. |
Separate proposals would need to be made to holders of options. Early exercise rights may be triggered under any Target option schemes. |
|
6 |
MINORITIES |
Possibility of being left with minority of holders of ordinary shares if offer closed with less than 90 percent. Consequences of this are: Depending on the number of minority shareholders Target may need to retain listing on Nasdaq and would therefore continue to be subject to SEC reporting requirements. Corporate governance may require that nonexecutive directors are retained on the board of Target. Would restrict freedom to reorganise the Target group post acquisition. |
No minorities provided that scheme is proposed and passed in respect of all classes of Target shares (and conditional on each other). |
|
7 |
TAX |
Cayman Islands position No corporate or personal tax consequences. |
No corporate or personal tax consequences. |
|
8 |
IRREVOCABLE UNDERTAKINGS |
Irrevocable undertakings may be taken and shares covered by them should count towards the 90 percent compulsory acquisition level (provided that irrevocables are given for no consideration and under seal or for no consideration other than a promise by the offeror to make the offer). |
There is no objection to a statement with regard to voting intentions at the meeting. The giving of irrevocable undertakings would not, of itself, give rise to those shareholders being treated as a separate class. |
|
9 |
PURCHASE OF TARGET SHARES |
Offeror may be able to purchase shares outside the offer but these will not count towards the 90 percent compulsory cooperation level. |
It may be possible for the offeror to purchase shares during course of scheme. However, the offeror would not be able to vote the shares acquired. |
|
10 |
OBJECTORS |
Objectors to squeeze out procedure can apply to the court for various orders to the effect that the offeror shall not be entitled to acquire their shares or to specify different terms for their acquisition. Where documentation has been properly prepared and the 90 percent threshold has been met an objector would need to show very strong grounds why compulsory acquisition was unfair. |
Objectors can be heard at the court hearing to sanction the scheme. The court has to decide whether the scheme is such that "an intelligent and honest man, a member of the class concerned, acting in respect of his interest might reasonably approve". Provided that the Scheme document is fair and provides such information as is reasonably required for shareholders to decide how to vote the Court should sanction the scheme. |
|
11 |
PRINCIPAL DOCUMENTATION |
Offer to Purchase sent to shareholders. If Target is listed, tender offer documents to be filed with relevant exchange. |
Scheme document and Explanatory Statement. |
|
Cayman Islands British Virgin Islands Hong Kong Singapore |
London Jersey Dubai |
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.
