The Cayman Islands' global appeal means it services clients from all corners of the globe, thereby offering a hedge against the full brunt of economic fluctuations which ordinarily affect a single jurisdiction. Whilst M&A activity has decreased throughout 2016 on a worldwide basis by 22%,1 Cayman Islands M&A activity remained steady.
During 2015 and the first six months of 2016, 15,8422 exempted companies and 4,9713 exempted limited partnerships were incorporated or formed (as relevant). The continued use and attraction of Cayman Islands entities is not surprising, as the nature of capital has changed dramatically in the last few years, with investments increasingly being made on an international scale. Investors are at ease moving their capital from one jurisdiction to another to achieve the highest returns. The more international capital becomes, the more likely Cayman Islands entities are used to facilitate the investment of such capital due to the tax neutrality afforded, and the sophisticated and stable nature of the jurisdiction.
The Cayman Islands has historically been, and continues to be, successful in attracting funds (both hedge funds and private equity funds) as well as structured finance issuers. Over time, the Cayman Islands has become recognised as a jurisdiction that is central to M&A transactions, particularly cross-border M&A transactions in downstream private equity transactions.
As noted above, with global M&A decreasing in 2016 as compared to 2015, the need for strategic global structuring solutions has increased. Given that Cayman Islands exempted limited partnerships are the vehicle of choice for offshore private equity funds, the private equity sector has embraced the use of Cayman Islands vehicles as holding companies, joint venture vehicles and listing vehicles for M&A deals. In light of the increase in private equity- backed M&A, the Cayman Islands has benefited from a number of deals involving Cayman Islands vehicles. Furthermore, the recent introduction in July 2016 of a Cayman Islands Limited Liability Company, or "LLC", should further supplement the attractiveness of the jurisdiction for clients familiar with the benefits of such vehicles in onshore jurisdictions such as Delaware.
Despite the volatility and uncertainty in the global equity markets, a key factor in the increase in private equity-backed M&A deals is the relative resiliency of the debt markets. According to Thomson Reuters, global syndicated lending for the first nine months 2016 reached US$2.9trn.4 Loans in the Americas accounted for 57% of global loan volume during the first nine months 2016. With greater access to loans particularly in the US, private equity funds have the capital available to complete their buyout transactions, thereby increasing the number of private equity-backed M&A deals. Not only is the Cayman Islands a jurisdiction favoured by private equity houses, it is a jurisdiction that is recognised to be creditor-friendly and therefore favoured by leverage providers. Accordingly, the use of Cayman Islands vehicles is expected to increase, with such buoyant private equity-backed M&A activity and the associated leveraged loans to fund such activity.
Reasons why the Cayman Islands are a preferred jurisdiction to facilitate M&A activity
The Cayman Islands is the destination of choice for the offshore structures which run parallel to onshore private equity structures. This is in large part due to the fact that it delivers the ability to raise capital efficiently, in a tax-neutral environment. It is common for a Cayman Islands entity to be used in international M&A transactions, whether it is to act as a holding vehicle for a bidco in an acquisition context, to act as a joint venture vehicle, or to act as the issuer to be listed on stock exchanges. The reasons for doing so are varied and can include any of the following:
- Simplicity and speed of incorporation − incorporation can usually be completed within 24 hours (using an express service) following completion of relevant know-your-client ("KYC") and anti-money-laundering ("AML") requirements.
- Major international financial and banking centre − the Cayman Islands is a major international financial and banking centre and has many leading international banks, trust companies, accounting firms, law firms and other such service providers.
- Well established legal system and flexible corporate governance − the Cayman Islands are administered as a British Overseas Territory, but have a significant degree of internal self-government. The Cayman Islands have a combined common law and statute-based legal system. English common law is of persuasive authority and the courts of the Cayman Islands are of good repute. Corporate governance is based on such common law and statute-based legal systems, with the flexibility to take into account the different needs of the parties, whether it is for a listing vehicle, bidco or joint venture vehicle.
- No direct or indirect taxation − exempted companies and LLCs are free from any form of income tax, capital gains tax or corporation tax, and no withholding tax is imposed by the Cayman Islands on any cash flows. Exempted companies are eligible to apply for an undertaking from the Cayman government to the effect that they will remain tax-free for a period of 20 years (which can be extended to 30 years for exempted companies, or to 50 years for LLCs, where the term of the transaction requires this) in the event of any legislative changes relating to taxation matters.
- No exchange controls − the Cayman Islands has no exchange control or currency regulations.
- Corporate documents not publicly available − the constitutional documents, the identity of the shareholders and directors of an exempted company are not available to the public and, additionally, the identities of the shareholders are not known by any governmental authority in the Cayman Islands (except in the case of certain regulated entities).
- Compliance − there are stringent compliance and KYC procedures in place to target money laundering.
- Ability to merge or consolidate with a non-Cayman Islands company − the Cayman Islands Companies Law permits an exempted company or LLC to merge or consolidate with Cayman Islands and/or overseas companies. See below for greater detail on the statutory merger regime.
- Reporting − annual reporting requirements are minimal and consist only of a statement, signed by the company secretary or a director, that the company has conducted its operations mainly outside the Cayman Islands and has complied with the provisions of the Companies Law.
- Directors − there are no requirements that directors of an exempted company or managers of an LLC be resident in the Cayman Islands.
- Regulatory regime – the Cayman Islands has a flexible regulatory regime in order to stay at the forefront of offshore financial centres and to encourage further investment through the Cayman Islands. An example of this is the introduction of the new Cayman Islands LLC (see below).
- Time zone and geographical proximity – the Cayman Islands is favoured as an offshore jurisdiction by the US, given its location in the same time zone and its geographical proximity.
Deals and highlights
"Take-private" deals are being driven by private equity and/or management of listed companies in the belief that they can increase the value of the company once it is de-listed and no longer subject to the increased reporting and regulatory costs associated with a listing.
In some cases, management has teamed up with private equity houses to effect the buyout of the relevant company, which raises issues of director duties and conflicts of interest. In such cases, where the target is a Cayman Islands company, Walkers has been involved in advising on such matters, whether it is from the perspective of the acquirer, the target, or the special committee of non-conflicted directors that may be formed to consider the buyout proposal.
The duties that govern the actions of the directors of a target company are not codified in the Cayman Islands, and so are set out in the common law as it has been developed, in the Commonwealth courts in particular. The abiding general principle is that the directors of a Cayman company owe their duties to the company and not to its shareholders. It is likely in a management buyout scenario that the Cayman courts will focus carefully on the following areas when considering the discharge by the company's directors of their fiduciary duties: (i) directors are not precluded by Cayman law from voting on, or prosecuting, a transaction in which they have a personal interest provided that the nature of that interest is disclosed, and any company information held by the directors in that capacity and which is material to the consideration and approval of the proposed transaction by shareholders is disclosed to them; and (ii) it will be important that any valuation of the company forming the basis of any offer to shareholders under the proposed transaction is supportable by reference to independent, informed third party advice.
The following are some high-profile take-private transactions involving Cayman Islands companies:
- Bohai Leasing and its take-private acquisition of NYSE-listed Avolon Holdings.
- Morgan Stanley and Credit Suisse in connection with the leveraged buyout of Goodpack Ltd by IBC Capital Ltd., the largest ever buyout of a Singapore-listed company by a private equity fund.
- Consortium led by Blackstone, in its US$625m privatisation of Pactera Technology International Limited.
- Acquity Group Limited, in connection with the US$316m take-private acquisition of NYSE-listed e-commerce and digital marketing company Acquity Group Limited by consulting firm Accenture PLC.
- China Fire & Security Group, Inc., in its US$265.5m take-private acquisition of NASDAQ-listed China Fire & Security Group, Inc. China Fire & Security Group, Inc. is a leading total solution provider of industrial fire protection systems in China.
- Giant Interactive, in connection with the takeover of NYSE-listed Chinese online game developer Giant Interactive, with a total value of approximately US$2.9bn.
- International Mining Machinery Holdings Limited, in connection with the going private acquisition by Joy Global Asia Limited, a wholly owned subsidiary of Joy Global Inc.
Strategic corporate acquisitions
Strategic corporate acquisitions are also on the rise, in light of the buoyant state of the global economy:
- Uber China and its 2016 merger with Didi Chuxing.
- Petroamerica Oil Corp. and the acquisition of all of its issued and outstanding shares by Gran Tierra Energy Inc.
- Funds managed by Blackstone in respect of the sale of Center Parcs, a UK-based holiday village company, to a fund managed by Brookfield Property Partners.
- Home Loan Servicing Solutions on its US$1.2bn acquisition by New Residential Investment.
- Valeant Pharmaceuticals International, Inc. and its acquisition of Mercury (Cayman) Holdings, the holding company of Amoun Pharmaceutical, for approximately US$800m.
- Atlantica Hotels International Ltd., the holding company for Atlantica Hotels International (Brasil) Ltd, the largest privately held hospitality company in South America, in its sale to Quantum Strategic Partners Ltd (an affiliate of Soros).
- The Carlyle Group and Warburg Pincus, a global private equity firm, and the acquisition of DBRS, the fourth-largest global credit rating agency.
- Tiger Media, Inc., a Shanghai-based multi-platform media company, in its acquisition of The Best One, Inc., parent company of US-based data solutions provider Interactive Data, LLC.
- Baring Private Equity Asia in connection with its acquisition of Vistra Group, a global provider of trust, fiduciary and fund administration services.
- Accenture/Acquity, in connection with the US$316m take-private acquisition of NYSE-listed e-commerce and digital marking company Acquity Group Limited by consulting firm Accenture PLC.
- Alibaba Group, in its US$586m acquisition of an 18% stake in China's largest internet portal and media website Sina Corp's microblogging service, Weibo.
- Baidu, in connection with its US$306m acquisition of Qunar, one of China's oldest and biggest online travel agents.
- Lombard International Assurance, and the acquisition of the Luxembourg-based wealth management business of Lombard International Assurance and Switzerland-based Insurance Development Holdings AG from Guernsey-based Friends Life Group Limited.
- Formation Capital, LLC, and the $763m acquisition of NHP Group, a property company 5 properties located throughout the UK.
To read this Chapter in full, please click here.
1. As reported in Mergers & Acquisitions Review, Financial Advisors, First Nine Months 2016, Thomson Reuters.
2. Cayman Islands Register of Companies.
3. Cayman Islands Register of Partnerships.
4. As reported in Global Syndicated Loans Review, Managing Underwriters, First Nine Months 2015, Page 1, Thomson Reuters.
Originally published by Global Legal Insights Mergers & Acquisitions 2017 Sixth Edition.
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.