Guide To Mergers & Acquisitions (M&A) In Bermuda 2023.

A guide to Mergers & Acquisitions (M&A) law in Bermuda, with a focus on key areas including deal structure, due diligence requirements, regulatory frameworks, treatment of seller liability, deal process, hostile bids and other trends across the M&A sector in the jurisdiction.

This guide to mergers and acquisitions (M&A) in Bermuda covers the following topics:

• DEAL STRUCTURE OF M&A DEALS
• INITIAL STEPS OF AN M&A TRANSACTION
• M&A DUE DILIGENCE
• REGULATORY FRAMEWORK
• TREATMENT OF SELLER LIABILITY IN M&A TRANSACTIONS
• DEAL PROCESS IN A PUBLIC M&A TRANSACTIONS
• HOSTILE BIDS
• M&A TRENDS AND PREDICTIONS FOR BERMUDA
• M&A TIPS AND TRAPS IN BERMUDA

DEAL STRUCTURE OF M&A DEALS

1.1 HOW ARE PRIVATE AND PUBLIC M&A TRANSACTIONS TYPICALLY STRUCTURED IN BERMUDA?

At present, a substantial portion of the entities formed in Bermuda are companies limited by shares incorporated under the Companies Act 1981, as amended (Companies Act). As such, the discussion in this Q&A focuses primarily on M&A transactions involving Bermuda companies.

M&A transactions in Bermuda typically proceed by way of statutory merger, amalgamation or scheme of arrangement under the Companies Act. The Companies Act also provides for compulsory acquisitions (‘squeeze-outs’) of minority shareholders in connection with M&A transactions structured by way of direct tender offer to the target’s shareholders.

If the target is a regulated entity – for example, under the Insurance Act 1978, as amended – the specific legislation applicable to such entities may also be relevant to the transaction and its structure.

The regulatory authority responsible for registering a merger or amalgamation pursuant to the Companies Act is the Bermuda Registrar of Companies (RoC). In addition, the Bermuda Monetary Authority (BMA) may:

be required to give permission from an ultimate beneficial ownership and exchange control perspective in the event there is an issue or transfer of shares in connection with the M&A transaction, unless a general permission already exists; and/or

if such target or subsidiary (as applicable) is a BMA regulated entity, be required either to be notified of or to provide its approval for the change of control for the target or parent entity (as applicable).

1.2 WHAT ARE THE KEY DIFFERENCES AND POTENTIAL ADVANTAGES AND DISADVANTAGES OF THE VARIOUS STRUCTURES?

Statutory merger/amalgamation

The Companies Act provides for both mergers and amalgamations of Bermuda companies, in both cases with other Bermuda companies or foreign corporations. Pursuant to a merger, one or more companies are merged with and into a single company, which becomes the surviving entity. In the case of an amalgamation, one or more companies join together to create an entirely new company. The key features and advantages and disadvantages of a merger and amalgamation include the following:

• Flexibility: Amalgamations and mergers are flexible structures allowing for the parties to structure the transaction in a way that reflects the commercial deal while allowing the Bermuda portion of the transaction to align and harmonise with the requirements of other jurisdictions. The Companies Act does not legislate as to whether a transaction should be structured as a merger or an amalgamation. Commercially and optically, companies might proceed by way of an amalgamation if structuring the business combination as a ‘merger among equals’, given that neither company is deemed to be the survivor. However, where one party is the ‘purchaser’, a merger may be the preferred choice.
• Approvals: Neither an amalgamation nor a merger requires the approval of the Bermuda courts (unlike a scheme of arrangement) or the approval of the Bermuda company’s creditors. The Companies Act requires shareholder approval of the amalgamation or merger agreement and provides all classes of share with the ability to vote. While the Companies Act sets a default shareholder approval threshold of 75%, it does allow for a company’s byelaws to set a lower approval threshold.
• Effectiveness: Once an amalgamation or merger has been approved by the requisite majority of shareholders, and subject to the satisfaction of any other conditions, the amalgamation or merger must be registered with the RoC in order to become effective. The effective date will be evidenced on the certificate of amalgamation or merger issued by the RoC. Where required by the parties – for example, in the context of a cross-border transaction with multiple steps that need to be effected – an effective time can be included in the certificate.
• Dissent rights: The Companies Act provides shareholders that do not vote in favour of the amalgamation or merger with the right, within one month of the notice regarding the general meeting in respect of the amalgamation or merger, to apply to the Bermuda courts to appraise the fair value of their shares. Dissenting shareholders are required to do so by issuing an originating summons in their name, either together with other dissenting shareholders in the same action, or under separate actions. In such cases, the dissenting shareholders are entitled to be paid the fair value of their shares as appraised by the court, but cannot block the amalgamation or merger itself. All shares carry the right to vote in an amalgamation or merger (and exercise dissent rights) notwithstanding that they would otherwise not be entitled to do so.

Tender offer

Tender offers may be used in both friendly and hostile transactions. The Companies Act does not prescribe the requirements of a tender offer. It is open for a potential acquirer, subject to compliance with the rules and regulations of any applicable stock exchange, to present an offer to the shareholders of a Bermuda company, which may or may not be recommended by the board of the target. The key features and advantages and disadvantages of a tender offer include the following:

• Offeror: A company (whether incorporated in Bermuda or not) can make an offer to the target’s shareholders to acquire all of their shares in the target.
• 90% squeeze-out: In the event that the offer reaches 90% approval, the purchaser has certain rights and obligations under Section 102 of the Companies Act regarding the remaining minority shareholders. The key features are as follows:
  • Compulsory transfer: The purchaser may require the remaining 10% minority to sell their shares on the terms of the offer where:

1. 1. there is a scheme or contract for the transfer of shares or any class of shares in a Bermuda company to another company (typically by way of offer to all shareholders);
   2. the offer is approved by not less than 90% in value of the shares subject to the offer (and so excludes shares held or contracted to be acquired prior to the date of the offer by the purchaser or its subsidiaries) within four months of the offer being made; and
   3. one month’s notice is given to dissenting shareholders (ie, shareholders that refuse the offer) that the bidder wishes to acquire their shares and such dissenting shareholders have not applied to the Bermuda courts for an order against the acquisition.

• Compulsory acquisition: If the purchaser acquires at least 90% in value of the target’s shares (and has not previously implemented the compulsory transfer provisions described above), the purchaser must, within one month of such acquisition, provide the remaining 10% shareholders with notice of their 90% acquisition. The remaining 10% shareholders may then, within three months, require the purchaser to acquire their shares on the same terms as they acquired the 90%.

Scheme of arrangement

A scheme of arrangement is a court-sanctioned compromise between a company and its creditors (or any class of them) or its members (or any class of them). In the context of an acquisition, a Bermuda company or any member may apply to the Bermuda court requesting that it order a meeting at which the members (or any class of them) are asked to consider the scheme. If the approval is obtained of a majority in number representing three-quarters in value of members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, the court may sanction the scheme. If it does so, the scheme becomes binding (subject to delivery of the requisite order of the court to the RoC) upon all of the company’s members (or any class of them, as the case may be). The key features and advantages and disadvantages of a scheme of arrangement include the following:

• Flexibility: A scheme of arrangement need not fit into any of the existing business combination methods provided in the Companies Act (eg, merger or amalgamation), and can include any or all of such methods features, allowing for great flexibility for both target and purchaser to structure the commercial terms of the acquisition and their implementation.
• Approval threshold and binding nature: A scheme of arrangement requires a lower approval threshold of 75% of the value of the members or class of members, as applicable, versus the 90% or 95% required for a squeeze-out. Additionally, once sanctioned by the court and filed with the RoC, a scheme of arrangement is binding on all of the arranged company’s members.
• No dissent rights: Unlike a merger or amalgamation, the Companies Act does not provide members with dissent rights in respect of a scheme of arrangement.
• Timing: Being a court-sanctioned process, schemes of arrangement often take longer than tender offers, mergers or amalgamations.

1.3 WHAT FACTORS COMMONLY INFLUENCE THE CHOICE OF SALE PROCESS/TRANSACTION STRUCTURE?

Transaction structures are typically driven by factors that influence the speed and approvals necessary to close the acquisition. The primary drivers of these matters are:

• the rules of the stock exchange on which the acquirer and/or target are listed, if any, and the applicable securities laws in such jurisdiction; and
• approval thresholds and other requirements contained in the Companies Act or the target’s bye-laws. For example, the Companies Act provides that the default approval threshold and quorum requirements contained in the Companies Act merger and amalgamation provisions may be overridden by specific provisions of the target’s byelaws.

Structure choices may also be driven by non-Bermuda factors that arise as a result of the fact that the parties may have international footprints that dictate or influence requirements or preferences. For example, while some jurisdictions may seek to amalgamate or merge a Bermuda company with one in their home jurisdiction, such a transaction may not be possible under the laws of another jurisdiction.

INITIAL STEPS OF AN M&A TRANSACTION

2.1 WHAT DOCUMENTS ARE TYPICALLY ENTERED INTO DURING THE INITIAL PREPARATORY STAGE OF AN M&A TRANSACTION?

Initial documents typically include:

• non-disclosure agreements;
• letters of intent/term sheets (with or without exclusive negotiating periods); and
• engagement letters and agreements with those advising or providing services in connection with the transaction.

2.2 ARE BREAK FEES PERMITTED IN BERMUDA (BY A BUYER AND/OR THE TARGET)? IF SO, UNDER WHAT CONDITIONS WILL THEY GENERALLY BE PAYABLE? WHAT RESTRICTIONS AND OTHER CONSIDERATIONS SHOULD BE ADDRESSED IN FORMULATING BREAK FEES?

The inclusion of break fees is relatively common. When setting a break fee, care must be taken so that the party seeking to recover the fee can demonstrate that it is a contractually agreed method of termination rather than a contractual consequence of a breach of the agreement between the parties seeking to serve as an alternative to a damages claim. Even if it is found to be the latter, such a break fee may be justifiable if it represents a proportionate way in which to protect legitimate interests of those impacted as a consequence of having invested in the negotiation of a transaction that has ultimately been aborted.

More innovative approaches to break fees may also be considered. We have seen consideration being given to the granting of options to prospective purchasers which would be triggered by a potential third-party acquisition of the target. The issuance of those additional shares would make it more expensive and less appealing for the third-party offeror to acquire the target.

When agreeing to break fees or any other deal protection mechanisms, particularly those that stand to make a company materially unattractive (eg, the granting of options) or potentially compromise its future (eg, by the sale of one of its ‘crown jewels’), there is a risk that the target’s directors could be found to be in breach of their fiduciaries because such measures are not in the best interests of the company. However, there is no bright-line test and the acceptability of such provisions will turn on their facts. Notwithstanding this, there is a range which is generally seen to be within a band of tolerance and the risks of a challenge would be considered to be greater the further outside that band one goes.

2.3 WHAT ARE THE MOST COMMONLY USED METHODS OF FINANCING TRANSACTIONS IN BERMUDA (DEBT/EQUITY)?

In our recent experience, acquirers use a mixture of:

• available cash;
• debt (whether pure acquisition facilities or other available facilities); and
• equity (including private investment in public equity financings in ‘de-SPACing’ transactions).

2.4 WHICH ADVISERS AND STAKEHOLDERS SHOULD BE INVOLVED IN THE INITIAL PREPARATORY STAGE OF A TRANSACTION?

Typical advisers and stakeholders involved at the initial preparatory stage include financial advisers, accountants, lawyers and PR advisers (in the case of hostile transactions). Depending on the nature of the transaction, targets often establish special committees that frequently engage their own financial and legal advisers. If there are shareholders that individually or together hold a meaningful portion of equity, they may also become involved with a view to ascertaining whether they would support a transaction.

2.5 CAN THE TARGET IN A PRIVATE M&A TRANSACTION PAY ADVISER COSTS OR IS THIS LIMITED BY RULES AGAINST FINANCIAL ASSISTANCE OR SIMILAR?

Financial assistance was historically formally prohibited in Bermuda and the prohibition was only removed following a 2011 amendment to the Companies Act.

While that prohibition no longer applies, the byelaws of any company established prior to the amendment should be reviewed to confirm that no provisions remain which would – notwithstanding the general ability to provide financial assistance under Bermuda law – act to prevent a target from being able to do so without taking steps to have such byelaws amended.

M&A DUE DILIGENCE

3.1 ARE THERE ANY BERMUDA-SPECIFIC POINTS RELATING TO THE FOLLOWING ASPECTS OF THE TARGET THAT A BUYER SHOULD CONSIDER WHEN CONDUCTING DUE DILIGENCE ON THE TARGET?

Commercial/corporate

We advise buyers to conduct typical commercial and legal due diligence. Legal diligence will include, but is not limited to, reviewing the following:

• the target’s constitutional documents, including byelaws and private incorporating act, as applicable;
• material contracts for change of control and other material provisions involving obligations to third parties (eg, indemnification);
• materials regarding material intellectual property or IT assets (trademarks, patents and commercial agreements);
• employee-related matters, such as:
  • executive officer employment contracts;
  • employee handbooks;
  • work permit approvals; and
  • employee long-term incentive programmes;
• material ongoing or threatened litigation, arbitration and other similar disputes (with commercial parties, government or regulatory bodies);
• if the target is regulated by the BMA, any regulatory filings, audits and other material correspondence and interactions with the BMA, including evidence of licensing (eg, under the Insurance Act, the Investment Business Act 2003, as amended or the Digital Asset Business Act 2018, as amended) and other materials (including governance documents) required pursuant to such licences; and
• records with respect to compliance with Bermuda’s:
  • economic substance requirements;
  • beneficial ownership reporting requirements; and/or
  • anti-money laundering and anti-terrorist financing requirements, as applicable.

Financial

There are no Bermuda-specific points regarding financial due diligence.

Litigation

The Supreme Court Causes Book at the Registry of the Supreme Court should be reviewed for any entries and filings shown in respect of the target. Such information will include any pending legal proceedings or judgments in Bermuda.

Tax

Currently, there is no Bermuda income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, or estate or inheritance tax. In respect of a Bermuda exempted company, no stamp duty, registration, documentary or any similar tax or duty of any kind is payable in Bermuda in connection with the signature, performance or enforcement by legal proceedings of any Bermuda law-governed document as long as the document does not effect a disposition or constitute an agreement for the disposition of Bermuda property.

A Bermuda exempted company may obtain an assurance from the Ministry of Finance of Bermuda granting an exemption, until 31 March 2035, from the imposition of tax under any applicable Bermuda law computed on profits or income or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, in each case in respect of such company or any of its operations, or the shares, debentures or other obligations of such company. However, such an exemption will not:

• prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda and holding such shares, debentures or other obligations of such company; or
• prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to land in Bermuda leased to such company.

Employment

A purchaser should engage employment counsel to review the material terms of the target’s employment arrangements, employee handbooks, work permit approvals and long-term incentive plans. Bermuda’s Employment Act 2000 governs employment in Bermuda.

Intellectual property/information technology

A purchaser should engage counsel to review the material documents regarding a target’s intellectual property.

Copyright: Predominately based on the UK Copyright, Designs and Patents Act 1988, the protection of copyright in Bermuda is provided for by the Copyright and Designs Act 2004. Registration is not required, as IP protection for copyrights is automatic in Bermuda. The principal IP right that protects software, for example, is copyright – the right to prevent others from, among other things, copying the software. The Copyright and Designs Act expressly includes computer programs, preparatory design materials for computer programs and databases within the definition of a ‘literary work’. For computer-generated works, the copyright expires at the end of the period of 50 years from the end of the calendar year in which the work was made.

Trademarks: The Trade Marks Act 1974 affords IP protection to trademarks and service marks, which can carry one of two levels of protection: Part A or Part B. Trademarks and service marks can be registered and renewed repeatedly or unregistered. Unregistered trademark rights are enforced through the law of passing off. Trademarks are registered locally at the Registry General for a fee, which generally takes 18 months.

Patents: Currently, patent protection in Bermuda is provided by the Patents and Designs Act 1930, which is largely based on the UK Patents and Designs Act 1919. The Registry General offers three types of patent applications:

• a national patent;
• a provisional (national) patent; or
• registration of a UK-granted patent or a European patent with a UK designation to Bermuda.

A patent granted in the United Kingdom or a European patent that designates the United Kingdom can be registered in Bermuda within three years of its original grant and will remain in force for as long as the original patent is in force. As with patents globally, patents are non-renewable.

Data protection

Bermuda’s Personal Information Protection Act 2016 (PIPA) received royal assent in July 2016 and applies to all organisations in Bermuda that use personal information. With significant ties to both sides of the Atlantic, PIPA was drafted as a bespoke privacy framework, designed to meet Bermuda’s unique requirements. Its provisions are drawn from privacy legislation in multiple jurisdictions, including Canada and the European Union. As at the time of writing, PIPA remains only partially in force.

PIPA is bespoke legislation drafted around a set of EU-style data protection principles with the express intention of securing EU ‘adequacy’ status to enable personal information to move freely between the European Union and Bermuda.

Pending the full implementation of PIPA, it is likely that the Bermuda courts will follow English common law principles regarding breach of confidence and the misuse of confidential or private information.

Cybersecurity

The Bermuda government and regulators (including the BMA) have been establishing cybersecurity requirements and cyber risk management frameworks in accordance with the Bermuda government’s Cybersecurity Strategy 2018–2022. Between 2020 and 2022, the BMA has released Cyber Risk Management Codes of Conduct for various regulated industries, including insurance and digital assets. These codes establish for registrants certain duties, requirements, standards, procedures and principles to be complied with in relation to operational cyber risk management. Additionally, targets that are licensed under the Digital Asset Business Act must have a cybersecurity programme that meets the requirements of the Digital Asset Business (Cybersecurity) Rules 2018.

Real estate

Title to real estate is evidenced by registration at the Bermuda Land Title Registry Office, which is open to public inspection and is the primary source of information on any real estate due diligence in Bermuda.

3.2 WHAT PUBLIC SEARCHES ARE COMMONLY CONDUCTED AS PART OF DUE DILIGENCE IN BERMUDA?

Information can be obtained by way of a search of the entries and filings shown in respect of a company in the Register of Companies at the offices of the Registrar of Companies, which will include:

• the certificate of incorporation, certificate of continuance, amalgamation or merger (as applicable) and memorandum of association, together with alterations thereto;
• the address of the registered office;
• any prospectus or offer document if required to be filed pursuant to the Companies Act; and
• certain other filings required pursuant to the Companies Act, including any charges registered against the company under the Companies Act.

The following information, among other things, can be obtained from the registered office of the company:

• details of directors and officers on the register of directors and officers. The register of directors and officers is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day be allowed for inspection); and
• the register of members, which will include:
  • the names and addresses of the shareholders, in the case of a company having a share capital;
  • details of the number of shares held by each shareholder (distinguishing each share by its number so long as the share has a number);
  • the amount paid up on the shares; and
  • the date on which the person was entered in the register of members as a shareholder.

The register of members of a company is open for inspection during business hours (subject to such reasonable restrictions as the company may impose, so that not less than two hours in each day are allowed for inspection). However, shares can be held by, and registered in the name of, a nominee.

If the company is listed on the Bermuda Stock Exchange (BSX), certain information will also be available at or from the BSX. Such information will include any filings with or announcements to the BSX, including published accounts and auditors’ reports.

Entries and filings in respect of the company can also be found in the Supreme Court Causes Book at the Registry of the Supreme Court. Such information will include any pending legal proceedings or judgments.

3.3 IS PRE-SALE VENDOR LEGAL DUE DILIGENCE COMMON IN BERMUDA? IF SO, DO THE RELEVANT FORMS TYPICALLY GIVE RELIANCE AND WITH WHAT LIABILITY CAP?

Due diligence, as in most established and recognised jurisdictions, is customarily and commonly undertaken. It would be a very rare occurrence if due diligence were not undertaken, unless a competing bidder forgoes due diligence as a completive advantage. However, if the bid is hostile, the only information which might be available for due diligence will be that in the public domain. Also, in friendly transactions, the target may look to limit the scope of due diligence undertaken and, in particular, withhold sensitive financial and business information until it is clear that the bidder has a genuine interest in proceeding with the transaction.

Reliance and liability caps are determined on a case-by-case basis.

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Originally provided for Mondaq’s Comparative Guide to Mergers & Acquisitions, 2023.

For further information, please contact:

Matthew Ebbs-Brewer, Partner, Appleby

mebrewer@applebyglobal.com