Guide To Mergers & Acquisitions (M&A) In Isle Of Man 2023.

A guide to Mergers & Acquisitions (M&A) law in Isle of Man, 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 Isle of Man 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 ISLE OF MAN
• M&A TIPS AND TRAPS IN ISLE OF MAN

DEAL STRUCTURE OF M&A DEALS

1.1 HOW ARE PRIVATE AND PUBLIC M&A TRANSACTIONS TYPICALLY STRUCTURED IN ISLE OF MAN?

The Isle of Man has two company law regimes, which operate in parallel. Companies can be incorporated under either the Companies Acts 1931-2004 (‘1931 act’) or the Companies Act 2006 (‘2006 act’). The legislation under which a company is incorporated will provide the legal framework for its operation in all areas, including in relation to mergers and acquisitions.

Private deals

Private M&A transactions are typically structured as:

• share sales (which involve the transfer of ownership of the target, including all of its assets and liabilities, unless there is a pre-transaction carve-out of specific assets or the definitive transaction documents include express indemnities in respect of specific liabilities); or
• asset sales (which involve the transfer of specific assets and rights, and often certain associated liabilities, relating to the target business).

Public deals

Public M&A transactions can be structured as schemes of arrangement, contractual takeover offers and, in certain circumstances, statutory mergers. Schemes of arrangement have been the most common structure for public-to-private transactions in recent years due to the advantages, which we consider in question 1.2.

The City Code on Takeovers and Mergers (‘Takeover Code’) applies in relation to takeovers of certain Isle of Man listed companies, whether structured as contractual offers or schemes of arrangement. The Takeover Code was amended with effect from 20 February 2023 to introduce new presumptions as to when parties are acting in concert under the Takeover Code. On 22 May 2023, several more amendments became effective in relation to, among other things, how the offer timetable applies in a competitive situation if:

• separate bids are proceeding by way of a scheme of arrangement and contractual offer; and/or
• a bid is subject to regulatory approval that cannot be satisfied within the normal 60-day timetable.

A small number of statutory mergers have taken place in recent years; but since they are relatively uncommon, we do not consider them further in this Q&A.

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

Private deals

On a private transaction, a share sale is simpler to document and, from the seller’s perspective, involves the transfer of all of the target’s liabilities to the buyer.

An asset sale provides more flexibility over the choice of assets to be transferred and, from the buyer’s perspective, allows it not to assume liabilities that it would prefer to be retained by the seller.

Public deals

On a public transaction, the thresholds for a successful scheme takeover are often considered easier to achieve than for a contractual offer.

Under a contractual offer, the bidder requires more than 50% acceptances to obtain control of the target and more than 90% acceptances to obtain 100% of the target’s shares.

A scheme, on the other hand, need only be approved by a majority by number representing at least 75% in value of the target’s shareholders that vote at the relevant shareholders’ meeting. If, as often happens, a large number of shareholders do not vote at the relevant meeting, either in person or by proxy, a scheme can often be approved by substantially less than 75% of all shareholders. On the other hand, however, shareholders that are opposed to a scheme will need less support to be able to block a scheme than they would need to prevent a contractual offer becoming unconditional as to acceptances. Once a scheme becomes effective, the bidder will obtain 100% of the target’s shares, including the shares of shareholders that voted against the scheme and those that did not vote at all.

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

The advantages and disadvantages listed in question 1.2, and tax considerations, tend to be most influential in terms of transaction structure. The choice of sale process is usually driven by commercial dynamics – most private M&A transactions involving Isle of Man targets tend to be conducted by bilateral negotiations, with auctions being reserved for higher-value targets.

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?

A non-disclosure agreement (NDA) will typically be entered into at the beginning of an M&A transaction requiring the parties to keep confidential the existence and terms of the negotiations, as well as any other confidential information that they receive from the other party as the negotiations progress. NDAs can include other restrictions, such as non-solicitation and exclusivity provisions.

On many transactions, the parties will also enter into a document setting out the headline terms of the proposed transaction. These documents (which are referred to by several different names, including ‘term sheets’, ‘letters of intent’ and ‘heads of terms’) are not intended to be legally binding, except in respect of specific provisions, such as exclusivity, confidentiality and costs.

2.2 ARE BREAK FEES PERMITTED IN ISLE OF MAN (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?

Isle of Man law does not prohibit a proposed buyer or the target from agreeing to pay break fees in appropriate circumstances, if the directors (of an Isle of Man buyer or the target) consider them to be appropriate and consistent with their fiduciary duties. However, break fees are not commonly used for private M&A transactions involving Isle of Man targets, and break fee agreements are generally prohibited for public M&A transactions that are subject to the Takeover Code.

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

The Isle of Man is no different in this regard from any other jurisdiction. Transactions can be funded entirely by cash, debt, equity or by a mix of them.

In certain transactions, such as management buyouts, the financing will consist of a mix of:

• institutional and management equity;
• debt financing (potentially including senior and subordinated debt); and
• possibly also vendor loan notes if the parties agree to defer a portion of the purchase price (eg, if the purchase price is subject to an earn-out).

The choice of (and, where relevant, the split between different methods of) financing will vary from deal to deal, depending on:

• the transaction structure;
• the type of buyer (trade buyer or private equity);
• the nature of the target and its underlying business; and
• the relative cost of cash, debt and equity.

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

This will depend on the transaction structure (different considerations apply for private and public M&A transactions).

Private deals

Generally speaking, for a private M&A transaction, the buyer and the seller should engage with Isle of Man lawyers, as well as international legal advisers where appropriate. They may also wish to engage financial and tax advisers (and actuaries for certain transactions in the insurance industry).

Public deals

A larger range of advisers and other stakeholders will be involved in a public M&A transaction, including the directors of the target, any substantial shareholders, financial advisers, international and Isle of Man lawyers (for the target, the bidder and the financial advisers), brokers, sponsors, analysts, PR advisers, stock exchanges and registrars.

On a transaction that is subject to the Takeover Code, confidential information concerning the proposed transaction must be kept secret until announcement. The Takeover Code requires an announcement to be made when discussions relating to a possible bid are extended to more than a very restricted number of people, and this fundamental rule must always be borne in mind before engaging with advisers and stakeholders before such a transaction has been announced.

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?

Yes, this is permitted if the target is an Isle of Man company, and it is relatively common on a primary fund raising for the target to bear some or all of the subscriber’s adviser costs.

There is no prohibition against a private Isle of Man company providing financial assistance in connection with the acquisition of its own shares. However, the following company law principles continue to apply:

• The provision of the financial assistance must be in the company’s best interests;
• The provision of the financial assistance must not breach the Isle of Man law rules on distributions or otherwise constitute an unlawful reduction of capital; and
• The provision of the financial assistance must not otherwise represent a fraud on the company’s creditors under Isle of Man insolvency laws.

M&A DUE DILIGENCE

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

• Commercial/corporate
• Financial
• Litigation
• Tax
• Employment
• Intellectual property/information technology
• Data protection
• Cybersecurity
• Real estate

It is important for buyers to review each of the above aspects as part of their due diligence process together with their Isle of Man lawyers and their international legal advisers, if any. The precise considerations in each of these areas will depend more on the nature of the target’s underlying business than on any jurisdiction-specific issues.

One important jurisdiction-specific item to consider, which straddles corporate and tax, is whether the target is within the scope of the Isle of Man’s economic substance rules and, if so, whether it complies with those rules. The economic substance regime was introduced in 2019 and any in-scope companies that are non-compliant could be liable for significant financial penalties; if there is no realistic possibility of becoming compliant, they will be at risk of being struck off the companies register. It is increasingly important that buyers identify any economic substance issues during their due diligence.

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

Searches of the target’s file at the Isle of Man Companies Registry, as well as searches against the entries and filings shown and available for inspection in respect of the target at the Rolls Office of the Isle of Man High Court of Justice.

It is also advisable to search the Isle of Man Financial Services Authority’s register to ascertain whether the target holds any financial services licences, authorisations or registrations.

Depending on the industry in which the target conducts its business and what the due diligence reveals, certain other searches might also be advisable, including:

• searches of the Isle of Man Gambling Supervision Commission’s register; and
• searches of the Isle of Man Deeds Registry or Land Registry.

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

Financial vendor due diligence tends to be more common than legal vendor due diligence on Isle of Man M&A transactions, although legal vendor due diligence is becoming more common, especially on auction sales and sales by private equity investors.

If legal vendor due diligence is carried out, it is customary for the report to be provided to bidders on a non-reliance basis as part of the auction process. The successful bidder will often be permitted to rely on the report by signing a reliance letter at the same time as the definitive transaction documents, but subject to customary limitations, including a cap on the report provider’s liability. Isle of Man lawyers tend to be guided by UK market practice and to set the level of the cap by reference to the deal value.

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

For further information, please contact:

Garry Manley, Partner, Appleby

gmanley@applebyglobal.com