Guide To Mergers & Acquisitions (M&A) In The Cayman Islands 2023.

A guide to Mergers & Acquisitions (M&A) law in the Cayman Islands, 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 the Cayman Islands 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 CAYMAN
• M&A TIPS AND TRAPS IN CAYMAN

DEAL STRUCTURE OF M&A DEALS

1.1 HOW ARE PRIVATE AND PUBLIC M&A TRANSACTIONS TYPICALLY STRUCTURED IN THE CAYMAN ISLANDS?

Public M&A transactions in the Cayman Islands are typically structured as either:

• a statutory merger/consolidation;
• a tender offer (accompanied by a squeeze-out); or
• a scheme of arrangement.

Each of these is discussed in more detail in question 1.2. In the authors’ experience, the statutory merger remains a popular tool for facilitating M&A transactions involving Cayman Islands companies, with the scheme of arrangement now tending to be reserved for more complex M&A transactions.

Private M&A transactions in the Cayman Islands are often accomplished by statutory merger/consolidation or asset acquisition. Tender offers (and squeeze-outs) and schemes of arrangement remain available options for private M&A transactions in the Cayman Islands, although these are less commonly used.

The primary sources of regulation of M&A transactions in the Cayman Islands are:

• the Companies Act (as revised) (Companies Act);
• the Limited Liabilities Companies Act (as revised) (‘LLC Act’); and
• common law.

Unlike some other jurisdictions, the Cayman Islands does not have a set of legal principles specifically relevant to ‘going-private’ transactions. Rather, directors must observe their general fiduciary and common law duties. Additionally, the Cayman Islands Stock Exchange’s (‘CSX‘) Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares will apply where the target is listed on the CSX.

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

Statutory merger/consolidation

Part XVI of the Companies Act provides a statutory regime for:

• the merger or consolidation of two or more Cayman Islands companies; and
• the merger or consolidation of one or more Cayman Islands companies with one or more overseas companies.

A merger is the process whereby one or more constituent companies are subsumed into another constituent company (or a new company in the case of a consolidation), the latter of which becomes the surviving company. The LLC Act provides a similar statutory merger framework, permitting Cayman Islands LLCs to merge and consolidate with Cayman Islands exempted companies and overseas companies. A segregated portfolio company cannot be merged or consolidated under either regime. The advantages of a statutory merger/consolidation include the following:

• The shareholder approval threshold for a statutory merger/consolidation (subject to any additional requirements in a merging company’s articles of association) requires only a special resolution passed in accordance with the company’s articles of association (typically, a two-thirds majority of those shareholders attending and voting at the relevant meeting);
• Court approval is not required (unlike for a scheme of arrangement); and
• Once the relevant approvals and thresholds have been satisfied, the merger or consolidation is binding on all shareholders. Dissenting shareholders will have the right to dissent and be paid the fair value of their shares, and may compel the company to institute court proceedings to determine fair value if the parties are unable to agree themselves; but importantly, they will be unable to block the merger or consolidation. These merger dissent rights are discussed further in question 8.1.

The consent of any secured creditors of each constituent company must be obtained prior to the merger or consolidation (except where the Cayman court has granted relief for such requirement).

Tender offer (accompanied by a squeeze-out)

A tender offer can be used in negotiated or unsolicited transactions. There is no prescribed form that a tender offer must take under Cayman Islands law, except where the target is listed on the CSX. One advantage of a tender offer is that the Companies Act provides for a squeeze-out of shareholders holding 10% or less of the shares following a takeover offer, allowing the purchaser to acquire the entire share capital of the target. A mirroring squeeze-out right is available under the LLC Act.

In order for a purchaser to invoke the squeeze-out provisions:

• there must be a scheme or contract for the transfer of shares or any class of shares in a Cayman Islands company to another company (the bidder);
• the offer must be 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 – a relevant consideration for bidders embarking on a stake-building exercise prior to the launch of an offer) within four months of the offer being made; and
• notice must be given to dissenting shareholders that the bidder wishes to acquire their shares.

The court has the power to exercise its discretion to order against a proposed squeeze-out and acquisition of the dissenters’ shares upon application by dissenting shareholders. A disadvantage of the tender offer approach is that the bidder must acquire acceptances from 90% or more of the shares which are subject to the tender offer before it can exercise the squeeze-out mechanism, which is typically a higher shareholder approval threshold than for a statutory merger/consolidation. Dissenters have limited rights to object to the acquisition and, in the case of a tender offer which is not on an all cash-basis, have no right to compel a cash alternative.

Schemes of arrangement

A scheme of arrangement is a court-approved compromise or arrangement that can be used to effect a takeover of a public or private company. This involves an application being made to the Cayman Islands court by a shareholder of the target or the target itself proposing an arrangement. Amendments to the Companies Act in 2022 removed the ‘headcount test’ for shareholder schemes, which had previously caused issues when dealing with companies whose shares are held by nominee entities – as is commonly the case for Cayman Islands companies listed on public stock exchanges. Following the 2022 amendments, the approval threshold for a shareholders’ scheme of arrangement is 75% in nominal value of the shareholders, or class of shareholders, present and voting either in person or by proxy at the shareholders’ meeting. The scheme must then be sanctioned by the court. The advantages of a scheme of arrangement are as follows:

• Once sanctioned by the court, the scheme will be binding on all shareholders or class of shareholders and the target;
• It provides flexibility in terms of structure; and
• Dissenting shareholders do not have the right to claim payment of fair value for their shares (unlike in a statutory merger/consolidation).

A main disadvantage is that a scheme of arrangement, being a court-driven process, can take longer to close than other routes such as a merger/consolidation. The high shareholder approval threshold can also be a hurdle. Lastly, a scheme of arrangement requires the support of the target’s board of directors and is therefore unavailable in a hostile takeover situation.

Asset acquisition

A contractual asset acquisition remains a useful tool for effecting M&A transactions. However, for most transactions, the statutory merger is likely to provide a more efficient mechanism for acquiring the target’s business (with a statutory merger resulting in all of the target’s property and liabilities vesting in the surviving company).

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

Key factors which commonly influence the choice of acquisition structure include:

• speed;
• whether the takeover is friendly or hostile;
• consent thresholds and the target’s share capital structure – for example, the shareholder approval threshold for a statutory merger/consolidation is typically a two-thirds majority of those shareholders attending and voting at the relevant meeting (unless the articles of association specify a higher threshold), which is lower than is required for a scheme of arrangement (75% majority) or to invoke a squeeze-out (90% approval);
• the likelihood of shareholders dissenting; and
• whether the target is listed – for example, the listing/takeover rules of the overseas stock exchange may not permit a statutory merger.

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?

The preliminary documents entered into during the initial preparatory stage of an M&A transaction include:

• non-disclosure agreements;
• a letter of intent, which may include an exclusivity provision – commonly referred to as a ‘no-shop’ clause;
• adviser appointment agreements; and
• lock-up letters.

2.2 ARE BREAK FEES PERMITTED IN YOUR JURISDICTION (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?

There is no express restriction on break fees in the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares or generally under Cayman Islands law. Break fees are a common feature of cross-border M&A transactions to incentivise parties to consummate the transaction. They can also act to deter competing offers by other would-be-buyers. With increased competition for attractive targets, reverse break fees (where the bidder has to pay) and mutual break fees are now also seen. The terms of any break fees will be deal specific and will depend on the relative strength of the parties’ negotiating positions, although they are generally designed to compensate a party for its out-of-pocket costs and expenditure if the other party backs out of the deal. The directors of the Cayman Islands company will need to be satisfied that:

• entering into the break fee arrangement is in the best interests of the company; and
• they are discharging their fiduciary duties to the company.

The Cayman Islands company’s memorandum and articles of association should also be checked to ensure that they do not contain any objects or other provisions which restrict or prohibit break fees.

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

We see a mixture of cash reserves, debt and equity used to finance transactions in the Cayman Islands. In recent years, special purpose acquisition companies (‘SPACs‘) have re-emerged as an alternative fund-raising tool, with the SPAC’s trust fund used to finance the business combination transaction and bring cash to the balance sheet of the combined business.

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

The common advisers and stakeholders involved at the initial preparatory stage of transactions include financial advisers, PR advisers, accountants and lawyers. On take-privates involving founder/management shareholders and other conflict transactions, a special committee of disinterested directors is often formed by the target’s board to lead the negotiations and approve (or reject) the transaction. It is common for special committees to engage their own independent advisers at an early stage.

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?

There are no financial assistance rules in the Cayman Islands and it is possible for the target in a private M&A transaction to pay adviser costs.

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

Buyers should conduct the usual diligence of the target’s:
constitutional documents – including its memorandum and articles of association and statutory registers, the minute book and any shareholders’ agreements; and

• commercial contracts entered into by the target to check for any change of control provisions, indemnities and termination rights, among other things.

Buyers should be aware that:

• the register of members of Cayman Islands companies is prima facie evidence of the matters set out therein (ie, the register of members will raise a presumption of fact on the matters set out therein, unless rebutted); and
• a shareholder registered in the register of members will be deemed as a matter of Cayman Islands law to have legal title to the shares as set against its name in the register of members.

The register of members and other constitutional documents are not publicly available for Cayman Islands companies and must be provided by the target as part of the due diligence process, which will be highly unlikely on a hostile bid.

Financial

There are no Cayman-specific points relating to financial due diligence and buyers should conduct the usual checks in this regard.

Litigation

Searches of the Cayman Islands courts are routinely carried out as part of the due diligence exercise to determine whether the Cayman target has been involved in any local litigation (past or ongoing cases) or subject to winding-up proceedings.

Tax

The Cayman Islands currently has:

• no income, corporate or capital gains tax; and
• no estate duty, inheritance tax or gift tax.

Other than stamp duty, no registration, documentary or any similar taxes or duties of any kind are payable in the Cayman Islands in connection with the signature, performance or enforcement by legal proceedings of any Cayman Islands law-governed documents.

A Cayman Islands exempted company may apply to the Financial Secretary at the Ministry of Finance and Economic Development of the Cayman Islands for a written undertaking that should a law ever be enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations, that law shall not apply to the exempted company or its operations. This undertaking may be granted for up to 30 years from the date of the undertaking. The target should be asked whether such undertaking has been obtained as part of the due diligence process.

A charge to ad valorem stamp duty under the Stamp Duty Act (as revised) or the Land Holding Companies Share Transfer Tax Act (as revised) may apply in the case of M&A transactions involving companies which own freehold or long leasehold real estate in the Cayman Islands. Specialist advice should be sought where this could apply.

Employment

The Labour Act (as revised) is the key law governing the terms and conditions of employment in the Cayman Islands and employment contracts must comply with minimum levels of protections provided under this law. However, given the nature of offshore business, the majority of Cayman Islands entities in cross-border M&A transactions are unlikely to have local employees and therefore Cayman Islands employment law considerations are not usually relevant.

Intellectual property and information technology

The Trade Marks Act 2016 establishes a Cayman Islands Register of Trade Marks and the Patents Act (as revised) provides for a Cayman Islands Registry of Patents.

Data protection

The Data Protection Act (as revised) (‘CIDPA‘) is the primary legislation in the area of data protection in the Cayman Islands. The CIDPA is based substantially on the UK Data Protection Act, 1998 and is intended to meet the ‘adequate protection’ requirements relating to the international transfer of personal data. The CIDPA does not replicate the EU General Data Protection Regulation (2016/679), but there is considerable overlap.

Cybersecurity

The Cayman Islands Monetary Authority (‘CIMA‘) recently updated its Rule and Statement of Guidance relating to Cybersecurity for Regulated Entities, which came into effect in April 2023. The Rule applies to entities that are regulated by CIMA, including banks and insurance companies, and requires such entities to establish and maintain a cybersecurity framework. The Statement of Guidance supplements the Rule by providing detailed guidance on implementing rule requirements, including in relation to:

• risk identification and assessment;
• risk monitoring and reporting;
• incident response, containment and recovery;
• use of the Internet;
• employee training and awareness;
• outsourcing arrangements; and
• data protection.

Real estate

Title to real estate is evidenced by registration at the Cayman Islands Land Registry, which is open to public inspection and is the primary source of information on any real estate due diligence in the Cayman Islands. The potential stamp duty tax which may apply to M&A transactions involving Cayman Islands real estate is discussed above under Tax.

3.2 WHAT PUBLIC SEARCHES ARE COMMONLY CONDUCTED AS PART OF DUE DILIGENCE IN THE CAYMAN ISLANDS?

Limited information about Cayman Islands entities – such as entity number, formation date, registered office and status – is available through a search portal which can be accessed through the Cayman Islands General Registry website by account holders (usually Cayman Islands law firms or local registered office service providers). The names of the directors of Cayman Islands entities can also be accessed for an additional fee. However, no other information is publicly available on the particulars of such directors, and it is not possible to run a search of a person’s name to determine all the directorships that he or she holds in the Cayman Islands.

Local court searches and a search of the Land Registry can also be carried out, as mentioned in question 3.1.

The Cayman Islands Intellectual Property Office maintains a register of trademarks and patents. This is not a publicly searchable register and access is available only to licensed agents appointed by the proprietor of the rights.

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

We sometimes see pre-sale vendor due diligence as the target seeks to ready itself for sale. This pre-sale vendor due diligence process may be accompanied by a pre-sale restructuring to streamline the target’s operations and assets. 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:

Jacob MacAdam, Partner, Appleby

jmacadam@applebyglobal.com