I OVERVIEW OF M&A ACTIVITY
The Cayman Islands is recognised as one of the world’s leading global financial services centres. Cayman Islands M&A activity is therefore largely driven by global rather than regional or national trends. Global M&A volume in 2015 reached the highest level recorded – US$6.1 trillion, climbing 28 per cent from 2014, according to the Zephyr Annual M&A Activity Report (2015 Zephyr Report).2 As a result, Cayman Islands M&A-related activity grew significantly during 2015. The 2015 Zephyr Report states that announced M&A deals in the Cayman Islands in 2015 exceeded US$110 billion, a substantial increase from the reported figure of US$66 billion in 2014.
The two main types of entity used in the Cayman Islands are the exempted company and the exempted limited partnership. 11,864 exempted companies and 3,370 exempted limited partnerships were incorporated or registered in the Cayman Islands during 2015, with 98,838 exempted companies and 18,041 exempted limited partnerships being active as at 31 December 2015.3
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The key sources of regulation of M&A in the Cayman Islands are the Companies Law (2013 Revision) (Companies Law) and common law.
The Companies Law includes provisions permitting mergers and consolidations between one or more companies, provided that at least one constituent company is incorporated under the Companies Law. The Limited Liability Companies Law (LLC Law), discussed further below, also provides for a similar framework for Cayman Islands limited liability companies (LLCs).
Mergers, amalgamations and reconstructions by way of a scheme of arrangement approved by the requisite majorities of shareholders and creditors and by an order of the Cayman Islands court under Section 86 or 87 of the Companies Law are still available for complex mergers (and are mirrored in the LLC Law). The Companies Law provides a limited minority squeeze-out procedure (which, again, is mirrored in the LLC Law).
The Cayman Islands does not have a prescriptive set of legal principles specifically relevant to ‘going private’ and other acquisition transactions (unlike other jurisdictions such as, for example, Delaware). Instead, broad common law and fiduciary principles will apply.
While there are no specific statutes or government regulations concerning the conduct of M&A transactions, where the target company’s securities are listed on the Cayman Islands Stock Exchange (CSX), the CSX Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares, which exists principally to ensure fair and equal treatment of all shareholders, may apply.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
In June 2016, the LLC Law came into force, creating a new Cayman Islands vehicle: the LLC. This vehicle takes its inspiration, in part, from the Delaware LLC. The flexible nature of the vehicle means that it will be well suited to a broad range of general corporate and commercial applications. The introduction of the LLC is expected to further strengthen the Cayman Islands’ position as the domicile of choice for offshore investment funds and corporate structuring vehicles.
An LLC is essentially a hybrid vehicle, combining certain characteristics of a Cayman Islands exempted company with those of a Cayman Islands exempted limited partnership. In developing the vehicle, certain Delaware concepts were taken into consideration and adapted, where appropriate, to mesh with Cayman Islands law and concepts. An LLC is a body corporate with separate legal personality, like a Cayman Islands exempted company, but without the constraint of having share capital.
Equivalent to the Delaware statute, the LLC Law provides a set of default rules as to how an LLC operates. However, the members of an LLC are free to legislate their own arrangements in the vehicle’s LLC agreement (the constitutional document of the LLC), which is not publicly filed.
Generally, the liability of a member of an LLC is limited to the amount such member has contractually agreed to contribute to the LLC. There is a limited statutory clawback, which applies only where a member receives a distribution when the LLC is insolvent and the member has actual knowledge of such insolvency at the time the distribution is made.
There is great flexibility in how LLCs are managed. They may be governed by the members themselves or by appointed managers who need not be members (such as a board of managers).
Unless otherwise expressly specified in the LLC agreement, the default duty of care in managing an LLC is to act in good faith. The good faith duty may be expanded or restricted, but not eliminated, by the express provisions of the LLC agreement. In the private M&A context, we consider this feature may be of particular interest for investors who may wish to have the right to appoint a representative as a director or manager of the acquisition vehicle. In a traditional exempted company, any investor representative (in a company context, as a director) has a duty to act at all times in the best interests of the company when participating in company decisions – the representative cannot solely consider the interests of the investor that has appointed him or her (to do so would expose him or her to potential personal liability). Contrast this with an LLC, where the members have the freedom to contractually agree in the LLC agreement the duty of care that the managers of the LLC owe.
Although dependent on the required structuring for particular deals, we anticipate that the vehicle will be used in a broad range of corporate and commercial applications, including acquisition and joint venture structures, acting as corporate blockers and holding vehicles, as a preference share issuing vehicle (in venture capital financing arrangements), as employee incentive vehicles and also in structured finance transactions.
ii Merger regime and dissenting rights
Since its introduction in 2009, the merger regime of Part XVI of the Companies Law has become a popular tool for facilitating mergers involving Cayman Islands companies. Under this regime, two or more companies may merge, with their property and liabilities vesting in one of such companies as the surviving company.
Similar to other jurisdictions with equivalent regimes, the Companies Law provides for a right of dissenting shareholders to object to the merger and be paid a payment of the fair value of their shares upon their dissenting to the merger if they follow a statutory procedure. If the dissenting shareholders and the relevant company are unable to agree in accordance with the statutory procedure, the Grand Court of the Cayman Islands has the power to determine the fair value of the shares together with a fair rate of interest, if any, to be paid by the company upon the amount determined to be the fair value.
These rights of a dissenting shareholder are not available in certain circumstances, for example:
- a to dissenters holding shares of any class in respect of which an open market exists on a recognised stock exchange or recognised interdealer quotation system at the relevant date; and
- b where the consideration for such shares to be contributed are shares of the surviving or consolidated company (or depositary receipts in respect thereof) or shares of any other company (or depositary receipts in respect thereof) that are listed on a national securities exchange or designated as a national market system security on a recognised interdealer quotation system or held of record by more than 2,000 holders.
In 2015, the Court ruled for the first time on fair value in the context of a merger of Cayman Islands companies. The decision of the Court in Integra Group sets out important guidance as to how, where a shareholder has dissented to a statutory merger, the ‘fair value’ of the dissenter’s shares will be determined. The following guidance can be taken from the Court’s decision:
- a fair value is the value to the shareholder of their proportionate share of the business as a going concern – it is a value that is ‘just and equitable’, and provides adequate compensation consistent with the requirements of justice and equity. Fair value does not include any premium for forcible taking of shares, and a minority discount cannot be applied. In determining fair value, neither the upside nor downside of the transaction being dissented from should be taken into account (e.g., any costs savings obtained by a company going private);
- b assessing fair value is a fact-based exercise, which requires an important element of judgment by the Court;
- c where a company’s shares are listed on a major stock exchange, this does not mean that a valuation methodology based upon its publicly traded prices is necessarily the most reliable. Whether this valuation methodology is appropriate will depend on whether there is a well-informed and liquid market with a large, widely held, free float; and
- d the date for determining fair value was the date that the shareholders approved the transaction – this was the date on which the offer could be accepted. Importantly, the Court concluded that dissenting shareholders could not take advantage of the cost savings going forward as a result of the merger. The Court’s view was that dissenting shareholders should not benefit from any enhancement in the value of their shareholding attributable directly to the transaction from which they have dissented.
Interestingly, in reaching its decision, the Court took into account guidance concerning similar statutory merger processes that exist in the state of Delaware and in Canada. In view of the litigious nature of United States M&A, there is a significant volume of case law on this topic in Delaware. We believe this may be the first time that the Court has specifically considered Delaware precedent.
iii Global transparency
Already recognised by the OECD, the International Monetary Fund (IMF) and other international bodies for its transparency and standards consistent with those of other major developed countries, the Cayman Islands is acknowledged as a first class jurisdiction for conducting international business. The government has now confirmed a number of further transparency steps it is willing to take, including:
- a a willingness to commence discussions with those jurisdictions that are participating in the G5 initiative (for the exchange of beneficial ownership information with law enforcement agencies) on entering into bilateral agreements with the Cayman Islands, similar to the exchange of notes currently in place with the UK;
- b the repeal of the Confidential Relationships (Preservation) Law (CRPL) by September 2016 (the CRPL will be replaced by the Confidential Information Disclosure Law, which offers more understanding and definition with regard to the mechanisms in place for sharing confidential information with the appropriate authorities);
- c acknowledging privacy as a basic human right by introducing new data protection legislation in September 2016 (this legislation will be on par with what is in place in the European Union); and
- d the abolishment of bearer shares (completed in May 2016).
These measures demonstrate the Cayman Islands’ continued efforts to comply with and promote transparency through close collaboration and compliance with the relevant global regulatory bodies, tax authorities and law enforcement agencies in line with international standards, while simultaneously respecting the legitimate right to privacy of law-abiding clients.
The Cayman Islands has agreements to share tax information with authorities in over 90 other countries, including the US under FATCA, and is in the ‘early adopter’ group for the Common Reporting Standard, the OECD’s global tax information exchange standard.
We anticipate that these measures will result in the continued growth of the use of Cayman Islands entities for global financial business.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
The vast majority of M&A activity involving Cayman Islands entities concerns foreign businesses and investors as a result of the offshore nature of the jurisdiction. These businesses and investors are based in a broad range of international jurisdictions.
A large number of Cayman Islands M&A deals continue to originate from the United States, while European deals continue to feature and Asian-related transactions continue to grow.
This Asian growth can be evidenced by the popularity of the Cayman Islands exempted company as a listing vehicle in Asia – as at the end of 2015, 728 of the 1,644 companies listed on the Main Board of the Hong Kong Stock Exchange were Cayman Islands exempted companies.4
The Cayman Islands continues to be an attractive jurisdiction for the structuring of offshore transactions for a number of reasons, including:
- a the speed with which vehicles can be established: usually within one business day, and without the need for any prior governmental approvals;
- b the laws of the Cayman Islands are substantially based upon English common law, and a number of ‘key’ English statutes. This gives Cayman Islands’ law and the legal system a common origin with those of many of the jurisdictions of its users, including the United States;
- c the Cayman Islands has a modern and flexible statutory regime for companies, limited partnerships and, as from June 2016, LLCs;
- d as described further below, the Cayman Islands has no direct taxes of any kind;
- e lack of exchange control restrictions or regulations;
- f there is no requirement that a Cayman Islands’ entity should have any local directors or officers, nor is there any requirement for local service providers (except for funds regulated under the Mutual Funds Law, where there is a requirement for their audited accounts to be signed off by a local firm of auditors); and
- g as discussed above, the Cayman Islands is recognised by the OECD, the IMF and other international bodies for its transparency and standards consistent with those of other major developed countries.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
The merger regime of Part XVI of the Companies Law continues to be a popular tool for facilitating mergers involving Cayman Islands companies, and we continue to see listed companies being the subject of ‘take-private’ transactions led by private equity and management in addition to traditional strategic corporate acquisitions.
Deals of note announced or closed during 2015 utilising the merger regime included:
- a US$7.6 billion acquisition of New York Stock Exchange-listed Avolon Holdings Ltd by Bohai Leasing Co, Ltd;
- b US$1.2 billion acquisition of NASDAQ-listed Home Loan Servicing Solutions by New Residential Investment;
- c US$1.9 billion take private of NASDAQ-listed Chinese online game developer Shanda Games Limited by a consortium led by Capitalhold;
- d acquisition of NASDAQ-listed Homeinns Hotel Group by BTG Hotels (Group) Co, Ltd;
- e US$3.3 billion take private of New York Stock Exchange-listed Mindray Medical International Limited;
- f US$3.3 billion take private of New York Stock Exchange-listed WuXi PharmaTech (Cayman) Inc;
- g acquisition of NASDAQ-listed Jiayuan.com International Ltd by Baihe Network Co, Ltd; and
- h Valeant Pharmaceuticals International, Inc’s US$800 million acquisition of Mercury (Cayman) Holdings, owner of Egyptian pharmaceutical business Amoun Pharmaceutical.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
As a leading jurisdiction for the establishment of private equity funds, it is perhaps unsurprising that a significant number of Cayman Islands M&A deals are also financed by private equity. The 2015 Zephyr Report records US$21 billion of private equity-led M&A deals in the Cayman Islands during 2015 – the fifth-highest jurisdiction after the United States, China, the UK and Australia.
Traditional sources also continue to be a key provider of finance for M&A involving Cayman Island entities, with a standout example being the US$15 billion in secured financing provided by a consortium of banks to Avago Technologies Limited and its associated entities in connection with its US$37 billion acquisition of Broadcom Corporation, the combined entity forming the third-largest US semiconductor maker by revenue after Intel Corp and Qualcomm Inc.
VII EMPLOYMENT LAW
A range of legislation and licensing requirements apply to companies seeking to carry on local business in the Cayman Islands and employ local personnel. In view of the nature of offshore business, the vast majority of Cayman entities do not have employees in the Cayman Islands, and these requirements are therefore often not relevant to Cayman Islands M&A deals.
Employment standards in the Cayman Islands are currently governed by the Labour Law (2011 Revision) (Labour Law), the Health Insurance Law (2013 Revision) and ancillary regulations (Health Law), the National Pensions Law (2012 Revision) (Pensions Law), the Workmen’s Compensation Law (1996 Revision) and ancillary regulations. These laws establish the minimum employment standards, but do not preclude an employer from setting conditions that are above the minimum.
The Labour Law includes provisions dealing with probation periods, employment termination, public holiday pay, sick leave, compassionate leave, maternity leave, severance pay and unfair dismissal.
The Health Law requires that health insurance cover is provided to employees, their uninsured spouses and children. The Pension Law requires an employer to provide a pension plan or make a contribution to a pension plan through an approved pension provider for every employee who is between the ages of 18 and 60 years (an employer is not required to provide a pension plan for non-Caymanian employees who have been working for a period of nine months or less).
VIII TAX LAW
i Cayman Islands taxation
The Cayman Islands has no direct taxes of any kind. There are no income, corporation, capital gains, withholding taxes or death duties. Under the terms of the relevant legislation, it is possible for all types of Cayman vehicle – the company, the unit trust, the limited partnership and the LLC – to register with and apply to the government for a written undertaking that they will not be subject to various descriptions of direct taxation, for a minimum period, which in the case of a company is usually 20 years, and in the case of the unit trust, limited partnership and LLC, 50 years.
Stamp duty may be payable in connection with the documentation executed in or thereafter brought within the jurisdiction of the Cayman Islands (perhaps for the purposes of enforcement). In most cases, this duty is of a relatively de minimis fixed amount except in limited circumstances, such as where security is being granted over property situated in the Cayman Islands.
ii Automatic exchange of information legislation
As discussed briefly above, the Cayman Islands has signed two intergovernmental agreements to improve international tax compliance and the exchange of information, one with the United States and one with the UK, to implement the regimes commonly known as ‘US FATCA’ and ‘UK FATCA’, respectively.
The Cayman Islands has also signed, along with over 90 other countries, a multilateral competent authority agreement to implement the OECD Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard.
Cayman Islands laws have been passed to give effect to these agreements, and the Cayman Islands Tax Information Authority has published related guidance notes. Cayman Islands ‘financial institutions’ are required to comply with the registration, due diligence and reporting requirements of these regimes, except to the extent that they are able to rely on certain limited exemptions.
IX COMPETITION LAW
There is no specific legislation regarding anti-competitiveness that is relevant to Cayman Islands M&A. Given the offshore nature of Cayman Islands M&A, competition law issues are usually a question of the relevant onshore jurisdictions where the underlying businesses that are the subject of the M&A are based.
Although concerns remain about the direction of the global economy during 2016, nearly nine out of 10 corporate executives and private equity investors responding to a recent Deloitte survey5 expected deal activity to continue at the same pace as the record year of 2015 or to increase, with 52 per cent of responding private equity investors (a significant source of deals for the Cayman Islands) anticipating that they will actively pursue a greater number of deals in 2016. Despite a slowdown in transactions during the first half of 2016, we anticipate that 2016 will be a strong year for Cayman Islands M&A.
The existing legal framework of the Cayman Islands, together with the continued focus on being at the forefront of global compliance developments and the ability to deliver new legal initiatives (such as the new Cayman Islands LLC), will continue to ensure that the Cayman Islands remains as the offshore jurisdiction of choice for global M&A transactions in the future.
1 Suzanne Correy is a partner and Daniel Lee is an associate at Maples and Calder.
2 Total announced deal value, Zephyr Annual M&A Activity Report – Global, FY 2015.
3 Cayman Islands Registrar of Companies and Registrar of Exempted Limited Partnerships annual statistics.
4 HKEx Fact Book 2015.
5 Deloitte M&A Trends Report 2016.