2023 was a challenging year for deal making, with both deal value and volume markedly reduced. While deal volumes in 2024 are at a two year high, both deal value and volume are still well below the record levels of the pandemic years. However, a recent burst of activity is the latest sign of an M&A revival as global economies continue to rebound. Global takeovers in 2024 have seen a marked increase compared to the same period a year ago powered by headline deals in the oil and gas and mining sectors. Private equity has been leading the way this year, with pressure to return money to investors, falls in borrowing costs and realistic valuations making transactions more appealing. Is the comeback really on?
Many acquisitions, especially privatisations, are structured as a statutory merger, and in this article, we provide a brief overview of Cayman Islands ("Cayman") mergers and consolidations and the general requirements for each under Cayman law.
Cayman Islands Mergers and Consolidations
The principal statute governing the formation and operation of Cayman companies is the Companies Act (the "Act"). Until 2009, the only mechanisms available under the Act allowing for a compulsory element on the acquisition of a company was either a court approved scheme of arrangement under sections 86-87 of the Act (which gives the Cayman courts significant flexibility to approve a corporate restructuring by way of schemes of arrangement, reconstruction and amalgamation) or a general offer, followed by a "squeeze out" under section 88 of the Act.
The Companies (Amendment) Act, 2009 introduced a new, simpler and more cost-effective mechanism for mergers and consolidations between Cayman companies and between Cayman companies and foreign companies. Part XVI of the Act permits contractual mergers and consolidations without the requirement for court approval or achieving the general offer acceptance level to trigger the squeeze-out, and has become the most common takeover and privatisation method for Cayman companies listed or traded on US stock exchanges or markets.
A "Merger" (which is by far the more common manner of structuring acquisitions) is defined in the Act as the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company whilst a "Consolidation" is the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies in the consolidated company. The essential difference between mergers and consolidations is that a consolidation produces a new company different from either of its constituent companies, while in a merger, one of the constituent companies will continue to exist or "survive" as the other is merged into it.
Plan of Merger or Consolidation
Implementing a Merger or Consolidation requires the directors of each constituent company to approve a written plan of merger or consolidation ("Plan"). The Plan must contain the matters required by the Act, which include the effective date of the merger or consolidation and the terms and conditions of the proposed merger or consolidation, including the manner and business of converting shares of each constituent company into shares in the consolidated or surviving company or into other property (consisting of shares, debt obligations, or other securities in the surviving company or consolidated company or any other corporate entity, or money or other property, or a combination thereof) and the rights and restrictions attaching to the shares in the consolidated or surviving company.
One of the chief benefits of the merger regime for an acquisition, including a privatisation, is the flexibility it allows for different groups of shareholders to receive different consideration on the closing of the merger or consolidation. Under this regime, it is common for the (often formerly public) shareholders to receive cash and exit their ownership interest in the constituent companies, whilst continuing shareholders receive shares in the surviving or consolidated company of the merged group, allowing them to acquire 100% of the equity.
Approvals and Consents
The Plan must be approved by special resolution of the shareholders of each constituent company in addition to any other authorisation as may be specified in the articles of association of the respective companies.
Where a merger is between a Cayman parent company and a Cayman subsidiary (i.e. a company in which the Cayman parent owns at least 90% of issued shares of each class that are entitled to vote), shareholder approval is not required if a copy of the Plan is given to every shareholder of each subsidiary company to be merged unless that shareholder agrees otherwise.
Each secured creditor of a constituent company must consent to the Plan unless the court waives consent (on the application of a constituent company that has issued the security). If a secured creditor does not consent, a constituent company may apply to court to waive the consent requirement. Where a constituent company is licensed or regulated by the Cayman Islands Monetary Authority ("CIMA"), the Plan of merger or consolidation must be consented to by CIMA and the continuing company (if not licensed) or the consolidated company will require a license.
Dissenting Shareholders
Any dissenting shareholder of a constituent company is entitled to the payment of the fair value of their shares held upon dissent to the merger or consolidation. The Act requires that the constituent company and any dissenting shareholder negotiate for a fixed period to try to agree such fair value but if (as is generally the case) they fail to agree such fair value, the dissenting shareholder may file a petition with the Cayman courts to ask the Court to determine the fair value. The statutory rights of dissenting shareholders do not delay or impede the effective date of a merger or consolidation which may continue to completion, but rather run concurrently and may well extend past the effective date.
It is possible to structure transactions to eliminate such dissent right, as the Act specifies that no appraisal rights are available in respect of the shares of any class for which an open market exists on a recognised stock exchange or recognised interdealer quotation system at the expiry date of the period allowed for written notice of an election to dissent. However, this exception shall not apply if the holders of the shares are required by the terms of a plan of merger or consolidation to accept for such shares anything except:
- shares of a surviving or consolidated company, or depository receipts in respect thereof;
- shares of any other company, or depository receipts in respect thereof, which are either 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 two thousand holders; and/or
- cash in lieu of fractional shares or fractional depository receipts described above or any combination of the shares, depository receipts and cash in lieu of fractional shares or fractional depository receipts described above.
Post-Approval
The Plan must be filed with the Cayman Registrar of Companies together with the applicable fees, a certificate of good standing and a director's declaration or affidavit that must contain the matters required by the Act, which include confirmation of solvency, that the merger is or consolidation is bona fide, that there is no proceeding outstanding or any order to wind up the constituent companies, that no scheme, order or compromise has been made whereby the rights of creditors have been suspended or restricted, the assets and liabilities of the constituent companies as at the latest practicable date and, in the case of a non-surviving constituent company, that the constituent company retired from any fiduciary duties and where relevant, that the constituent company has complied with any applicable requirements under the regulatory acts.
An undertaking must also be given by a director that a copy of the certificate of merger or consolidation will be given to the shareholders and creditors of the constituent company and that notification of the merger or consolidation will be published in the Cayman Gazette.
Registration
A certificate of merger or consolidation issued by the Registrar of Companies constitutes prima facie evidence of compliance with all Cayman statutory requirements.
At the effective date, all the rights and property of each constituent company immediately vest in the surviving or consolidated company and the surviving or consolidated company immediately becomes liable for all the debts, contracts, obligations and liabilities or each constituent company. Any existing claims, proceedings or rulings of each constituent company are automatically continued against the surviving or continued company.
Conclusion
Mergers and consolidations in Cayman are, as outlined above, simple, cost-effective mechanisms for implementing restructuring transactions. From commencement of a merger or consolidation to the effective date will typically range from two to three months, however, timing of any particular transaction will be dependent on factors such as the requisite notice period specified in the relevant articles of association to call a shareholders meeting and will be subject to any applicable listing rule or regulatory requirements.
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.