With effect from May 11 2009, the Companies Amendment Law (2009) of the Cayman Islands introduced statutory mergers to the Islands by inserting a new Part XVA to the Companies Law (2007 Revision) ("the Law"). Its introduction has been eagerly anticipated by the legal fraternity in the Cayman Islands.
Prior to the introduction of the statutory merger model, reorganisations, restructurings and takeovers were often effected by a court-supervised scheme of arrangement ("Scheme of Arrangement"). The statutory merger model now provides a faster and more cost-efficient method of undertaking certain types of restructurings, particularly those within a group structure or a very small group of shareholders. However, it is expected that Schemes of Arrangement will remain the popular choice for mergers or takeovers involving listed entities or other companies with a large shareholder base.
The statutory mergers provisions provide for:-
(1) Merger: merger of two (or more) constituent companies by vesting of the rights and obligations of one (or more) constituent companies in a surviving constituent company; or
(2) Consolidation: a combination of two (or more) constituent companies into a new consolidated company by vesting of rights and obligations of all constituent companies in the consolidated company.
In each case the surviving company must be a Cayman company. Foreign companies can merge or consolidate with Cayman companies, provided the surviving entity is a Cayman company. It should also be noted that the statutory merger provisions do not apply to segregated portfolio companies. Under Part XVA of the Law the process for approval is as follows.
Step 1: Merger plan
The directors of each constituent company that proposes to participate in a merger or consolidation approve a written plan of merger or consolidation for their respective company. The Law sets out what information must be included in the written plan.
Step 2: Shareholder approval
The plan of merger or consolidation is authorised by each constituent company by either:
(i) A shareholder resolution by a majority in number representing 75% in value of the shareholders voting together as one class; or
(ii) If the shares to be issued to each shareholder in the consolidated or surviving company are to have the same rights and economic value as the shares in the constituent company, a special resolution of the shareholders voting together as one class; and in either case a shareholder shall have the right to vote regardless of whether the shares he holds carry voting rights.
There is no definition in the Law of what "economic value" means in this context and therefore it is unlikely that plans will be approved other than by (i) above as it will be difficult to structure the merger or consolidation with shares being issued of the same economic value as those contributed.
Given that the threshold for consent is relatively high (a majority in number and 75% in value of all the shareholders) it is unlikely that the statutory merger provisions will be used by companies with a large shareholder base, such as those listed on recognised exchanges. In such instances the Scheme of Arrangement will be favoured given the consents required in such instances is determined by those present and attending at class meetings, rather than based on a percentage of all the shareholders voting as one class.
Where a Cayman company is merging with one of its subsidiaries (90% owned and also a Cayman company) the vote is not required.
Step 3: Consent of holders of fixed or floating charges
Each constituent company must obtain the consent of each holder of a fixed or floating security interest. However, should a creditor not consent then the constituent company may apply to the Grand Court of the Cayman Islands for an order that the consent be waived. This order may be granted by the Court in circumstances where it is satisfied with the terms as to security to be granted by the consolidated or surviving company.
Step 4: Filing with the registrar of companies
Once the consents referred to above are obtained, the plans are signed by the directors and filed with the Registrar of Companies together with certain other documents including directors' declarations as to, among other things, solvency, bona fide nature of the transaction, no other petitions or proceedings relating to insolvency or other schemes, orders or compromises and a statement of the assets and liabilities of the constituent company.
Once filed with the Registrar the merger or consolidation is effective at that date unless a later date is stated in the plan, provided that the later date (which may be specified as a date or an event) is not later than the 90th day after the date of registration. As a result, if the merger or consolidation is subject to regulatory approval, the plans should not be filed with the Registrar unless the companies are certain that the conditions will be satisfied within 90 days of filing.
The merger provisions also provide for limited dissenter shareholder appraisal rights. This is only open to a shareholder that has notified the company before the shareholder vote on the merger or consolidation that it wishes to dissent to. The Law provides strict periods for the company to notify a shareholder of the approval of the merger and for the dissenting shareholder to demand fair value for all its shares. The Law also provides a time period for the parties to agree the fair value for the shares to be purchased. If the parties fail to agree within the specified periods the surviving company shall, and the dissenting shareholder may, petition the Court for a determination of fair value. These appraisal rights are not available in a number of circumstances, including where the shares to be contributed by the dissenting shareholder are listed or where the consideration to be issued in respect of the merger is the issue of shares in the surviving company or listed shares in another company (or a combination of these and cash).
It is expected that the introduction of the statutory merger provisions will enhance the Cayman Islands as a choice of jurisdiction for certain companies that seek flexibility to effect reorganisations and takeovers by way of statutory merger.
| Author biography |
Iain McMurdo
Maples and Calder
McMurdo specialises in investment funds, with an emphasis on private equity and hedge funds. He also has experience in corporate finance and mergers and acquisitions.
McMurdo joined Maples and Calder in February 2008. He was previously a partner at Walkers in the Cayman Islands and prior to that, he worked for Freshfields in London specialising in takeovers and mergers. McMurdo is named as a leading private funds lawyer in The International Who's Who of Private Funds Lawyers 2008, the 2008 edition of Chambers Global, the 2009 edition of IFLR1000, the 2008 Legal Media Group Guides to the World's Leading Lawyers and the PLC Which Lawyer? Yearbook 2009.
iain.mcmurdo@maplesandcalder.com |