By Marco Martins1 From “the Mergers & Acquisitions Review Eighth Edition

I         OVERVIEW OF M&A ACTIVITY

The Cayman Islands experienced a significant increase in new company registrations in 2013 compared to 2012; 9,433 new companies were incorporated compared with 8,971 a year earlier.2 As of 31 December 2013, there were a total of 95,530 active Cayman companies, exceeding the 93,693 Cayman companies that were active at the end of 2008 (which was previously the highest number of active Cayman companies recorded on a year-end basis to date).3

The Global Financial Centres Index (GFCI), an instrument for tracking the shifts in competitiveness of global financial centres, published in March 2014, recently placed the Cayman Islands as the third highest-ranking offshore jurisdiction.4 According to the GFCI15, the Cayman Islands increased its overall financial centres ranking, but moved down four to 43 from a ranking of 39 in the GFCI 14 published six months earlier in September 2013.5

Despite volatility in global markets, continuing uncertainty about the stability of the eurozone and a slowdown in the growth of the BRIC nations – Brazil, Russia, India and, in particular, China, Cayman Islands M&A activity increased significantly in number of transactions and remained stable as to the number of completed transactions.

There were 620 completed6 M&A deals7 in 2013 involving Cayman Islands entities,8 up from 519 completed transactions in 2012, an increase of approximately 19.4 per cent.9 Total deal value for M&A transactions completed in 2013 involving Cayman Islands entities decreased slightly to US$38.2 billion in 2013 from US$38.7 billion in 2012.10

In the first quarter of 2014, the value of Cayman deals were valued $2 billion higher than those completed in the previous three months, despite 30 fewer deals than last quarter. When compared to the first quarter of 2013, the number of transactions involving Cayman increased 19 per cent and total deal value was 66 per cent higher.11

The increase in Cayman Islands M&A transactions is somewhat inconsistent with global M&A statistics for 2013 – the total number of worldwide M&A deals (37,212 transactions), as well as total global M&A deal value, fell to the lowest level since 2005, and aggregate worldwide M&A deal value declined 6 per cent to US$2.4 trillion compared to US$2.54 trillion in 2012.12 In the first quarter of 2014, global M&A aggregate deal value increased 23 per cent to US$804.5 billion compared with the same period in 2013.13

Total completed initial public offerings involving Cayman Islands companies was up in 2013; with 67 Cayman Islands companies going public compared with 55 completed IPOs in 2012.14

While overall, the Cayman Islands economy continues to be dominated by the financial services, banking and insurance industries, there has been increased Cayman M&A activity in the energy, resources, mining, extraction and other raw minerals sectors. M&A activity is also strong in the technology sector particularly among Cayman- incorporated Asian-based companies. Significant M&A deals involving Cayman entities are likely to have an Asian component due to economic growth in the Asian markets and the fact that the Cayman Islands continues to be a preferred offshore jurisdiction for Asia-Pacific transactional work.15

 

II         GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

Mergers, consolidations, amalgamations, schemes of arrangements and takeovers in the Cayman Islands are governed by the Companies Law (2013 Revision) (the Companies Law). The Companies Law is substantially derived from the UK Companies Act 1948 and its predecessor, the English Companies Act 1862, and was originally enacted in the Cayman Islands as the Companies Law, Cap 22 (Law 3 of 1961). In addition to Cayman Islands statutes, English common law and equitable principles form part of the substantive law of the Cayman Islands.

Under the Companies Law, a ‘merger’ is defined as the merging of two or more constituent companies and the vesting of their respective undertaking, property and liabilities in the surviving company by operation of law.16 A ‘consolidation’ means 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.17 Under Cayman law, in a merger, only one of the merging entities survives; whereas in a consolidation, the constituent companies continue as the consolidated company.

Prior to the introduction of the statutory merger and consolidation regime in the Cayman Islands in 2009, the only procedure available under the Companies Law to effect a merger or consolidation between companies was a court-approved scheme of arrangement. Pursuant to the provisions of the Companies Law, the Cayman Islands courts had (and continue to have) significant authority to approve acquisitions and corporate restructurings by way of schemes of arrangements, amalgamations and reconstructions.18

Court-approved schemes of arrangements are still available for more complex mergers and consolidations but the new statutory merger and consolidation regime provides a much simpler, more efficient and cost-effective way for Cayman Islands companies to merge with other Cayman Islands companies and/or foreign companies (other than Cayman Islands segregated portfolio companies) to merge or consolidate, subject to the express provisions to the contrary in the constitutional documents of such companies. Court approval is no longer necessary for contractual mergers and consolidations as they can now be accomplished by shareholder approval and a registration process. Furthermore, shareholder approval is not required if a Cayman parent company19 wishes to merge with its Cayman subsidiary provided that a copy of the plan of merger is given to every shareholder of the subsidiary (unless the shareholder waives the right to receive it).20 This provision of the Companies Law does not apply to Cayman parent-subsidiary consolidations.

In accordance with the provisions of the Companies Law, the directors of each Cayman Islands constituent company are required to approve a written plan of merger or consolidation (the Plan) containing matters outlined in the Companies Law (which is submitted for shareholder approval if necessary), as well as file the Plan and certain required declarations with the Registrar of Companies in the Cayman Islands (the Registrar).21 The Plan must be approved by special resolution of the shareholders of each merging or consolidating Cayman company in addition to any other authorisation specified in the company’s articles of association.22 Some or all of the shares, whether of different classes or of the same class in each merging or consolidating Cayman company, may be converted into or exchanged for different types of property (including the shares, debt obligations or other securities in the surviving company or consolidated company or money or any other property whatsoever, or a combination thereof ) as provided for in the Plan.23

Each holder of a fixed or floating security interest in a Cayman company merging or consolidating under Cayman law must also consent to the Plan.24 Such secured creditors may impose certain requirements as a condition for providing consent (i.e., they may ask to be given certain priorities in relation to their security). If a secured creditor refuses to provide such consent, the Cayman Islands company can apply to the Grand Court in the Cayman Islands to have the requirement to obtain such consent waived.25

The Companies Law also sets out takeover provisions relating to the power to acquire shares of dissentient shareholders. In general, under the Companies Law, a shareholder of a Cayman company that dissents from a merger or consolidation is entitled to be paid the fair value of its shares.26 There is a strict notice and objection procedure under the Companies Law resulting in the Grand Court of the Cayman Islands determining the fair value of the shares held by all dissenting shareholders if the value cannot be agreed to between the company and dissenting shareholders.27 Shareholders of a constituent Cayman company will not be entitled to exercise dissenters’ rights in certain important circumstances including if they hold shares of a company that are listed on a recognised stock exchange or interdealer quotation system.28

The effective date of a merger of consolidation is the date the Plan is filed with the

Registrar or such later date (not to exceed 90 days from the date of filing) as specified in the Plan.29 A certificate of merger or consolidation issued by the Registrar is prima facie evidence of compliance with all statutory requirements.30

As soon as the merger or consolidation becomes effective the following will apply:

a          in the case of a consolidation, the memorandum and articles of association filed with the Plan will immediately become the memorandum and articles of

association of the consolidated company;

b          all rights, property, business, undertakings, goodwill, benefits, immunities and privileges of each of the constituent companies shall immediately vest in the surviving or consolidated company; and

c          subject to any agreements between the applicable parties, the surviving or consolidated company shall be liable for all mortgages, charges, security interests, contracts, obligations, claims, debts and liabilities of each of the constituent companies.31

 

A Cayman company is not statutorily prohibited from providing financial assistance with respect to the acquisition of its own shares. Accordingly, in such circumstances, a Cayman company may provide financial assistance if the board of directors of the company, in discharging its fiduciary duties and acting in good faith, concludes that the provision of such financial assistance is for a proper purpose and in the best interests of the company.

In addition to the Companies Law, M&A involving Cayman Islands licensed companies will require compliance with industry-specific legislation (i.e., the Banks and Trust Companies Law, Insurance Law and Mutual Funds Law) including, in certain circumstances, obtaining the prior approval of the Cayman Islands Monetary Authority (CIMA). Regardless of the merger provisions in the Companies Law, CIMA has the authority to ensure that a licensed Cayman company complies at all times with its obligations under the Islands’ regulatory laws.32

Companies listed on the Cayman Islands Stock Exchange are also regulated by the Cayman Islands Stock Exchange Listing Rules and the Code on Takeovers and Mergers and Rules Governing Substantial Acquisitions of Shares.

An acquisition, merger or consolidation involving a Cayman company will also involve directors’ duties under Cayman common law. Recent case law confirms that: (1) directors owe fiduciary duties to their companies to act bona fide in the best interests of the company; (2) directors have a duty to exercise reasonable care, skill and diligence; (3) while directors may delegate to external advisers to assist them, they must take an active role in supervising those they delegate to; and (4) they must apply their independent judgement and minds to the decisions they make, as well as to the documents they are asked to review and execute. The decision is currently subject to an appeal.33

 

III        DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT

In response to worldwide economic changes, global regulatory requirements and in order to best address the needs of international business, legislation in the Cayman Islands continues to evolve. From 2011 through to the end of 2013, the Cayman Islands enacted a further set of amendments to its Companies Law. Some of those that relate to or could affect M&A are discussed in further detail below.

i         Mergers and consolidations

A Cayman Islands company can merge or consolidate with a foreign company (a company not incorporated in the Cayman Islands) provided that the applicable laws and constitutional documents of the foreign company permit such a merger or consolidation and following the recent amendments, the surviving or consolidated company can now also be a foreign company.34

The authorisation requirements for mergers and consolidations were also simplified so that the Plan need only be approved by special resolution of the shareholders of each Cayman company and any other authorisation specified in the company’s articles of association.35 A special resolution must be passed by a majority of at least two-thirds (or such higher percentage as may be specified in the Cayman company’s articles of association) of shareholders entitled to vote, either voting in person or, where proxies are allowed, by proxy at a general meeting or by unanimous written resolution executed by all shareholders entitled to vote.36 In contrast, Cayman schemes of arrangements require approval by a majority in number representing 75 per cent in value of affected members or class of members (or creditors or class of creditors), as the case may be, who attend and vote in person or by proxy at a court-sanctioned meeting of the members (or creditors) or of each applicable class.37

The recent amendments to the Companies Law also provide a Cayman Islands company with increased flexibility to establish different voting thresholds for the passing of special resolutions at shareholder meetings with respect to different matters (subject to the majority of two-thirds minimum).38 For example, a Cayman company may now specify that the majority required to pass a special resolution to wind up the company by voluntary liquidation may be higher than that required to approve a merger or consolidation.

Recent changes to the Companies Law state that where the merger or consolidation involves a foreign company, a director of the Cayman Islands company must, in addition to meeting the other requirements of the Companies Law, give a declaration or affidavit with respect to the foreign company including, without limitation, satisfying the Registrar that the merger or consolidation is permitted by the constitutional documents and the jurisdiction of incorporation of the foreign company and that the foreign company is not being wound up.39 Such declaration must be made by the director having made due enquiry and any such director will now be deemed to have made such due enquiry if he or she obtains a declaration from a director of the foreign company confirming the same matters.40

Where the surviving or consolidated company is to be a foreign company, such company must file with the Registrar an undertaking that it will promptly pay dissenting shareholders of a Cayman constituent company the amount, if any, they are entitled to receive under the dissenters’ rights provisions of the Companies Law along with evidence of the merger or consolidation from the jurisdiction of the surviving or consolidated foreign company.41

If the Cayman Islands company is not the surviving entity, the Registrar will strike off the Cayman Islands company and shall immediately publish in the Cayman Islands Gazette a Government Notice to the effect that the company in question has been struck off the register, the date on which it has been struck off and the reason for its removal.42

The recent amendments to the Companies Law requires that any merging or consolidating Cayman company that is not the surviving company retire from any fiduciary office held by it no later than immediately prior to the effective time of the merger or consolidation.43

ii       Treasury shares

While it is still not possible for a Cayman company to issue shares directly into treasury, as a result of the 2011 amendments to the Companies Law, provided there is no prohibition in the company’s articles of association and the memorandum and articles of association of the company are complied with, upon a repurchase, redemption or surrender of shares, Cayman companies can now decide whether to cancel those shares so that they form part of the authorised but unissued share capital (as was the case prior to the recent Companies Law amendments), or hold them as treasury shares and resell them at a later date (including for no consideration or at a discount to par value).44 A Cayman company will not be entitled to receive distributions or exercise any voting rights in relation to treasury shares that it holds.45

iii       Redemption, repurchase and surrender of shares

Amendments to the Companies Law relating to the redemption, repurchase and surrender of shares provide a Cayman company with more flexibility to manage its share capital, as well as assist with group restructurings. The term ‘fully paid’ and ‘paid up’ with respect to a share with a par value has been redefined as the payment of the par value of such share without the inclusion of any share premium.46 This change confirms that the redemption or repurchase of shares will be possible if only the par value of such shares have been paid.

Shares originally issued as non-redeemable can now be converted into redeemable shares and a Cayman company’s articles of association or a shareholders’ resolution can authorise the directors of a Cayman company to determine the manner or terms upon which any redemption or purchase will be made.47 Subject to the provisions of the company’s articles, a Cayman company can now also surrender fully paid shares for no consideration unless as a result of the surrender there would be no issued shares of the company other than treasury shares.48 Upon surrender, the relevant shares will be cancelled unless they are held as treasury shares.49

iv       Documents to be kept at the registered office and registers

The register of members of a Cayman company can be kept at the registered office of the company or in the case of an exempted Cayman company, at any other place within or outside the Cayman Islands. Recent Companies Law amendments also permit Cayman exempted companies to maintain in any country or territory one or more branch registers of such category or categories of shareholders it may determine.50 The Companies Law also now permits the principal register of members of a Cayman-exempted company to be kept in a different jurisdiction than its branch registers, provided that a duplicate copy of all branch registers is kept at the place where the principal register is located within 21 days of establishing a branch register or within 21 days of making a change in the details recorded in a branch register.51 These provisions may be particularly helpful to those Cayman exempted companies that have multiple classes of shares or shareholders, or that are located in multiple jurisdictions.

If a Cayman company is served with an order or notice from the Cayman Islands Tax Information Authority pursuant to the Tax Information Authority Law (Revised), it shall make available at the company’s registered office, in electronic form or any other medium: (1) the company’s register of members, including in the case of an exempted company any branch register; and (2) copies of its books of account or any part or parts thereof specified in the notice or order (if such accounts are kept at any place other than at its registered office or at any other place in the Cayman Islands). If the company fails to comply with the order or notice without reasonable excuse, the company shall incur a penalty of CI$500 and a further penalty of CI$100 for every day such non-compliance continues.

Any Cayman company that fails to either: (1) maintain a register of directors and officers at such company’s registered office; (2) send a copy of such register to the Registrar in the Cayman Islands within 90 days of the registration of the company; or (3) notify the Registrar of any change to the company’s directors and officers within 30 days of such change will now incur a penalty of CI$1,000 and a further penalty of CI$100 for every day during which the default continues, and every director and manager of the company who knowingly and wilfully authorises or permits such default shall incur the same penalty. The register of directors of Cayman companies must now also contain the names and addresses of alternate directors, if appointed.

v         Certificates of good standing

The Companies Law now provides that: (1) a certificate of good standing is evidence of the fact that a company is in good standing on the date that the certificate is issued; and (2) a company is deemed to be in good standing if all fees and penalties under the Companies Law have been paid and the Registrar has no knowledge that the company is in default under the Companies Law.

vi       Paperless share transfers

Amendments to the Companies Law now permit, if authorised by a company’s articles of association or by shareholder resolution, paperless share transfers and electronic share registers for Cayman companies listed on certain approved foreign stock exchanges.52

These changes not only facilitate the listing of shares of Cayman companies globally but will make it easier to acquire the shares of listed Cayman companies (i.e., effectuate share transfers) without having to use physical share transfer forms.

vii     Execution of documents

Practical difficulties arose as a result of the English Mercury53 case (a persuasive authority in the Cayman Islands), which called into question the validity of documents where separate signature pages were pre-signed, sent or transmitted by e-mail or fax and then later attached to agreements or contracts. New amendments to the Companies Law provide that contracts or other documents (including deeds and instruments under seal) may be executed in any manner consented to by the parties including the pre-signing of separate signature pages to the contract or document even if the contract or document is not in final form without affecting its validity.54 The new provisions also validate any execution by this method that took place prior to the passing of the new amendments.55

Companies can also now appoint a person to execute a document as a deed or under seal on behalf of the company without the instrument appointing the person itself having to be a deed or instrument under seal.56

viii     Names in foreign script

The Companies Law was recently amended to permit company names in foreign script. This means that a Cayman Islands exempted company will be permitted to adopt a ‘dual foreign name’ in a foreign script (i.e., a Chinese name), which is not necessarily a direct translation or transliteration of its English name.57 This element has proved popular with Asian markets.

ix       Takeovers

New amendments to the Companies Law have been welcomed particularly in relation to takeovers of Cayman Islands companies listed on various exchanges around the world. A number of listed Cayman Islands companies have recently ‘gone private’ using the statutory merger provisions.

The introduction of the statutory merger provisions under the Companies Law may result in the use of the merger provisions as a faster and less costly alternative to the statutory squeeze out provisions under the Companies Law. Under Section 88 of the Companies Law, if 90 per cent in value of shareholders have agreed to sell, an acquirer can make a compulsory acquisition (‘squeeze out’) of the minority after a four-month waiting period from the initial date of the offer. Dissenting shareholders have one month from the date that they have been notified that their shares will be compulsorily acquired to apply to the Grand Court of the Cayman Islands to provide reasons why the shares should not be purchased. The new merger regime provides an alternative route whereby a Cayman Islands bidder could acquire 90 per cent of the shares in the Cayman Islands target company and then merge with the target by way of ‘parent/subsidiary merger’ without having to undergo a waiting period or obtain shareholder approval.

x         Liquidations

The Companies Law statutory merger provisions could also be used as an alternative solution to liquidation. Instead of formally liquidating a subsidiary that is no longer being used or needed, the Cayman Islands subsidiary could merge with its Cayman Islands parent company or foreign parent company, thereby transferring any remaining assets and liabilities of the subsidiary to the parent and terminating the existence of the subsidiary.

 

IV     FOREIGN INVOLVEMENT IN M&A TRANSACTIONS

Cayman companies do business all over the world. Cayman exempted companies, while resident in Cayman, must carry on business outside of the Cayman Islands. Significant M&A deals involving Cayman companies continue to originate from the United States and Europe and a substantial amount of current Cayman Islands-related M&A activity involves emerging markets, particularly Asia.

The popularity of Cayman Islands entities globally can be attributed to a number of factors including the ease of incorporation, the fact that the Cayman Islands is a British overseas territory and common law jurisdiction with its foundation in English law, no director or shareholder residency requirements, the flexibility of Cayman corporate structures including the ability to increase capital, distribute capital and issue different classes of shares, and the fact that the Cayman Islands is a major banking centre and has a highly developed professional infrastructure.

i         Asia

A large number of the most significant M&A transactions involving Cayman entities in 2013 and early 2014 involved Asia and this trend is expected to continue. Of the 1,643 companies listed on the Main Board and the Growth Enterprise Market of the Hong Kong Stock Exchange as of the end of December 2013, 728 or approximately 42 per cent of them were Cayman Islands companies.58 As a result of the significant number of Cayman companies based in China, the Cayman Islands is expected to be part of Asia’s increasingly important position over the next two decades as a driver of worldwide growth.

Mergers and acquisitions in the Asia-Pacific region experienced a decline in

2013, which, given the prevalence of Cayman companies in China, also affected M&A involving Cayman companies. According to Zephyr, in the Asia Pacific region total deal value for 2013 was US$732.5 billion in 2013, down 9 per cent from 2013 (US$806.8 billion).59

ii       Latin America

The Cayman Islands is one of the top five jurisdictions in the world for investment in and out of Brazil according to 2010 International Monetary Authority statistics. Recent reports also indicate that some US$67 billion currently flows between the two countries.60

While Latin America-targeted M&A was down 45 per cent (US$195.2 billion) in 2013 from 2012 (US$352.2 billion), M&A in Brazil was US$43.5 billion in 2013, down 19 per cent from 2011 (US$123.4 billion).61

 

V          SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

i         Going-private transactions

As a result of the recent changes to the Companies Law, statutory mergers and Cayman companies are now increasingly being used in ‘going private’ transactions, particularly by publicly listed China-based companies. The lower threshold for shareholder approval and removing the need for court approval has been cited as having advantages over the traditional Cayman Islands scheme of arrangement. Taking companies private involves cashing out all or a substantial portion of a company’s public shares so that the company becomes eligible to delist and deregister its shares from the relevant stock exchange. Depending on factors specific to the company, going-private transactions involving Cayman Islands companies are often structured as one-step mergers or as tender offers followed by a parent-subsidiary statutory merger.

There were a number of significant ‘going-private’ transactions completed in

2013, and a number of commentators expect this trend to grow,62 particularly in respect to Cayman listed companies with operations in China. Significant transactions include the US$173 million acquisition of Cayman company and NYSE-listed ShangPharma Corporation, a China-based organisation that carries out chemical, pharmaceutical, biological and other research by a buyer consortium that included TPG Growth and ShangPharma’s CEO, Michael Xin Hui,63 Focus Media being taken private in a US$3.66 billion buyout lead by Carlyle,64 the US$370 million going private transaction of NASDAQ listed 3Sbio,65 and the US$890 million take-private of AsiaInfo-Linkage.66

This trend has continued into 2014 with a number of transactions being announced including China Hydroelectric Corporation67 and iSoftStone.68

ii       Significant minority stake transactions

Kenneth Heebner’s Capital Growth Management LP purchased an interest in Cayman company Herbalife in October 2012 only to later sell US$110 million of its interest in the company in the first quarter of 2013.69 Similarly Third Point LLC, the hedge-fund firm run by Daniel Loeb, acquired an approximately 8.2 per cent interest in Herbalife in January 2013 but sold the position a couple of months later.70

iii       Other notable deals

In February 2013, NYSE-listed company Stanley Black & Decker announced that it had completed its acquisition of Infastech Ltd, a Cayman company and global manufacturer and distributor of specialty engineered fastening technologies headquartered in Hong Kong, from CVC Capital Partners and Standard Chartered Private Equity Limited for US$850 million in cash.71

In November of 2013, Coastal Energy Corporation announced that it had entered into an agreement to be acquired by Compañia Española de Petroleos, SAU in a merger transaction with an aggregate value of US$2.3 billion. The transaction was completed on 17 January 2014.

iv       Initial public offerings

Despite the large number of going-private transactions involving Cayman companies operating in China, Chinese IPOs, many involving Cayman companies, are beginning to make a comeback.72 Significant IPO transactions involving these Chinese enterprises included the US$187 million IPO of 58.com, a Chinese classified ad website operator that is often compared to Craigslist,73 the US$117 million IPO of Qunar Cayman Islands,74 the HK$77.7 million IPO of Telecom Digital Holdings Limited,75 and the long-awaited IPO of Alibaba Group, announced in 2014, which is expected to be the largest IPO ever.

 

VI     FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

There were a total of 213 banks under the supervision of the Cayman Islands Banking Supervision Division at the end of December 2013.76 According to CIMA, ‘the fundamentals of the Cayman Islands banking sector remain sound and the industry in general has been relatively resilient in a very challenging market environment. Banks continue to consolidate and restructure in search of cost efficiencies, improvements in operational risk management and governance.77 Forty of the top 50 banks in the world hold Cayman Islands banking licences.78 The Cayman Islands continues to be a tax-neutral platform for international capital flows, over 80 per cent of the more than US$1 trillion on deposit and booked through the Cayman Islands represents inter-bank bookings between onshore banks and their Cayman Islands branches or subsidiaries.79

While it is difficult to quantify exactly how much of the capital flows through Cayman entities are specifically used for Cayman M&A transactions or the exact source of financing for Cayman-related M&A deals, Cayman companies are commonly used by multinationals for financial management and treasury operation purposes or as special purpose vehicles in order to assist in the execution of new acquisitions or mergers. Parties in emerging countries have, in particular, used Cayman companies to gain access to liquidity and global markets in order to fund regional trade and job growth in their respective local economies.

2013 continued to show signs of economic recovery in the United States and companies globally began to slowly make use of the cash reserves they had kept on their balance sheets.80 Transactional financing also started to become more accessible and higher stock market valuations made stock a more attractive currency for acquisitions.81

The funding of the acquisition of interests in Cayman companies in 2012 took a multitude of forms – some transactions were all cash deals, a number of transactions used a combination of cash and equity, some were pure stock deals and some were funded by bank financing.

The Cayman Islands are seeing some increased activity in terms of private equity. Cayman Islands private equity funds are often utilised for leveraged buyouts, private investments in public equities, recapitalisations, acquisitions and divestitures. Although Cayman exempted companies are also employed, the most commonly used structure for Cayman private equity funds is the exempted limited partnership (ELP). The total number of new Cayman ELPs registered in 2013 increased to 2,368 – a 16.25 per cent increase from the 2,037 new Cayman ELPs registered in 2012.

 

VII     EMPLOYMENT LAW

The Cayman Islands Labour Law applies to employees located in the Cayman Islands. Pursuant to the Cayman Islands Labour Law, an employee will not be entitled to severance pay if an acquirer of a Cayman-based business offers the employee the same employment he or she had prior to the acquisition.

The Labour (Amendment) Law, 2011 came into force on 15 March 2011. In circumstances where an employee in the Cayman Islands has worked for at least one year of continuous employment with an employer and has been terminated (other than for misconduct or unsatisfactory performance), the employee will be entitled to one week’s severance pay for each completed full year of employment. Previously severance payments were capped at a maximum of 12 weeks’ pay. Similarly, the 12-year restriction is no longer applicable to retirement or resignation allowances that are payable to an employee who has worked at least one full year for an employer and who is not entitled to a pension under the Cayman Islands National Pensions Law.

In an effort to attract new businesses and jobs to the Cayman Islands, the Special Economic Zones Law, 2011 (the SEZ Law) was passed by the Cayman Islands legislature. Among other things, the SEZ Law sets out the process of establishing, regulating and administering special economic zones (SEZs) within the Cayman Islands. SEZ businesses are enterprises that are located within a SEZ in the Cayman Islands but carry on business mainly outside the Islands. SEZ businesses may be entitled to certain benefits including relief from trade licensing requirements and certain customs duties and reduced work permit fees for foreign workers. Like other Cayman exempted companies, they will also not be subject to income, corporate, capital gains or payroll tax in Cayman. The 60 per cent Cayman ownership rule generally applicable to companies carrying on business in the Cayman Islands will also not apply to businesses located in a SEZ. The first SEZ to be established pursuant to the SEZ Law is Cayman Enterprise City (CEC), which plans to create campuses dedicated to five sectors: information technology, media, biotechnology, derivatives and commodities trading and academics. CEC has stated in a 5 February

2014 press release that: ‘Cayman Enterprise City has crossed what it considers to be a milestone. Starting the year with 29 zone companies, now more than 100 companies have been established.’

 

VIII   TAX LAW

Presently, the Cayman Islands has no income, corporation, capital gains or any other tax applicable to a Cayman Islands exempted company conducting offshore business, including M&A although documents may be subject to (generally nominal) stamp duty if executed in or brought to the Cayman Islands, or produced before a court of the Cayman Islands. The Cayman Islands also does not operate a withholding tax.

Cayman exempted companies can receive a ‘tax exemption undertaking’ from the Cayman Islands government, exempting them from any future Cayman Islands taxes for a period of up to 30 years. The Cayman Islands government normally grants a 20-year undertaking initially, which is normally renewable for a further 10 years on expiry. Upon entering the special economic zone, CEC companies receive an exemption from taxation in the Cayman Islands until 2061.

The Cayman Islands is on the Organisation for Economic Co-operation and Development (OECD) ‘white list’ of jurisdictions that substantially implement international tax standards and, as of April 2014, had signed 35 bilateral tax information exchange agreements (TIEAs) with other countries, most recently with Belgium, Seychelles and Poland.82 The Cayman Islands signed its first TIEA in 2001 with the United States. TIEAs are aimed at promoting international cooperation in tax matters through the exchange of information in order to assist in the administration and enforcement of tax laws.

Under the European Union Savings Tax Directive, the Cayman Islands Tax Information Authority also administers bilateral agreements with the 27 EU Member States in relation to the automatic reporting of savings income information, in effect since 2005. In April 2013, the Cayman Islands government also agreed to join the United Kingdom, Germany, France, Italy and Spain in a G5 pilot programme to automatically exchange further tax information. The data that Cayman will pass on to such countries is expected to go beyond the current reporting of interest income on bank deposits held by EU citizens in the Cayman Islands and may include additional bank account information such as the names, addresses, account numbers, account balances and details of payments made to and from such accounts.

The Cayman Islands Tax Information Authority Law (Revised) also provides for a parallel ‘unilateral mechanism’ for cooperation in tax matters that can be used in addition to bilateral agreements.

Under the Cayman Islands Monetary Authority Law (Revised), CIMA can enter into memoranda of understanding (MoU) with other overseas regulatory authorities to facilitate information exchange and other assistance between CIMA and these other regulatory bodies. CIMA has entered into bilateral and multilateral MoUs and undertakings with regulatory authorities in the United States, Canada, the Caribbean, Central and South America, the United Kingdom, Europe and the Middle East. In March 2012, CIMA entered into a MoU with the US Securities and Exchange Commission. As of May 2013, it had also entered into a MoU with the US Federal Deposit Insurance Corporation and added additional provisions to the MoUs it had already executed with the Office of the Superintendent of Financial Institutions Canada and the UK Financial Services Authority.

The US Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report directly to the US Internal Revenue Service (IRS) information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest. On 15 March 2013, the Cayman Islands government announced that it would adopt a Model 1 intergovernmental agreement (IGA) with the United States in response to FATCA, and the agreement was signed on 29 November 2013. Under the Model 1 IGA foreign financial institutions will report to their home government, which will then relay the requested information to the US tax authorities as opposed to the financial institutions directly reporting to the IRS.

The European Securities and Markets Authority (ESMA) Board of Supervisors, at its 22 May 2013 meeting, approved cooperation agreements with 34 regulators including CIMA (collectively, the global regulators).83 ESMA said it had negotiated the agreements on behalf of all 27 EU Member State securities regulators as well as the authorities from Croatia, Norway, Iceland and Liechtenstein.84 In order to allow their alternative investment funds such as hedge funds and private equity funds to be marketed in the EU following 22 July 2013, these global regulators now need to sign the cooperation agreements with each of the EU securities regulators to achieve compliance with the minimum conditions imposed under the EU Alternative Investment Fund Managers Directive. In a press release dated 30 May 2013, CIMA stated that it had already signed cooperation agreements with 20 EU securities regulators. The agreements, which are effective from 22 July 2013, will facilitate the exchange of information, cross- jurisdictional on-site visits and mutual assistance in the enforcement of the parties’ respective supervisory laws.

 

IX     COMPETITION LAW

In the Cayman Islands, the Information and Communications Technology Authority Law has some provisions designed to prevent anti-competitive practices, but there is no specific antitrust legislation governing commerce. Therefore antitrust concerns involving M&A related to Cayman Islands entities are typically addressed by the legal or regulatory requirements of the relevant onshore jurisdiction.

 

X       OUTLOOK

The Cayman Islands economy is showing signs of recovery after the 2008–2009 financial crisis. So far in 2014, the US is showing gradual growth in its economy, record stock market valuations have been reached and there has been a recent upswing in M&A, all of which will have a positive impact on the Cayman Islands.

Europe, however, continues to face challenges and any further slowdown in M&A in the Asia Pacific region will have a material effect on M&A involving Cayman entities. Global or national tax and regulatory policies that could permit taxes to be imposed in certain circumstances on entities like those established in the Cayman Islands or disallow the use of structures involving Cayman entities may also affect the way Cayman entities are used in the future.

Nevertheless, the Cayman Islands continues to be a leading international financial centre and has in the past adopted a flexible and pragmatic approach to global and regional business. There is nothing to suggest that this will not continue; however, to maintain its attractiveness, the jurisdiction will need to continue to adapt its legislation and business practices to meet the needs of international business in both developed and emerging markets.

 

AUTHOR

MARCO MARTINS

Harney Westwood & Riegels

Marco Martins is head of Harneys’ Cayman Islands office and its Americas Group. Marco’s practice encompasses all aspects of corporate, banking, finance and investment funds disciplines. He speaks fluent Spanish, Portuguese and Italian.

Prior to joining Harneys in 2007 Marco worked for Shearman & Sterling in London and California and Norton Rose in London. He has extensive experience in international finance, having advised several global clients on international offerings of registered and unregistered equity and debt, including complex structured finance transactions. He was the principal lawyer in a number of IPOs and privatisations, with listings on major stock exchanges in the US and Europe.

HARNEYS

Harney Westwood & Riegels

Level 4, Harbour Place

103 South Church Street

PO Box 10240

Grand Cayman

KY1-1002

Cayman Islands

Tel: +1 345 949 8599

Fax: +1 345 949 4451 [email protected]

www.harneys.com

 

1          Marco Martins is the managing partner at Harney Westwood & Riegels.

2          General Registry of the Cayman Islands statistics.

3          Id.

4          Global Financial Centres Index 15, March 2014 at p. 15.

5          Id. at p. 4 and Global Financial Centres Index 14, September 2013 at p. 27.

6          Zephyr database published by Bureau van Dijk.

7          Id. Deals include acquisitions, IPOs, planned IPOs, institutional buyouts, joint ventures, management buy-ins, management buy-outs, mergers, demergers, minority stake transactions, share buy-backs, private equity and venture capital deals.

8          Id. Based only on deals where a Cayman Islands entity was either an acquirer or target.

9          Id.

10       Id. Based on number of deals with known deal value.

11       Cayman Islands continues to dominate offshore M&As, Caymanian Compass, 21 May 2014.

12       Thomson Reuters, Mergers & Acquisitions Review, Financial Advisors, Full year 2013 at p. 1.

13       Dealogic M&A Review, First Quarter 2014.

14       Id.

15       Id.

16       Section 232 of the Companies Law.

17       Id.

18       Sections 86 and 87 of the Companies Law.

19       Under the Companies Law, a ‘parent company’ is one that owns shares of another company representing at least 90 per cent of the votes at a general meeting of such company (Section 232 of the Companies Law).

20       Section 233(7) of the Companies Law.

21       Sections 233(3), (4) and (9) of the Companies Law.

22       Section 233(6) of the Companies Law.

23       Section 233(5) of the Companies Law.

24       Section 233(8) of the Companies Law.

25       Id.

26       Section 238 of the Companies Law.

27       Id.

29       Section 234 of the Companies Law.

30       Section 233(12) of the Companies Law.

31       Section 236(1) of the Companies Law.

32       Section 233(2) of the Companies Law.

33      Weavering Macro Fixed Income Fund Limited (In liquidation) v. Stephan Peterson & Hans Ekstrom. An appeal of the August 2011 decision was concluded in April 2012, and a decision of the Cayman Islands appeal court is pending.

34       Section 237(7) of the Companies Law.

35       Section 233(6) of the Companies Law.

36       Section 60 of the Companies Law.

37       Section 86(2) of the Companies Law.

39       Section 237(7) of the Companies Law.

40       Section 237(8) of the Companies Law.

41       Section 237(10) of the Companies Law.

42       Sections 236(3) and 158 of the Companies Law.

43       Section 233(9)(f ) of the Companies Law.

44       Section 37A of the Companies Law

45       Section 37A(7) of the Companies Law.

46       Section 2(4) of the Companies Law.

47       Section 37 of the Companies Law.

48       Section 37B of the Companies Law.

49       Id.

50       Section 40A of the Companies Law.

51       Sections 40A(4) and 40A(5) of the Companies Law.

52       Section 40B of the Companies Law.

53       R (on the application of Mercury Tax Group Ltd and another) v. HMRC & Others [2008] EWHC 2721.

54       Section 81(8) of the Companies Law.

55       Section 81(9) of the Companies Law.

56       Section 83 of the Companies Law.

57       Definition of ‘dual foreign name’ in Section 2(1) and Section 31(1) of the Companies Law.

58       HK Ex Fact Book 2013, p. 1 and Appendices.

59       Zephyr Annual M&A Report, Global 2013, Bureau Van Dijk.

60       CNS Business News, ‘Cayman boosts Brazil ties’, 4 May 2012.

61       Zephyr Annual M&A Report, Latin America 2013, Bureau Van Dijk.

62       Thompson Reuters Business Law Currents, China’s Cresting Going Private Wave 31 July 2013 and IBA – China: Asia’s emerging superpower is going private.

63       Tim Burroughs, Asian Venture Capital Journal, ‘TPG completes take-private of China’s

ShangPharma’, 31 March 2013.

64       IBA – China: Asia’s emerging superpower is going private.

65       Id.

66       Id.

67       PR Newswire , 13 January 2014.

68       PR Newswire, 18 April 2014.

69       Inyoung Hwang, Bloomberg, ‘Kenneth Heebner Buys Goldman Sachs, Hertz; Sells BofA, Herbalife’, 15 May 2013.

70       Alexis Leondi, Bloomberg, ‘Loeb’s Third Point Exited Herbalife Stake in First Quarter’, 15 May

2013.

71       Press release: Stanley Black & Decker, ‘Stanley Black & Decker Completes Previously

Announced Acquisition Of Infastech’, 23 February 2013.

72       Chinese IP.Os to make comeback in US, The New York Times, 1 November 2013.

73       Id.

74       IPO Preview: Qunar Cayman Islands, IPO DeskTop.

75       CNS Business, 6 June 2014.

76       CIMA Banking Statistics 2013, CIMA website.

77       Id.

78       Id.

79       Id.

80       Maureen Farrell, CNN Money, ‘M&A making a comeback’, 14 February 2013.

82       Cayman Islands Tax Information Authority, List of Cayman Islands Bilateral Agreements and Arrangements.

83       Press release: European Securities and Markets Authority, 30 May 2013.

 

END

To download a copy of the Full Review go to: http://www.harneys.com/publications/articles/cayman-chapter-the-mergers-and-acquisitions-review