Points for consideration
Corporate law in the British Virgin Islands provides for a number of mechanisms that can be used for the purpose of acquiring control of a company, but in the last 24 months there has been a noticeable increase in the occurrence of the use of top-up options, especially in relation to publicly listed BVI companies and tender offers in M&A transactions. This update explains what a top-up option is, how it works, the main points that directors of a target should note in employing the use of a top-up option in relation to their BVI company and the procedure to effect a squeeze-out once the 90% threshold is achieved.
The shareholders of a BVI company may receive an offer from a bidder that is seeking to acquire all of the issued shares in the capital of the company. The bidder's offer may result in it acquiring less than 100% of the issued shares and in a number of cases the bidder may find that he only gets to for example 75%. One possibility is a statutory merger whereby the two companies merge and one of them ceases to have a separate corporate existence. Such an approach involves the approval of directors and shareholders of both constituent companies and, notices for meetings and so on. A shorter, more cost-efficient approach is available: the squeeze-out. This is where, in the context of an initial failure to acquire the necessary 90% holding, the top-up option becomes useful.
The target may grant to the bidder, in connection with its tender offer, an option to acquire a sufficient number of authorised but unissued shares to enable the bidder to increase its percentage shareholding from 75% to 90%. At this point, the bidder can effect a squeeze-out of the minority under Section 176 of the BVI Business Companies Act 2004. It is the exercise of the option that 'tops up' the bidder, thus permitting the squeeze-out to be implemented.
BVI law does not specifically address the use of top-up options and as such it is not precluded. The act is silent on this, and at common law the only issues are directors' duties and the need to ensure that shareholders are treated fairly. Accordingly, there are very limited constraints on the use of this mechanism.
If they decide to grant a top-up option the directors of the target BVI company will have to consider a number of issues in addition to their general directors' duties. These include:
- necessary corporate authority to grant options;
- consideration for the option and the shares issued pursuant to the option;
- whether the company has a sufficient number of authorised but unissued shares to satisfy the exercise of the options;
- whether the grant of the option adversely affects any of the company's other contracts ;
- while the directors have a discretion as to whom they may issue options and the shares pursuant to the exercise thereof, whether they need to consider if they are acting in the best interests of the company and observing their duties; and
- whether the top-up option results in a dilution in the value of shares held by dissenting shareholders.
Most of the points mentioned above will be easily addressed. Requisite corporate authority can be achieved pursuant to a board resolution. If the option is to be convertible into shares in the target without any payment, then the consideration paid for the option must also cover the shares proposed to be issued, and where the shares have a par value then that consideration must be sufficient to cover the par value per share. Where non-cash consideration is involved, BVI law requires the directors to make certain determinations in relation to the value of such consideration. Likewise, the company's constitution can normally be amended to increase the number of shares available for issue so that the options can be adequately satisfied. Whether the option affects other contracts is a question of fact and it is the job of the directors to consider their duties at all times. However, it is sensible to agree contractually that dissenters will be entitled to the fair value of their shares without taking into account any potential impact of the top-up option. In this way, the validity of the proposed top-up option is less likely to be called into question because the dissenting shareholders will be less capable of claiming that they have suffered some loss by virtue of a purported dilution.
A squeeze-out procedure may be implemented if members entitled to vote and holding 90% of the votes of the outstanding shares and, 90% of the votes of the outstanding shares of each class of shares entitled to vote as a class instruct the company in writing to redeem the shares held by the remaining members - this action is subject to the express provisions of the company's memorandum and articles. Upon receipt of the instruction, the company must redeem those shares; no discretion is afforded to the company's directors to refuse to carry out the instruction. This is a compulsory redemption of the shares of minority shareholders at the instance of the majority. The law does not prescribe any procedure in which such redemption should be carried out or how the redemption price shall be determined. Thus, the company must decide on the manner of the redemption and set the redemption price, although it must give written notice of these to the member whose shares are to be redeemed. Thereafter, some of the notice and appraisal provisions in the section on dissenters' rights apply to ensure that a member who dissents receives fair value. One of the most important things in this process is to ensure that the company's register of shareholders is up to date and accurate, and that notices to the shareholders are given as prescribed by the company's constitution. However, even if one follows the correct procedure and complies with all timelines under the act, recent BVI case law(1) confirms that this will not necessarily prevent minority shareholders from approaching the court at a later date and asking them to reconsider that the value the company attributed to his shares, as the court has an inherent jurisdiction to deal justly and fairly with matters of such nature. It is therefore important to consider carefully the issue of the fair value of the shares.
The attractiveness of the top-up option lies in the fact that it can be effected with a minimum of corporate approvals. This affects the process by reducing the timeframe within which control of the target can be achieved and following on from that, the cost will be more attractive than might be the case in relation to other methods of corporate reconstruction. Furthermore, the absence of a stock exchange in the BVI means that, relative to major international finance centres, there are fewer constraints in terms of what approvals are required. Compliance with the act, the common law and the company's constitution is sufficient.
For further information on this topic please contact Leonard A Birmingham at Harney Westwood & Riegels, London office by telephone (+44 20 7842 6080), fax (+44 20 7353 0487) or email ([email protected]).
(1) Brantley Inc v Antarctica Asset Management Ltd, British Virgin Islands, Claim No BVIHCV2007/0227