The British Virgin Islands’ statutory merger regime is straightforward, well established and effective. It has been used on a number of high profile, public transactions including, for example, Apax Partners’ $1.6 billion buyout of Tommy Hilfiger Corporation, and most recently by Essilor International SA for its recommended US$565 million takeover of NASDAQ listed FGX International Holdings Limited.
This article examines the mechanics of the statutory procedure, its increasing popularity and pitfalls to be avoided.
A statutory merger is a merger between two or more companies, one of which will be a BVI company, effected pursuant to a specific statutory procedure, with the following events occurring simultaneously at the time of the merger:
- Only one of the merging companies continues to exist as a legal entity (the “Surviving Company”);
- All assets and liabilities of the other merging company or companies become assets and liabilities of the Surviving Company; and
- The surviving Company becomes entitled to all the rights, privileges, immunities, powers, objects and purposes of each of the merging companies.
The BVI’s statutory merger regime, contained in Part IX of the BVI Business Companies Act, 2004 (the “BCA”), allows one or more companies that are not incorporated in the BVI to merge with one or more BVI companies, if permitted by the laws of the jurisdictions of incorporation of those foreign companies. Alternatively, eligible foreign companies can first migrate into the BVI in order to effect a statutory merger under BVI law, following which the surviving company will remain domiciled in the BVI.
A common transaction structure is for a BVI company (“Newco”) to be incorporated by a bidder (“Bidco”), the Newco to pay or procure via Bidco the merger consideration to the shareholders of the target company (the “Target”) in exchange for their Target shares, and the Target to merge into the Newco, with the Target being the survivor of the merger, pursuant to the BVI statutory merger procedure. This statutory procedure therefore enables the Target to become a wholly owned subsidiary of the Bidco, with the shareholders of the Target receiving merger consideration (e.g. cash or shares/securities in Bidco) in exchange for their shares. Only a single filing with the BVI’s Registrar of Corporate Affairs (the “Registrar”) is required and there is no court involvement.
The BVI’s statutory merger legislation was enacted in the 1980s, and its provisions are not dissimilar to the equivalent provisions in Delaware company law. Consequently, the statutory merger procedure will be familiar to US lawyers. Furthermore, in 2006, the US Treasury issued regulations that allow foreign entities to participate in certain tax-deferred reorganisations and business combinations under US tax law, and it is possible to structure a BVI statutory merger in order to take advantage of this change in US tax law.
The BVI’s statutory merger procedure can be broken down into the following five steps, and whilst straightforward, it is important to instruct legal counsel familiar with the process: First, the directors of each constituent company approve a written plan of merger. The plan of merger must contain certain brief details of the companies, the terms and conditions of the proposed merger, and a statement of any amendment to the memorandum and articles of association (the “M&A”) of the surviving company.
Secondly, the shareholders entitled to vote on the proposed merger approve the plan of merger in accordance with each respective merging company’s constitutional documents.
Thirdly, a single set of articles of merger are executed by each company, containing the plan of merger, the date on which the M&A of each constituent company (if a BVI company) were registered with the Registrar, and the manner in which the merger was authorised.
Fourthly, the articles of merger are filed with the Registrar, together with any resolution to amend the M&A of the surviving company. If the surviving company is not to be a BVI company, it must also file certain additional documents pertaining to service of process of proceedings and payments to dissenting shareholders, together with a certificate of merger issued by the appropriate authority of the foreign jurisdiction where it will be continuing.
Finally, the Registrar registers the articles of merger and any amendment to the M&A of the surviving company, and, if satisfied that all requirements of the BCA’s statutory merger procedure have been complied with, issues a certificate of merger.
In the case of a statutory merger between a parent company and one or more subsidiary companies, where the parent company owns at least ninety per cent of the outstanding shares of each class of its subsidiary/subsidiaries, the merger procedure is modified such that shareholder approval is not required, only the directors of the parent company need approve the merger; and only the parent company need execute articles of merger.
Under the BCA, shareholders in a BVI company have the right to dissent to a statutory merger. However, a dissenting shareholder’s entitlement is limited to payment of the fair value of his shares, in accordance with the procedure set out in the BCA.
A BVI statutory merger is a tried and tested, straightforward acquisition procedure, with potential US tax benefits. Its popularity has increased in recent years, and the BVI Registrar’s familiarity allows for a BVI statutory merger to be effected in a timely and cost-effective manner.