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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The merger mania that Bermuda witnessed in 2015 – particularly in the (re)insurance sector – has recently slowed down. However, the M&A market is still extremely active, with Bermuda continuing to be a prime jurisdiction for offshore deals, particularly in the technology, industrials/chemicals, energy and mining sectors.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
No economic or political developments in Bermuda have significantly affected the M&A market in the past 12 months. However, global economic and political developments such as uncertainty arising from Brexit, the Chinese economy and the result of the US presidential election have affected the global M&A market.
Are any sectors experiencing significant M&A activity?
Are there any proposals for legal reform in your jurisdiction?
No major legal reforms are planned in connection with the M&A market in Bermuda.
What legislation governs M&A in your jurisdiction?
The legislation most relevant to M&A in Bermuda is the Companies Act 1981, as amended.
How is the M&A market regulated?
The M&A market is generally not regulated in Bermuda, but specific regulations may apply depending on the nature of the transaction, whether it involves public or private entities and whether they are regulated entities.
Public M&A transactions will be regulated by stock exchange rules – in particular, the Bermuda Stock Exchange (BSX) Listing Regulations, which impose obligations on BSX-listed entities.
Private M&A transactions are not regulated. However, prior approval from the Bermuda Monetary Authority (BMA), Bermuda’s regulator, will generally be required for the issue or transfer of securities (shares) to foreign buyers. The BMA also regulates particular sectors (eg, insurers, banks and investment businesses) and, depending on the entity, material change or change of control provisions may apply.
Are there specific rules for particular sectors?
Yes – licensed entities must comply with particular sector-specific provisions.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
The most common ways to acquire a company in Bermuda include:
- purchasing a company’s shares;
- purchasing substantially all of the company’s assets;
- amalgamating the acquisition company with the target;
- merging the acquisition company with the target;
- a scheme of arrangement;
- a takeover offer; and
- holders of 95% of the shares acquiring the remaining shares.
Due diligence requirements
What due diligence is necessary for buyers?
Due diligence is key for any M&A deal. A due diligence request list will typically be compiled by the buyer and include all items that it requires the seller to disclose relating to the target (and group) in order to carry out its due diligence before the acquisition, which will vary depending on the particular transaction. There may be negotiations involved between the buyer and seller over this due diligence list. However, the following will typically be considered as part of standard due diligence:
- corporate structure and minute book(s);
- taxes (if applicable);
- material agreements;
- intellectual property (if applicable); and
- environmental impact (if applicable).
Searches will also typically be carried out in relation to the company, including a search at the Registrar of Companies and the Supreme Court registry.
Specific asset due diligence will be carried out as applicable.
What information is available to buyers?
As discussed above, a due diligence request will typically be made and publicly available searches will be carried out to verify information and representations.
- The following company information is publicly available in Bermuda:
- The Registrar of Companies keeps the following documentation in relation to Bermuda incorporated companies:
- the certificate of incorporation and memorandum of association;
- the address of the registered office;
- any prospectus or offer document that must be filed pursuant to the Companies Act 1981;
- any registered charges against the company; and
- any other filings required pursuant to the Companies Act 1981.
- Recent changes to Bermuda company law will also require companies from the end of 2016 and thereafter to file directors’ information with the Registrar of Companies.
- The Registry of the Supreme Court maintains records of legal proceedings and judgments.
- The Bermuda Stock Exchange (BSX) will have published accounts and auditors reports and any other relevant filings and announcements in respect of listed companies.
- The registered office of the company will contain the following information:
- the register of directors and officers, setting out names and addresses; and
- the register of members, setting out the names and addresses of members, details of the number of shares held, the amount paid up on the shares and the date on which the person was entered in the register of members.
What information can and cannot be disclosed when dealing with a public company?
A public company should not disclose material non-public information unless it acts within the BSX Listing Regulations and is protected by a non-disclosure agreement.
How is stakebuilding regulated?
The BSX Listing Regulations govern stakebuilding and notice must be made to the BSX in respect of any shareholder of a listed entity who:
- acquires 5% or more of the beneficial interest, control or direction; or
- has a beneficial interest or exercises control of 5% or more and acquires, in aggregate, an additional 3% or more.
Insider dealing and market manipulation are offences under Bermuda’s Criminal Code and may potentially be committed by a bidder if it possesses price sensitive information and seeks to build a stake in the target.
What preliminary agreements are commonly drafted?
Letter of intent
A letter of intent will normally be negotiated and will broadly set out the type of transaction being contemplated, its timing and any applicable key terms and conditions, including:
- the type and amount of consideration to be paid;
- the types of warranties to be given; and
- any non-compete covenants that may be given.
Letters of intent are usually non-binding, with the exception of certain provisions such as those concerning exclusivity, confidentiality, access to information or cooperation during the due diligence period and governing law. A term sheet, heads of agreement or memorandum of understanding can be executed instead of a letter of intent, as they contain the same information.
Non-disclosure agreement A mutual non-disclosure or confidentiality agreement is typically entered into and provides that:
- the buyer will use the information only for the purpose of evaluating the acquisition; and
- neither party will disclose information to third parties about the negotiations.
It is important for confidential information to be fully outlined, including any necessary carve-outs or exceptions. Typically the buyer and seller will want to provide that the non-disclosure provisions extend to any agents, advisers or employees of the other party. The seller will also want to try to ensure that the buyer will not solicit any of the target's employees, suppliers or clients.
Exclusivity agreement Exclusivity provisions are typically built into the letter of intent or non-disclosure agreement. However, if this is not the case, a separate exclusivity agreement is often sought by the buyer because it allows the buyer to negotiate the acquisition with the seller for a period of time without threat of another potential buyer being identified. The buyer will generally want to negotiate for a longer exclusivity period while the seller will want a shorter period.
Due diligence request list A due diligence request list will usually be compiled by the buyer and include all items that the seller must disclose in relation to the target (and group) in order to carry out its due diligence before the acquisition. There may be negotiations involved between the buyer and seller over this due diligence list.
What documents are required?
The main acquisition documents on a share or asset purchase include:
- a share or asset purchase agreement (typically prepared by the buyer);
- a disclosure letter or schedules qualifying the representations and warranties (typically prepared by the seller);
- conveyance documents (typically prepared by the buyer), including:
- share transfer form; and
- assignment/assumption agreements for certain assets or liabilities;
- employment/consulting agreements with key employees (typically prepared by the buyer);
- change of control consents (if applicable);
- release of security documentation (if applicable); and
- any required transitional service agreements (specific to the transaction).
The main acquisition documents on an amalgamation or merger include:
- an agreement and plan of amalgamation or merger setting out the terms on which the amalgamation or merger is to be effected (typically prepared by the buyer);
- an amalgamation or merger agreement (typically prepared by the buyer); and
- any transaction-specific agreements.
The main acquisition documents in a takeover offer include:
- a circular or announcement summarising the terms and conditions of the offer (issued by the target);
- the offer document;
- an acceptance form (issued by the buyer); and
- a prospectus, if required.
Which side normally prepares the first drafts?
What are the substantive clauses that comprise an acquisition agreement?
The key terms for a binding contract under basic contract law principles are an offer, acceptance and consideration. However, the main substantive clauses of an acquisition agreement include:
- a description of the transaction structure and its terms, including the purchase price and purchase price adjustment provisions (if applicable);
- payment provisions;
- conditions and closing requirements;
- representations and warranties;
- indemnification and limitation of liability;
- termination provisions; and
- boilerplate clauses relating to:
- third-party rights;
- the entire agreement;
- further assurances; and
- governing law and jurisdiction.
An asset purchase agreement also normally includes a description of the assets being acquired and specifies the liabilities being assumed by the buyer.
What provisions are made for deal protection?
Deal protection is increasingly common in cross-border Bermuda M&A deals. The key forms of deal protection include:
- full exclusivity;
- break fees;
- termination fees;
- no-talk or no-shop provisions;
- lock-up agreements; and
- standstill agreements.
What documents are normally executed at signing and closing?
The documents executed on signing and closing vary widely according to the nature of the transaction. However, the definitive agreement should typically be executed at signing, if signing and closing are not contemporaneous, and will normally be subject to fulfilment conditions including, among other things, receipt of all regulatory and other necessary approvals. Documentation relating to shares or conveyances, resignations of directors and officers, bank mandates and any applicable board and shareholder approvals should be executed at or before closing.
Are there formalities for the execution of documents by foreign companies?
Under Bermuda law, no specific or special formalities for the execution of documents by foreign companies exist.
Are digital signatures binding and enforceable?
Digital signatures are binding and enforceable, provided that they satisfy the conditions set out in the Electronic Transactions Act 1999, as amended.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes – agreements may provide for a foreign governing law.
What provisions and/or restrictions are there for foreign ownership?
Restrictions on foreign ownership of shares in Bermuda local (ie, domestic) companies apply. However, this does not affect Bermuda exempted companies which may be owned by non-Bermudians.
In local companies, 60% of the total voting rights must be exercisable by Bermudians (60/40 rule). In addition, restrictions govern the ownership of land by businesses (local or exempted).
A Bermuda local company must obtain a licence under Section 114B of the Companies Act to be owned and operated in a manner that is not compliant with the 60/40 rule. Therefore, a foreign entity will need a special licence if it wants to take control of a local limited liability company and carry on business in Bermuda. An application must be made to the Registrar of Companies, which will assess the application (before submitting it to the minister responsible for approving the issue of the licence) according to various criteria, including:
- the economic situation in Bermuda;
- the nature and previous conduct of the company;
- any advantage or disadvantage that may result from the company carrying on business in Bermuda; and
- the desirability of Bermudians retaining control of the economic resources of Bermuda.
The Companies Act was recently amended with the aim of facilitating direct foreign investment in Bermuda. A Bermuda company may be eligible for an exemption to the 60/40 rule if its shares are listed on a designated stock exchange (including the Bermuda Stock Exchange) and it engages in business in a prescribed industry – for example:
- hotel operations;
- banking; and
- international transportation services (by ship or aircraft).
There are no restrictions on foreign ownership of exempted companies. However, for exchange control purposes, the issue and transfer of any securities in these companies involving non-residents must generally be notified to or receive the prior approval of the Bermuda Monetary Authority (BMA). Certain acquisitions will also require a change of control application to be made to the BMA (eg, acquisitions of regulated or licensed entities). In those cases, the BMA will evaluate the proposed controllers and senior executives according to the applicable criteria.
Valuation and consideration
How are companies valued?
There are many methods to value a company. Typical valuation methods include share price and net asset value, but the open market value of a company may also be calculated by assessing:
- earning and/or growth potential;
- multiple of profits;
- risk profile;
- asset valuation;
- earnings before interest, taxes and amortisation; and
- industry rule of thumb.
What types of consideration can be offered?
Forms of consideration typically include:
- loan/promissory notes or equity; or
- a combination of the above.
There may also be earn-out provisions where there is an acquisition of all the shares of a company due to valuation issues or where the buyer has limited finance.
What issues must be considered when preparing a company for sale?
A review of applicable laws and regulations should be undertaken, as should an analysis of the company’s structure and governing documents. A company preparing for a sale should ensure that it has reviewed its memorandum of association and bylaws, as well as any applicable shareholders agreement and material contracts. It will also want to ensure that it has complied with any provisions relating to rights of first refusal.
A company should carry out practical steps to assist in the preparation of a sale, including:
- developing a divestiture plan;
- assembling a team of reputable expert advisers;
- ensuring its financials are in order;
- obtaining a sound valuation;
- setting realistic timelines;
- identifying the target market and likely buyers; and
- preparing key principle documents (eg, non-disclosure, confidentiality and exclusivity agreements).
What tips would you give when negotiating a deal?
Key tips for negotiating a deal include researching either the industry (from the seller’s perspective) or the target and value (from the buyer’s perspective). Having the right people involved in the negotiations is vital, including experts as required, and keeping a practical approach to the transaction can greatly assist. While expecting the best outcome is important, alternative outcomes should also be considered.
Are hostile takeovers permitted and what are the possible strategies for the target?
Bermuda law allows hostile takeovers but they are uncommon.
The target’s board of directors must act in good faith and in the best interests of the company. With that caveat, a board may try to dissuade shareholders from accepting a bid or take any other action to prevent the bid from proceeding, including searching for a ‘white knight’ to circumvent the takeover. A company’s bylaws may also contain a poison pill or other defensive provisions.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Representations, warranties and indemnities typically relate to areas that the buyer is concerned about after performing due diligence. These issues should be negotiated based on:
- the level of due diligence that has been carried out;
- the information provided;
- risk allocation; and
- issues identified in consultation with expert advisers.
The following seller representations, warranties and indemnities are typically included in acquisition agreements:
- corporate existence, authorisation and capacity;
- unencumbered title to assets/shares;
- financial accounts and records;
- changes since accounting date;
- IP rights and computer systems;
- environmental issues;
- information discovered in the data room/disclosure letter;
- no encumbrances;
- compliance with laws;
- employee benefit plans;
- change of control; and
- no material adverse changes.
Limitations and remedies
Are there limitations on warranties?
Representations and warranties are typically qualified by negotiation between the buyer and seller. Exceptions are listed in the disclosure letter or in a disclosure schedule forming part of the acquisition agreement itself. Survival periods are also typically built in.
What are the remedies for a breach of warranty?
Remedies for a breach of warranty must be in accordance with the terms of the acquisition agreement and common law, but parties will often agree to include indemnification provisions in the acquisition documentation. Indemnity provisions often provide a specified minimum threshold for claims and a maximum claim limit.
Are there time limits or restrictions for bringing claims under warranties?
The parties will typically negotiate time limits for claims and there is usually a general time limit with carve-outs for specific representations and warranties. This will vary according to the transaction. The time limits may be comparatively much shorter on an asset sale. There may also be escrow retention for all or specified warranties.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Typically, no taxes are payable in Bermuda on a share purchase, merger or amalgamation involving an exempted Bermuda company.
Stamp duty is payable on the transfer of real estate. Typically, this is payable on a conveyance as a percentage of the amount of consideration paid as follows:
- on up to the first $100,000 – 2%;
- on the next $400,000 – 3%;
- on the next $500,000 – 4%;
- on the next $500,000 (over $1 million but not exceeding $1.5 million) – 6 %; and
- thereafter – 7%.
A sale and purchase agreement relating to land or assets also attracts stamp duty of $25.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
What are the common methods used to mitigate tax liability?
What fees are likely to be involved?
The key fees for M&A transactions will relate to the professional fees payable to advisers (eg, investment bankers, lawyers and accountants). Otherwise, the central cost consideration will relate to the cost to acquire the target.
Management and directors
What are the rules on management buy-outs?
Generally speaking, directors should comply with conflict of interest rules and corporate governance policies. The Bermuda Stock Exchange Listing Regulations govern transactions where insiders and persons of control are involved.
What duties do directors have in relation to M&A?
The typical directors’ duties apply in relation to M&A – that is, directors have a duty to act honestly and in good faith, with a view to the best interests of the company, while exercising the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. These fiduciary obligations require directors to make informed decisions and act in good faith when making decisions on the company’s behalf.
Consultation and transfer
How are employees involved in the process?
Typically, employees need not be involved in the process.
In a share purchase, there is no change in the entity itself, meaning that there are no issues with respect to employment contracts or employee benefits.
In an asset purchase, the buyer is able to cherry-pick employees that it wishes to retain, although this may not apply to unionised employees. Unionised employees may be transferred if the buyer has taken over the collective bargaining agreement.
If there are unionised employees or a collective bargaining agreement is in place, this should be analysed and employees should be dealt with appropriately in accordance with any applicable procedures and as required by the union or collective bargaining agreement.
What rules govern the transfer of employees to a buyer?
What are the rules in relation to company pension rights in the event of an acquisition?
The National Pension Scheme (Occupational Pensions) Act 1998 requires employers to establish and maintain a pension plan for certain employees. Mandatory contributions must be made by both the employer and employee. Pension plans must meet prescribed minimum standards and are subject to regulation under statute. As a result, certain eligible employees will have continued protection of their pension rights or be provided with similar rights. However, this is subject to the vesting provisions which provide that full vesting of accrued benefits must occur no later than two years after commencement of membership in a pension plan.
The buyer must comply with the relevant pension laws if the target’s employees are employed by the buyer on an asset purchase.
In a merger or amalgamation transaction, the surviving company or amalgamated company will hold the assets and assume the liabilities of the merging or amalgamating entities by operation of law. Any pre-existing pension or other benefit plans of the amalgamating entities do not automatically merge. Any relevant plans will typically continue separately unless they are formally merged.
Other relevant considerations
What legislation governs competition issues relating to M&A?
Bermuda has no competition laws.
Are any anti-bribery provisions in force?
Bermuda’s anti-bribery and corruption laws are undergoing a process of review and modernisation but are presently governed by the Criminal Code Act 1907.
Further, the UK Bribery Act 2010 has extra-territorial effect and thus has direct implications for Bermuda, which is a British overseas territory, such that Bermuda-based companies with a nexus to the United Kingdom can be prosecuted in the United Kingdom if they are involved in bribery anywhere in the world.
What happens if the company being bought is in receivership or bankrupt?
Under Bermuda law, a ‘bankrupt’ company can be put into liquidation. This authority is contained in Part XIII (Winding-Up) of the Companies Act 1981. Where an insolvent company is involved, the process will take the form of a creditors’ voluntary winding up. The company and board usually cooperate during this process. The procedural steps for a winding up are contained in the Companies (Winding-Up) Rules 1982. If the company is uncooperative, it may be necessary for creditors to apply to the court for the appointment of a provisional liquidator or liquidator. In all of these circumstances, the party acquiring the company must deal with the liquidator and determine the best process for acquiring the company, given the fact that it is in liquidation.
Bermuda law also recognises the appointment of receivers. A receiver can be appointed by the court or a creditor pursuant to the powers contained in a security instrument. The receiver will take over control of the company and be the party with which a purchaser must coordinate various matters (eg, due diligence and discussions regarding the structure of any acquisition).
The scheme of arrangement procedure is also available to solvent or insolvent companies under the Companies Act 1981, as amended, whereby the process is court sanctioned.