Legal and regulatory frameworkTypes of transaction
What types of transactions are classified as ‘corporate reorganisations’ in your jurisdiction?
The main forms of corporate reorganisation available in the Cayman Islands in the Companies Act (2021 Revision)are: mergers and consolidations, schemes of arrangement and takeovers.
It is also possible to effect certain business reorganisations, such as sales and purchases of shares or assets, by contractual agreement, or by unanimous consent of all participants.
Mergers and consolidations
‘Merger’ means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company.
‘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.
The essential difference between mergers and consolidations is that a consolidation produces a new company different from either of its constituent companies, while in a merger, one of the constituent companies will continue to exist as the other is merged into it.
Schemes of arrangement
A ‘scheme of arrangement’ is a court-approved compromise or arrangement ‘between a company and its creditors, or any class of them, or between the company and its members or any class of them’.
In addition to the power to compromise with creditors and members, the arrangements and reconstruction provisions in the Cayman Islands include provisions relating to facilitating the reconstruction and amalgamation of companies and, where a scheme or contract involves the transfer of shares or any class of shares to another company, provides for the power to acquire shares of dissentient shareholders.
A ‘takeover offer’ is an offer for the entire issued share capital of a target company, which could become effective without the offeror acquiring 100 per cent of such issued share capital. The act permits the offeror to acquire 100 per cent of the target company if the offer is approved by holders of not less than 90 per cent in value of the shares affected.Rate of reorganisations
Has the number of corporate reorganisations in your jurisdiction increased or decreased this year compared with previous years? If so, why?
Corporate reorganisations in the Cayman Islands continue to increase, not least because of take-private transactions involving Chinese businesses incorporated in the Cayman Islands whose equities were previously listed on public exchanges such as NASDAQ or NYSE. These companies are Cayman Islands domiciled entities within a corporate structure where the underlying business or business entity is based in the People’s Republic of China. A large number of corporate reorganisations originate from the United States and Europe, as well as there being a marked increase in Asia-related transactions. Given the rate of consolidation in industries such as insurance and healthcare, there have been a number of corporate organisations involving solvent captive insurance companies.Jurisdiction-specific drivers
Are there any jurisdiction-specific drivers for undertaking a corporate reorganisation?
Until 2009, the only mechanism available under the Companies Act for a merger or consolidation between companies was a court-approved scheme of arrangement. Sections 86–87 of the Companies Act give the Cayman Islands courts significant flexibility to approve corporate restructuring by way of schemes of arrangement, reconstruction and amalgamation. Section 88 of the Companies Act sets out provisions relating to the power to acquire shares of dissentient shareholders (takeover provisions).
These types of court-approved schemes continue to be available for more complex mergers but the Companies (Amendment) Act 2009 introduced a simpler and more cost-effective mechanism for mergers and consolidations between Cayman Island companies and between Cayman companies and foreign companies. Part XVI of the Companies Act now permits contractual mergers and consolidations without the requirement for court approval.
Corporate reorganisations in the Cayman Islands continue to increase, not least because of take-private transactions involving Cayman Islands companies with Chinese businesses whose shares were previously listed on NASDAQ or NYSE. These companies are Cayman Islands-domiciled entities within a corporate structure where the ultimate operating entity is based in the People’s Republic of China.Structure
How are corporate reorganisations typically structured in your jurisdiction?Structure of a merger or consolidation
The structure of a merger or consolidation involves the directors of each constituent company approving a written plan of merger or consolidation (a Plan).
Approvals and consentsShareholders
The Plan must be authorised by special resolution of the members of each constituent company and such other authorisation as may be specified in the articles of association of the respective companies.
Shareholder approval is not required for a merger of a Cayman parent with a Cayman subsidiary if a copy of the Plan is given to every member of each subsidiary company to be merged unless that member agrees otherwise. For these purposes, a parent is a company that owns at least 90 per cent of issued shares of each class in any subsidiary entitled to vote.
Each holder of a fixed or floating security interest in a constituent company must consent to the Plan unless the court waives consent (on the application of a constituent company that has issued the security). If a secured creditor does not consent, a constituent company may apply to court to waive the consent requirement. Secured lenders may require a specific arrangement as to priorities as a condition of consent.
Where a constituent company is licensed or regulated by the Cayman Islands Monetary Authority (CIMA), the Plan of merger or consolidation must be consented to by CIMA. Where a constituent company is licensed by CIMA, the continuing company (if not licensed) or the consolidated company will require a licence.
Any dissenting shareholder of a constituent company is entitled to payment of the fair value of shares held upon dissent to the merger or consolidation. Where the parties cannot agree on price, either party may file a petition to determine the fair value. However, dissenting rights are generally not available if the shares are listed on a recognised stock exchange.
The rights of dissenting shareholders do not delay or impede the effective date of a merger or consolidation but rather run concurrently and may well extend past the effective date. Shares of dissenting shareholders acquired by a company are to be cancelled and, if they are shares of the surviving company, are available for reissue.
The Plan must be signed by a director on behalf of each constituent company and filed with the Registrar of Companies together with the applicable fees, a certificate of good standing and a director’s declaration or affidavit.
A director must also give an undertaking that copy of the certificate of merger or consolidation will be given to the members and creditors of the constituent company and that notification of the merger or consolidation will be published in the Gazette.
Consequences of registration
A certificate of merger or consolidation issued by the Registrar of Companies constitutes prima facie evidence of compliance with all statutory requirements.
The rights and property of each constituent company immediately vest in the surviving or consolidated company and the surviving or consolidated company immediately becomes liable for all the debts, contracts, obligations and liabilities or each constituent company. Any existing claims, proceedings or rulings of each constituent company are automatically continued against the surviving or continued company.
In the case of a consolidation, the new memorandum and articles of association filed with the plan of consolidation immediately become the memorandum and articles of association of the consolidated company.
Upon a merger or consolidation becoming effective, the registrar will strike off the register any constituent company that is not the surviving company in a merger and any constituent company that participates in a consolidation.
Structure of a scheme of arrangement
The structure involves proceedings to sanction a proposed scheme being commenced by way of petition and a supporting affidavit. An interlocutory summons for an order convening a meeting of the company’s creditors must be filed with the petition. The court will fix a date for the substantive hearing of the petition and notice of the substantive hearing must be given to the creditors as part of the scheme documentation.
The supporting affidavit must include the following:
- particulars to enable the court to determine whether it is appropriate to convene class meetings of creditors and, if so, the composition of classes;
- particulars to enable the court to determine the proposed time and place for required meetings and the method of giving notice; and
- a description of the purpose and effect of the proposed scheme and why the scheme is necessary.
The scheme documentation must:
- include sufficient information to satisfy the court that the scheme documentation provides creditors with sufficient information to make an informed decision about the merits of the proposed scheme; and
- include the explanatory memorandum of the scheme documentation must draw attention to fact that creditors have the right to attend and be heard at the hearing of the petition.
Approvals and consentsShareholders
The scheme must be approved by the relevant members of the company at a special meeting convened by the court. Approval must be by majority in number representing 75 per cent in value of members of each class voting. Each of the ordinary and preference share classes would constitute a separate class and an approval level is required for each class. Founders or insiders who have a separate economic interest in the vote may be treated as a separate and distinct class.
The scheme must be approved by a majority in number representing 75 per cent in value of the creditors present and voting either in person or by proxy. Within seven days of the creditors’ meeting the applicant must file a supplementary affidavit sworn by the chairperson of the meeting verifying that notice was duly sent in accordance with the court’s order, that the meeting was duly held, and giving particulars of the result.
The court has the power to impose conditions and must be satisfied of the following before sanctioning a scheme:
- the classes were properly constituted;
- the meetings were convened and held in accordance with the directions of the court;
- the scheme was properly explained to shareholders and creditors so they could exercise an informed vote; and
- the scheme is one that an intelligent and honest person, who is a member of the relevant class and properly acting, might reasonably approve.
A dissenting shareholder is entitled to appear before the court at the approval application in relation to a scheme and argue against it. If the scheme is sanctioned, it is binding on all members, including those dissenting.
A copy of the court order approving the scheme must be annexed to every copy of the company’s memorandum and articles of association, and a copy of the court’s order should be lodged with the Registrar of Companies.
Effect of a court sanction
A scheme of arrangement is effective once a copy of the court order is lodged with the Registrar of Companies. Once sanction of the court is given to a scheme, the scheme is binding on all creditors and classes of creditors and members and classes of members who are parties, and on the company. A scheme cannot be altered subsequent to sanction being given, even if the shareholders and creditors acquiesce.
Structure of a takeover
A takeover is structured by way of an offer to purchase being sent to the shareholders.
If the target company is listed, tender offer documents are to be filed with the relevant exchange and the target company may be subject to certain rules and regulations in the jurisdiction of listing.
If acceptances are received within four months of the offer, from holders of at least 90 per cent in value of shares affected by the offer, the offeror may, at any time within two months of expiry of that four months, give notice to dissenting shareholders that their shares will be acquired.
Approvals and consentsShareholders
An offer can become unconditional with acceptances from 50.1 per cent of ordinary shareholders. The squeeze-out of the minority requires approval of holders of 90 per cent of shares to which the offer relates. The offeror may be able to purchase shares outside the offer but these will not count towards the 90 per cent compulsory cooperation level.
Dissenting shareholders have one month from the notice date to apply to the court to give reasons as to why the shares should not be purchased. The court has discretion to make any order considered appropriate but will generally not interfere with compulsory acquisition unless the dissenting shareholder is treated differently from other shareholders of the same class.
Where there is no application to court by dissenting shareholders or any court order to the contrary, dissenting shareholders are bound to transfer shares pursuant to the terms of the offer.
The court has discretion to make any order considered appropriate but will generally not interfere with compulsory acquisition unless the dissenting shareholder is treated differently from other shareholders of the same class.
Where notice is given by the offeror and there is no court order to the contrary or applications by dissenting shareholders are disposed of, the following takes place:
- the offeror is to transmit a copy of the notice of the desire to purchase shares to the target company and to transfer consideration representing the price payable for the shares;
- the target company is thereupon required to register the offeror company as holder of the shares; and
- the target company is to pay the sums received into a separate bank account and hold those sums on trust for persons entitled to the shares in respect of which the sums were received.
Where the court makes order an order, the offeror and target company are to comply with the terms of the court order.
Effect of court sanction
The offeror, target company and dissenting shareholders are bound by the terms of any court order.Laws and regulations
What are the key laws and regulations to consider when undertaking a corporate reorganisation?
The key legislation is contained in the Companies Act (2021 Revision) (the Companies Act). Sections 86–87 of the Companies Act give the Cayman Islands flexibility to approve corporate restructuring by way of schemes of arrangement, reconstruction and amalgamation. Section 88 of the Companies Act sets out provisions relating to the power to acquire shares of dissentient shareholders (takeover provisions).
Part XVI of the Companies Act permits contractual mergers and consolidations without the requirement for court approval, specifically sections 232–239A.
The Grand Court Act (2015 Revision), the Grand Court Rules (GCR), which govern court proceedings, and the Financial Services Division Guide (the FSD Guide), which contains procedural rules applicable to the work of the Financial Services Division of the Grand Court are also relevant as well as the published practice directions.
Other legislation and regulations that may be relevant include:
- the Limited Liability Companies Act (2021 Revision);
- the Limited Liability Partnership Act (2021 Revision);
- the Exempted Limited Partnership Act (2021 Revision);
- the Banks and Trust Companies Act (2021 Revision);
- the Information and Communications Technology Act (2019 Revision);
- the Insurance Act 2010;
- the Interpretation Act (1995 Revision);
- the Mutual Funds Act (2021 Revision);
- the Securities Investment Business Act (2020 Revision);
- the common law of the Cayman Islands and other Commonwealth jurisdictions (primarily that of England);
- the Cayman Islands Code on Takeovers and Mergers; and
- any domestic takeover codes, laws and listing rules in the jurisdiction where the shares of the target company are traded or listed.
The Cayman Islands has introduced measures and laws demonstrating the continued efforts to comply with and promote transparency with global regulatory bodies, law enforcement agencies and tax authorities so as to maintain consistency with international standards while at the same time respecting the right to privacy of those legally conducting business in Cayman. These measures notably include the introduction of a beneficial ownerships register regime and an economic substance regime, legislation in respect of mutual funds and collective investment vehicles, and the replacement of the Confidential Relationships (Preservation) Law with the Confidential Information Disclosure Act. As such, these laws, regulations and regimes may also be relevant.National authorities
What are the key national authorities to be conscious of when undertaking a corporate reorganisation?
The key national authorities are:
- the Registrar of Companies;
- the Cayman Islands Stock Exchange Authority; and
- the Grand Court of the Cayman Islands.
Law stated dateCorrect on
Please state the date on which the law stated here is accurate.
5 March 2021