Going Private? The Benefits of Statutory Mergers in the British Virgin Islands
A little more than a year after the introduction of new mergers legislation in the Cayman Islands and the jurisdiction is now in a position to reflect on 12 of its busiest and most successful months on the mergers and acquisitions front. High-profile takeovers, most of which have involved acquisitions of Cayman Islands companies listed on the NASDAQ and New York Stock Exchanges (e.g. Funtalk China Holdings Limited, Chemspec International Limited and Shanda Interactive Entertainment Limited), have dominated the takeovers headlines, having all capitalised on the Cayman Islands' new and flexible mergers regime.
In light of the success the new mergers legislation has had in the Cayman Islands, it is timely to note that the British Virgin Islands ("BVI") has had virtually identical mergers legislation in its statute books stretching back to 1984. The BVI merger provisions have been applied to equally great effect in takeovers of listed BVI companies (recent examples include Apax partners' takeover of Tommy Hilfiger Corporation and Essilor International S.A.'s acquisition of FGX International Holdings Limited).
The following provides an overview of the key components of a merger in the context of an acquisition or "take private" of a BVI company, and compares the merger regime with that of a court-supervised scheme of arrangement, which continues to be the widely-used alternative to a merger in jurisdictions where local laws do not neatly fit in with the BVI's merger regime.
What is a merger?
A merger is a relatively straight forward procedure under the BVI Business Companies Act, 2004 ("Act") whereby one or more constituent companies are subsumed into another constituent company, the latter of which becomes the surviving entity upon the merger taking effect. The legal effect of a merger is that the surviving entity assumes all the rights, privileges, immunities, powers, objects and purposes of every non-surviving constituent company, whilst at the same time the subsumed companies cease to exist.
Whilst BVI law provides for mergers of BVI companies with foreign companies – including scenarios where the foreign company becomes the surviving entity to the merger – for the purposes of the analysis below, we have assumed that the merger is between two BVI companies. In the "take private" context this is the preferred structure whereby the bidder incorporates a new BVI company for the sole purpose of merging with and being subsumed into the listed company, the latter of which survives the process and de-lists.
Steps required to implement a merger
In order to implement a merger, each constituent company must take the following steps:
(a) The directors must approve a plan of merger (see below for details), following which they then convene an extraordinary general meeting of shareholders at which the plan of merger is put to the shareholders for approval. The voting threshold for approval of the merger is a simple majority of every class of shareholders authorised to vote on the merger unless a higher threshold is stipulated under the company's memorandum and articles of association.
(b) Once the plan of merger has obtained shareholder approval, articles of merger (see below for details) are executed by each constituent company and filed with the BVI's Registry of Corporate Affairs ("Registry") accompanied by any resolutions concerning amendments to the memorandum and articles of the surviving company.
The merger becomes effective once the articles of merger have been filed with the Registry or on any later date (within 30 days following the filing) as may have been provided for in the articles of merger. The Registry will issue the surviving company with a certificate of merger that constitutes conclusive evidence of compliance with the applicable requirements of the Act. Any non-surviving BVI company is automatically struck off the companies register and dissolved.
Plan of merger
The plan of merger is required to set out the key terms of the merger as follows:
(a) The names of the constituent companies to the merger and the name of the surviving company.
(b) With respect to each constituent company:
(i) the designation and number of outstanding shares of each class of shares, specifying each such class entitles to vote on the merger; and
(ii) a specification of each such class, if any, entitled to vote as a class.
(c) The terms and conditions of the proposed merger, including the manner and basis of cancelling, reclassifying or converting shares in each constituent company into shares, debt obligations or other securities in the surviving company, or money or other assets, or a combination thereof.
(d) A statement of any amendment to the memorandum or articles of the surviving company to be brought about by the merger.
Articles of merger
The articles of merger are required to contain details of:
(a) The plan of merger.
(b) The date on which the memorandum and articles of each constituent company were registered by the Registry.
(c) The manner in which the merger was authorised by each constituent company.
Comparing mergers with schemes of arrangement
The key advantages that a merger has over a scheme of arrangement are as follows:
(a) With a merger, all shareholders of the target company with a right under its memorandum and articles to vote on the approval of the deal can do so regardless of whether they may be affiliated with the bidder or the bidder itself. This contrasts with a scheme of arrangement where, in the case of a "take private" proposed by a controlling shareholder, only the independent shareholders can vote. The controlling shareholder, even if it holds a significant majority of the target shares, is disenfranchised from voting under a scheme of arrangement.
(b) A merger has a lower approval threshold than a scheme of arrangement. With a merger, all that is required for approval is a simple majority of the shareholders of each constituent company. In contrast, with a scheme of arrangement, the threshold is a majority in number of affected (i.e. independent) shareholders on a show of hands, whose collective shareholding must be at least 75% of the shares being voted at the meeting to approve the transaction.
(c) Unlike with a scheme of arrangement, a merger is not a court-supervised process. This has time and cost-saving advantages for the parties to the deal. It also provides the target company in a merger with considerably more manoeuvrability in the event of a competing, unsolicited (or hostile) offer being made because there would be no need for it to deal with obtaining Court approval for its actions or to otherwise keep the Court informed of what it is undertaking and how that might bear on the scheme.
(d) With a merger it is easier for a bidder to obtain irrevocable voting undertakings from key target shareholders without worrying about whether those shareholders, by virtue of their undertaking or any incentives given to them, will be disenfranchised from voting alongside other (independent) shareholders. With a scheme of arrangement, any target shareholder who is to receive something from the bidder that is different to the independent shareholders would not be entitled to vote alongside them. Instead they would comprise their own separate class of shareholders for the purpose of approving the transaction, and in circumstances where the approval of all classes is required, this could reduce the likelihood of the scheme of arrangement being approved.
The following are possible disadvantages of a merger compared with a scheme of arrangement:
(a) Unlike with a scheme of arrangement where the minority is bound by the majority, shareholders of constituent companies to a merger who dissent from the transaction are entitled to exercise appraisal rights in order to determine the fair value of their shares. The Act provides a mechanism for this assessment to be made by appraisers appointed by each of the dissenting shareholders, the relevant constituent company and the appraisers themselves. Two points emerge from this. The first is that the availability of appraisal rights for dissenting shareholders is not necessarily a "disadvantage" of a merger. Indeed, it is a protection mechanism from which constituent company directors will derive considerable comfort when considering their fiduciary obligations. The second is that a dissenting shareholder does not delay the implementation of a merger and cannot influence the affairs of the surviving company after the merger has been brought into effect. In this regard, dissenting shareholders lose all their rights as shareholders other than the right to be paid fair value.
(b) An area of particular concern to directors of target companies that are the subject of a "take private" proposal from a controlling shareholder who is already in possession of a sufficient number of shares in the target to drive the merger through without the approval of other (independent) shareholders will be the manner in which they discharge their fiduciary duties to ensure that the interests of all (especially independent minority) shareholders are protected. In this scenario, unlike with a scheme of arrangement where the decision-making is left in the hands of the independent shareholders, the independent shareholders cannot influence the outcome of the deal. Directors will take comfort from the protection given to dissenting shareholders under the Act in the form of the availability of appraisal rights, but they should also be mindful that a merger, at its core, is simply a deal, and provisions can be built into the deal to ensure that independent or minority target shareholders are protected. One way of doing this might be to incorporate an additional "majority of minority" voting threshold alongside the special resolution. Another might be to make the merger conditional upon only a certain number of shareholders electing to dissent.
The BVI's statutory merger regime was introduced more than a quarter of a century ago for the purpose of providing a modern and simple mechanism for implementing takeovers of BVI companies without the involvement of the Courts, and so as to allow all applicable voting shareholders of participating companies the right to be involved in the decision-making process. With the Cayman Islands' new mergers legislation making headlines on major deals in the last 15 months, it is important for lawyers to remind themselves of the availability of almost exactly the same procedure in the BVI, not just in the context of "take privates" involving listed companies, but also for more routine mergers and acquisitions where the BVI's flexible legislative regime is likely to play an important and helpful role.