Options for Structuring the Takeover of a Listed BVI Company
This article also appeared in the January 2014 edition of the BVI International Finance Centre's newsletter. A copy can be found here.
British Virgin Islands ("BVI") companies are frequently listed on the major stock exchanges, including the London Stock Exchange/AIM, Nasdaq, Hong Kong Stock Exchange and TSX. When a bidder is considering a potential acquisition of a publicly listed BVI company (the "Target"), there are various ways in which such an acquisition could be effected. This article examines those alternative routes.
It should be noted that the BVI does not have in force securities laws or a code of conduct to govern takeovers. The takeover of a BVI company which is listed on a foreign stock exchange will therefore be likely to be subject to, and governed by, the rules of any relevant listing and/or securities authority.
BVI law offers two principal methods to achieve the possible acquisition: (i) a takeover bid accepted by the Target's shareholders (or, more likely, a majority of the Target's shareholders); and (ii) a shareholder approved transaction, such as a merger or court approved plan of arrangement. There are alternative ways to achieve the possible acquisition where the board of the Target approves the offer, without a shareholder vote (or with a simple majority shareholder vote only) but these may not be acceptable under the applicable Exchange rules. In addition, there may be issues of uncertainty as to the outcome where these alternatives carry the possibility of dissent and appraisal rights.
Takeover bid accepted by (a majority of) the Target's shareholders
As noted above, BVI law does not set down rules or a timetable for an offer process between a bidder and the Target's shareholders. The rules and timetable applicable to a company listed on the applicable Exchange will apply.
BVI law offers a statutory process under which a bidder that has acquired 90% or more of the voting shares in a BVI company can forcibly redeem the shares of the remaining minority shareholders, in order to become the sole shareholder. We have set out the statutory process below, but note that the Target may amend its memorandum and articles of association ("M&A") to disapply or vary these provisions as part of its takeover protection plans.
Under the BVI Business Companies Act, 2004 (as amended, the "Act"), subject to the memorandum or articles of a company, members of the company holding 90% of the votes of the outstanding shares entitled to vote, and members of the company holding 90% of the votes of the outstanding shares of each class of shares entitled to vote as a class, may give a written instruction to the company directing it to redeem the shares held by the remaining members. Upon receipt of the written instruction referred to above, the company shall redeem the shares specified in the written instruction irrespective of whether or not the shares are by their terms redeemable. The redemption shall be at a specified price which the company determines to be their fair value.
The right of the 90% majority to bring about the redemption, and accordingly to "squeeze out" the remaining members, is therefore straightforward. The Act does not give the minority a statutory right to prevent the redemption from taking place, although the Act does give a right to the minority shareholder(s) to dissent to the redemption price offered, and contains a timetable for the procedure for dissenting and assessing the fair value of the shares to be redeemed.
Shareholder approved transaction
BVI law offers several routes to structure a shareholder approved transaction. For example, the acquisition could be structured by way of a statutory merger or consolidation.
A merger involves merging two or more companies into one of the constituent companies that shall remain as the surviving company, and a consolidation involves two or more companies consolidating into a new company. The merger could result in the surviving entity being the Target, the bidder, or a BVI (or foreign) company set up by the bidder for the purpose.
The process for effecting the merger will depend on whether the constituent companies are BVI companies or whether a foreign company is involved as the merging or surviving company. The board of the Target would need to approve a plan of merger containing the specified information. The plan of merger must be authorised by a resolution of the shareholders of the Target of every class of shares entitled to vote on the merger. If a meeting of members is to be held, notice of the meeting, accompanied by a copy of the plan of merger, must be given to each member, whether or not entitled to vote on the merger; and if it is proposed to obtain the written consent of members, a copy of the plan of merger must be given to each member, whether or not entitled to consent to the plan of merger.
The M&A of the Target will state the requisite majority of the votes to approve the resolution of the shareholders.
As soon as a merger becomes effective:
(a) the surviving company (so far as is consistent with its M&A, as amended by the articles of merger) has all rights, privileges, immunities, powers, objects and purposes of each of the constituent companies;
(b) the M&A of the surviving company are automatically amended to the extent, if any, that changes to its M&A are contained in the articles of merger;
(c) assets of every description, including choses in action and the business of each of the constituent companies, immediately vest in the surviving company;
(d) the surviving company is liable for all claims, debts, liabilities and obligations of each of the constituent companies;
(e) no conviction, judgment, ruling, order, claim, debt, liability or obligation due or to become due, and no cause existing, against a constituent company or against any member, director, officer or agent thereof, is released or impaired by the merger; and
(f) no proceedings, whether civil or criminal, pending at the time of a merger by or against a constituent company, or against any member, director, officer or agent thereof, are abated or discontinued by the merger; but
(i) the proceedings may be enforced, prosecuted, settled or compromised by or against the surviving company or against the member, director, officer or agent thereof, as the case may be; or
(ii) the surviving company may be substituted in the proceedings for a constituent company.
Again, a shareholder may have the right to dissent from the merger, and to exit the company (but not prevent or delay the merger in the absence of illegality). Ultimately, if the company and the dissenter fail to agree on the price to be paid for the shares owned by the dissenter, then the statutory procedure provides that the fair value of the shares owned by the dissenter is fixed by three appraisers.
BVI law also permits the directors to apply to the BVI court for approval of a Plan of Arrangement or a Scheme of Arrangement.
Plan of Arrangement
The Act contains a statutory process for court approved "plans of arrangement". If the directors of a company determine that it is in the best interests of the company or the creditors or members of the company, the directors may approve a plan of arrangement that contains details of the proposed arrangement, even though the proposed arrangement may be authorised or permitted by any other provision of the Act or otherwise permitted.
Upon approval of the plan of arrangement by the directors, the company must apply to the BVI court for approval of the proposed arrangement. The court may:
(a) determine what notice, if any, of the proposed arrangement is to be given to any person;
(b) determine whether approval of the proposed arrangement by any person should be obtained and the manner of obtaining the approval;
(c) determine whether any holder of shares, debt obligations or other securities in the company may dissent from the proposed arrangement and receive payment of the fair value of his shares, debt obligations or other securities under the dissent and appraisal provisions of the Act;
(d) conduct a hearing and permit any interested person to appear; and
(e) approve or reject the plan of arrangement as proposed or with such amendments as it may direct.
Where the court makes an order approving a plan of arrangement, the directors of the company, if still desirous of executing the plan, shall confirm the plan of arrangement as approved by the court whether or not the court has directed any amendments to be made thereto. Having confirmed the order as approved by the court, the order and certain statutory requirements must then be followed and the arrangement will be effective on the date that articles of arrangement are registered by the Registrar of Corporate Affairs or on such date subsequent thereto, not exceeding 30 days, as is stated in the articles of arrangement.
The "arrangements" which may be subject of a plan of arrangement are broadly defined and would encompass, among other things, a reorganisation or reconstruction of a company, a merger or demerger.
The plan of arrangement process is not frequently used. The BVI court has recently confirmed that it has no power to approve plans of arrangement involving the forfeiture or confiscation of property. Guidance has been given on how to approach holders of securities and structure the plans before asking the court for approval. The court is likely to question the use of the plan of arrangement provisions to achieve a transaction that may be achieved without court involvement, and may not be inclined to make an order that it considers unnecessary under BVI law. The court may permit members to object at the hearing, and to put counter arguments to the court, where they would not have an opportunity to do so under the company's M&A. Finally, the court may permit members to dissent and redeem their shares for appraised fair value.
Scheme of Arrangement
An alternative to a plan of arrangement is a statutory, court approved, scheme of arrangement. Where an arrangement is proposed between a company and its members, or any class of them, the court may, on the application of the company or a shareholder (or an administrator or liquidator), order a meeting of the members or class of members, as the case may be, to be summoned in such manner as the court directs.
The two main advantages of a scheme of arrangement are that, first, if a majority in number representing 75% in value of the members or class of members, present and voting either in person or by proxy at the meeting ordered by the court, agree to any arrangement, the arrangement, if sanctioned by the court, is binding on (among others) all the members or class of members, as the case may be, and also on the company and any liquidator of the company. Secondly, the dissent rights of shareholders do not apply.
An order of the court made as above must be registered with the Registrar of Corporate Affairs and shall has no effect until so registered. The order must also be annexed to every copy of the company's M&A issued after the order has been made.
The Act does not define what an "arrangement" may be for the purposes of this section and a court would have discretion to decline to consider a proposed arrangement if it was not satisfied that the arrangement is within the scope of these statutory provisions.
Role of the Target's board, and fiduciary out
Under BVI law, the common law duties of directors to act honestly and in good faith with a view to the best interests of the company (i.e. of the shareholders as a whole and not one individual shareholder) have been given statutory footing.
A "fiduciary out", i.e. the ability of the board of directors of the Target to withdraw their recommendation to shareholders for a particular offer and recommend instead a subsequent offer, can be problematic for directors. It is conceivable that in binding themselves to a "no-shop" undertaking with a particular bidder, the Target’s board may be fettering their discretion in such a way as to call into question their future ability to act in the best interests of the company. For example, where a subsequent competing offer turns out to be at a higher price, or on terms otherwise more beneficial to the shareholders, it may actually be in the company’s best interests to proceed with that subsequent offer.
However, even investigating such a competing offer could be a breach of the contract with the initial bidder (although it may be that the breach is justifiable on the grounds that the competing offer is so much better that neither the company nor the shareholders will suffer net loss). The Target company’s board will therefore likely be keen specifically to include their fiduciary out in an acquisition agreement.
The question arises whether a bidder can, nevertheless, require that the Target’s board effectively "opt out" of the fiduciary out, tying themselves into undertakings to proceed with the initial offer, regardless of any competing bids and regardless of their fiduciary duties. We are not aware of any decided case in which a BVI court has determined whether such a provision would constitute an unacceptable fetter on the discretion of a BVI Target’s board. The directors may be able to justify such a fetter if they can satisfy the court (and their shareholders) that they have fully investigated the alternatives, and have determined that the bid in question was in the best interests of the company at the time the agreement was entered into, because it would help secure the completion of that bid. In practice, an independent committee of the board of the Target would be established and would take legal advice on these issues.
It can be seen that the attractions of listing through a BVI vehicle are matched by the scope of available routes to achieve a takeover.