The Cayman Islands (Cayman) has been the leading offshore jurisdiction for merger and acquisition (M&A) activity over the last two (2) years. In 2015, Cayman-incorporated companies were the target of 863 transactions worth a combined value of USD116.41bn. The value was more than twice the amount of the British Virgin Islands with USD49.62bn (with 387 M&A transactions) and well in excess of Bermuda with 498 M&A transactions with a combined value of USD67.57bn.
In 2016, Cayman-incorporated companies again led the way in terms of offshore M&A activity and were the target of transactions worth a combined USD68.85bn followed by the British Virgin Islands with USD41.65bn and Bermuda with USD41.25bn. By way of comparison, Hong Kong incorporated companies were the target of transactions worth a combined USD33.19bn in 2016.
With Cayman-incorporated companies becoming the target for such a large proportion of offshore M&A activity, our Year in Review of the Cayman Merger Take-Privates that completed successfully in 2016 aims to showcase some recent trends resulting from M&A activity in the specific area of merger take-privates involving Cayman-incorporated companies listed on U.S. stock exchanges, and to discuss some related lessons which are useful for shareholders, directors and their onshore legal advisors. While our main focus is on those transactions which actually completed in 2016, in providing our analysis on recent trends we also cover some M&A transactions that were either aborted or are still ongoing.
Development of the trend for using Cayman companies for IPOs and merger take-privates
Starting with the 1990’s, many Chinese companies chose to list on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market (NASDAQ) to gain, among other things, access to capital from U.S. investors and stature and credibility in an increasing global world. In or around 2011 and 2012, this trend changed. While U.S. listings remained attractive for Chinese companies, the cost of complying with reporting standards continued to increase. Additionally, a lack of comprehension by U.S. investors of the corporate structures being utilised by these companies and of the underlying business environment in China led to lower market valuations for these Chinese companies.
This opened the door for arbitrage opportunities. A Chinese company which was listed on the NYSE or NASDAQ but which had a stock market value lower than its intrinsic value would be taken private and de-listed with help from private equity (PE) sponsors and either (i) continue to be privately held and later sold to a strategic or a financial buyer or (ii) re-listed on the Shanghai Stock Exchange, the Hong Kong Stock Exchange or the Singapore Stock Exchange for a better pricing. A wave of merger take-private transactions followed and this trend remains strong to date, despite speculation of a potential clampdown on re-listing by Chinese securities regulators.
Since 2010, the Cayman Islands statutory merger regime (the “Cayman Merger Law”) has offered a more streamlined and efficient offshore alternative to the onshore merger law regimes (e.g. in New York and Delaware). The popularity of the Cayman Islands for merger take-privates further increased when in 2011 the shareholder voting threshold for approving a merger was reduced to a special shareholder resolution requiring only two-thirds of the votes cast.
Our Year in Review of the Cayman Merger Take-Privates that completed successfully in 2016 which (i) provides legal insights into developing trends and lessons that can be learned from merger take-private acquisitions from U.S. stock exchanges using the Cayman Merger Law, and (ii) deals with the issues that acquirers and minority shareholders should bear in mind. In addition to the above, the publication covers the following areas:
- The Nuts and Bolts of the Cayman Merger Law Regime
- Data Analysis of Merger Take-Private Transactions which completed successfully, including the following topics:
Cash, Equity or Debt
- Length of the Merger Process
Negotiating with the Special Committee
- What Value?
- Top 5 Lessons for the Buyout Group from the 2016 Take-Privates
- Top 5 Lessons for the Minority Shareholders from the 2016 Take-Privates