Technology M&A 2022 Comparisons

Last Updated December 14, 2021

Contributed By Conyers

Law and Practice

Author



Conyers is a leading international law firm with a broad client base including FTSE 100 and Fortune 500 companies, international finance houses and asset managers. The practice comprises a team of highly experienced lawyers, advising on the laws of Bermuda, the British Virgin Islands and the Cayman Islands. Through its global network of offices, it has real-time capability in the prominent financial markets of London, Hong Kong and Singapore, and it advises some of the world’s leading corporations, banks and financial institutions. It provides lenders and borrowers with high-quality, responsive and solutions-oriented advice on a wide variety of secured and unsecured financial transactions. Conyers specialises in mergers and acquisitions. From early structuring to successful closing, its lawyers advise on all aspects of M&A transactions and have experience in handling multibillion-dollar deals across multiple industry sectors.

There were 83 M&A deals in the British Virgin Islands in 2020, six of which were in the technology sector. The BVI is home to 400,000 companies. In view of the size of the jurisdiction, M&A activity is weaker than in the global marketplace.

There were no particular key trends in the BVI in 2020-21. The M&A market in the BVI is diverse.

New start-up companies are regularly incorporated in the BVI.

To facilitate this process, the following documents are sent to the client:

  • an application form to incorporate a BVI business company, including bank wiring instructions, a form of subscription agreement, a form of director’s acceptance letter and a schedule of fees;
  • a KYC document which sets out the beneficial ownership verification procedure and form of personal declaration;
  • a draft of the standard form of services agreement and indemnity agreement of the law firm's trust company (BVI) limited – once the application form is returned completed, the law firm will provide execution copies for signature (note that the firm will not be able to proceed without signed agreements); and
  • a publication providing further information on BVI business companies.

In order to incorporate a BVI company, it may be helpful to think of it as a multi-stage process as follows. 

First Step

KYC: for step 2, the law firm will need “know your client” information.

Second Step

The client must provide the following:

  • a completed and signed application form;
  • KYC information (including a personal declaration completed by the ultimate beneficial owners or UBOs); 
  • a subscription agreement from each registered shareholder;
  • a director’s acceptance letter from each proposed director (the subscription agreement and director’s acceptance letters are included with the application form and if the name of the BVI company is provided, then this can be finalised; BVI law specifically requires somewhat personal information in the director’s acceptance letter and this must be completed in full); and
  • an incorporation retainer. 

Third Step

Once the firm receives the completed application form, it will finalise the services agreement and indemnity agreement and send the execution versions to the client. While the forms of these two documents are attached, the execution version is sent separately. Both need to be sent back signed.

Fourth Step

Once all the foregoing steps are completed, the law firm will incorporate and organise the company, and it is ready to carry on business. Timing is dependent upon how quickly the aforementioned documents and funds can be sent. Incorporation usually takes 24 hours from receipt of the above-mentioned documents.

There is no minimum capital requirement.

Most entities in the BVI are BVI business companies with limited liability. Entrepreneurs are typically advised to incorporate a BVI business company.

Early-stage financing would typically be provided by foreign investors. The investment can take the form of an injection of capital in exchange for shares, or a loan agreement for which security would be provided by the start-up.

Home country venture capital is not easily available to start-ups in the BVI. Home country venture capital is not available from a government-sponsored fund. Foreign venture capital firms actively provide financing in the BVI.

As the venture capital firms are nearly always from a foreign jurisdiction, the documentation would be driven by that jurisdiction. Typically, that would be the US, which has well-developed standards for venture capital documentation.

Start-ups continue in the same corporate form and in the same jurisdiction. They will not be advised at any stage of VC financing that they need to change their corporate form or jurisdiction. However, they might consider listing on an exchange.

When investors in a start-up in the BVI are looking for a liquidity event, they would be more likely to take a company public and arrange a listing on a securities exchange, rather than run a sale process. The current trend is not to have a dual-track process, but rather to choose an IPO or a sale at the outset.

If the company decides to do a listing it would be listed on a foreign exchange. The BVI does not have a home country exchange.

As a matter of course, squeeze-out mechanisms are included in the constitutional documents. There is also a statutory mechanism set out in the BVI Business Companies Act, 2004.

If a sale of a company is chosen as a liquidity event, the sale process would be run as a bilateral negotiation with a chosen buyer, rather than as an auction.

There is no typical transaction structure in the BVI for a privately held technology company that has a number of VC investors. The BVI sees both sales of the entire company, and a sale of a controlling interest with VC funds having a choice to stay as shareholders in the company.

Most transactions in the BVI are completed as a sale of the entire company for a combination of stock and cash.

Founders and VC investors are expected to stand behind representations and warranties and certain liabilities (eg, tax, employee benefits, environmental) after closing (eg, through indemnification or other mechanisms). An escrow/holdback is customary for these purposes. Representations and warranties insurance is not customary in the BVI.

There do not appear to be any spin-offs in the technology sector in the BVI.

Notwithstanding any provision of the BVI Income Tax Ordinance, all dividends, interest, rents, royalties, compensations and other amounts paid by a company, and capital gains realised with respect to any shares, debt obligations or other securities of a company, are exempt from all the provisions of the Income Tax Ordinance. As such, spin-offs in the BVI can be structured as a tax-free transaction at the corporate level and shareholders’ level.

A spin-off, immediately followed by a business combination, is possible in the BVI.

When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spin-off. A spin-off is a type of divestiture. A company creates a spin-off expecting that it will be worth more as an independent entity. A spin-off is also known as a spin-out or starbust.

  • A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.
  • The spun-off companies are expected to be worth more as independent entities than as parts of a larger business.
  • When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity.

A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses. An entity's purchase of a controlling interest in another unrelated operating entity will usually be a business combination.

There is no typical timing for a spin-off. Once the deal has been agreed, it can proceed. The parties do not require approval from a tax authority in the BVI prior to completing a spin-off.

It is not customary in the BVI to acquire a stake in a public company. There is no reporting threshold for an acquisition of an interest in a public company or timing of the reporting obligation. This would be driven by the exchange on which the company is listed. Similarly, there is no obligation on the part of the buyer to state the purpose of the acquisition of the stake or the buyer’s plans or intentions with respect to the company. However, in practice, the directors make enquiries to satisfy their common-law and statutory duties. The buyer is not required to make a proposal or state that it will not be making a proposal within a specified period of time (ie, there is no “put up or shut up requirement”).

The legal obligations for shareholders relate to anti-money laundering and require the registered agent to identify the beneficial owners and registerable legal entities for which it acts as registered agent, collect the information prescribed by the Beneficial Ownership Secure Search System Act, 2017 (the “BOSS Act”) and enter the information on the RA database required to be maintained under the BOSS Act.

There is no mandatory offer threshold, except in the case of a merger (see 6.3 Transaction Structures).

A publicly traded or widely held BVI business company may go private under British Virgin Islands law by:

  • a mandatory redemption of minority shares pursuant to Section 176 of the BVI Business Companies Act (the “Act”);
  • an arrangement pursuant to Section 177 of the Act;
  • an arrangement pursuant to Section 179A of the Act; or
  • a merger or consolidation pursuant to Section 170 of the Act.

Dissenting shareholders may exercise certain dissent rights and be paid the fair value of their shares in cash. The four methods of going private and the dissent rights are considered below.

Redemption of Minority Shares

Section 176 of the Act permits shareholders holding 90% of the votes of the outstanding shares of a company entitled to vote, to direct the company to redeem the shares held by the remaining shareholders. On receipt of the direction, the company must redeem the shares irrespective of whether the shares are by their terms redeemable. Such shareholders do not need to be connected or affiliated in any way, provided they are able to act in concert to provide the required direction to the company to redeem the shares. 

The company must then give written notice to each shareholder whose shares are to be redeemed, stating the redemption price and the manner in which the redemption is to be effected. The redemption price may be any amount and the redemption proceeds may be paid in cash or goods, but a shareholder whose shares are being redeemed may dissent and demand to be paid the fair value of their shares in cash. 

Shareholders entitled to use the power under Section 176 of the Act may do so at any time, whether pursuant to a tender offer or otherwise.

Plan of Arrangement

An arrangement includes a transfer of shares in a company for shares, debt obligations or other securities in the company, or money or other property, or a combination thereof. It also includes a reorganisation or reconstruction of a company. If the directors of a company determine that an arrangement is in the best interests of the company, its creditors or its shareholders, they may approve a plan of arrangement. The company must then apply to the court for its approval of the proposed arrangement. The court will review the arrangement for fairness and will determine whether certain additional approvals (such as shareholder or creditor approval) must be obtained and whether dissent rights should be granted. The court may approve or reject the plan of arrangement as proposed, or may approve the plan of arrangement with certain amendments as it directs. 

If a court approves a plan of arrangement, the directors may confirm the plan of arrangement as approved by the court. After the directors have confirmed the plan and obtained such approvals as may be required by the court, articles of arrangement (which include the plan of arrangement) are executed and filed with the Registrar of Corporate Affairs. The arrangement will become effective on its registration by the Registrar of Corporate Affairs (or up to 30 days thereafter if the articles of arrangement so provide).

Scheme of Arrangement

Where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or between a company and its shareholders, or any class of them, a court in the BVI may, on application, order a meeting of the relevant creditors or shareholders, as the case may be, to be summoned in such manner as the court directs. The application to court may be made by the company, a creditor, a shareholder, or an administrator or liquidator of the company. If a majority in number representing 75% in value of the relevant creditors or shareholders, as the case may be, agree to the compromise or arrangement, then the compromise or arrangement, if sanctioned by the court, is binding on all the relevant creditors or shareholders, as the case may be. 

A plan of arrangement and a scheme of arrangement achieve similar results. Where court approval is considered beneficial (eg, if it is intended to extinguish warrants), a plan of arrangement is typically preferred for a going-private transaction. The court will usually require a resolution approved by a simple majority of the relevant persons for a plan of arrangement, whereas for a scheme of arrangement, the statutory threshold is 75%. However, with a scheme of arrangement, there are typically no dissent rights, whereas for a plan of arrangement, it is expected that the court will grant dissent rights.

Merger or Consolidation

By far the most common method of going private in the BVI is the statutory merger or consolidation. Two or more companies may merge or consolidate in accordance with Section 170 of the Act. A merger means the merging of two or more constituent companies into one of the constituent companies, and a consolidation means the consolidating of two or more constituent companies into a new company. In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorised by a resolution of shareholders. The plan of merger or consolidation must include: 

  • the name of each constituent company and the name of the surviving company or the consolidated company, as the case may be;
  • in respect of each constituent Company –
    1. the designation and number of shares entitled to vote on the merger or consolidation, and a specification of such shares, if any are entitled to vote as a class or series; and
    2. the terms and conditions of the proposed merger or consolidation, 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 or consolidated company, or money or other asset, or a combination thereof;
  • in respect of a merger, a statement of any amendment to the memorandum or articles of association of the surviving company to be brought about by the merger; and
  • in respect of a consolidation, the memorandum and articles of association for the consolidated company.

The plan of merger must be approved and authorised by a resolution of shareholders. Furthermore, shareholders not otherwise entitled to vote on the merger or consolidation (eg, if they have non-voting shares) may still acquire the right to vote if the plan of merger or consolidation contains any provision which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation, irrespective of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation. However, subject to the memorandum and articles of association of the constituent companies, there are no super-majority or majority of minority approvals required. 

As indicated above, the shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities of the surviving or consolidated company, or money or other assets, or a combination thereof. Furthermore, some or all the shares of a class or series may be converted into a particular or mixed kind of asset, while other shares of the same class or series may receive a different kind of asset. As such, not all the shares of a class or series will receive the same kind of consideration. It is on this basis that a merger or consolidation is especially useful as a going-private technique. 

After the plan of merger or consolidation has been approved by the directors and authorised by a resolution of the shareholders, articles of merger or consolidation are executed by each company and filed with the Registrar of Corporate Affairs. Articles of merger or consolidation must include the following: 

  • the plan of merger or consolidation and, in the case of a consolidation, the memorandum and articles of association of the consolidated company; 
  • the date on which the memorandum and articles of association of each constituent company were registered by the Registrar of Corporate Affairs; and 
  • the manner in which the merger or consolidation was authorised with respect to each constituent company.

Public company acquisitions in the BVI are cash transactions. In a merger or similar structure, the acquisition is by way of a percentage of the shares acquired. There is no minimum price requirement for a takeover offer/business combination. It is typical to use contingent value rights or other bridging mechanisms to bridge value gaps between the parties with high valuation uncertainty.

It is common for the directors to establish special or ad hoc committees and seek independent financial advice while considering the interests of the company and its shareholders. Regulators do not restrict the use of offer conditions.

It is customary in the BVI to enter into a transaction agreement in connection with a takeover offer or business combination. As noted in 6.5 Common Conditions for a Takeover Offer/Tender Offer, independent financial advice is commonly given to directors while considering the interests of the company and the shareholders. Typically, a statement appears in the offer or merger document or registration statement to the effect that the directors believe the takeover to be in the best interests of the company and, based on the fairness opinion (generally provided by the company’s financial advisers), believe the consideration to be fair to the general body of shareholders from a financial point of view. Whether an independent committee or fairness opinion is required will depend on the facts of each transaction. It is customary for a public company to give representations and warranties.

There are no minimum acceptance conditions, except in the case of a squeeze-out merger where the acquirer succeeds in acquiring 90% or more of the shares. Then it may invoke the redemption of minority shares mechanism under the Act. Where an acquirer succeeds in acquiring between 50% and 90% of the shares, it may invoke the merger provisions under the Act.

If the acquirer succeeds in acquiring 90% or more of the shares, then it may invoke the redemption of minority shares mechanism in the Act.

Upon receipt of a notice to redeem, the company is obliged to redeem the shares specified in the instructions, regardless of whether the shares are, by their terms, redeemable. This is instigated by the company giving written notice to each member whose shares are being redeemed, stating the redemption price and the manner in which the shares will be redeemed.

If a minority shareholder objects to the price notified to them by the company, they may object and insist on being paid fair value for their shares. Within seven days of receipt of the dissent notice, the company must make an offer to each dissenting shareholder to purchase their shares at a specified price that the company has determined to be a fair value.

If the company and the dissenting shareholder fail to agree on the price to be paid for the shares within the periods set out in the Act, the following steps need to be taken:

  • the company and the dissenting member must each appoint an appraiser;
  • the two designated appraisers must designate another appraiser;
  • the three appraisers must fix the value of the shares owned by the dissenting member and that value is binding on the company and the dissenting members for all purposes; and
  • the company must pay the member the amount in money, on the surrender by the member of the certificates representing their shares.

There is no requirement in the BVI for a company to have certain funds. However, a takeover offer or business combination may be conditional on the bidder obtaining financing.

Although there are no prescribed defensive measures under the Act, the use of defensive measures is permitted in the BVI. However, as a matter of BVI law, transfers of shares are subject to the approval of the directors. As such, the target company will be able to resist a hostile approach subject to their overriding duty to act in the best interests of the company. A target company may grant deal protection measures such as break-up fees, matching rights and non-solicitation provisions. Force-the-vote provisions are permitted if provided for in the constitutional documents of the target. The most common deal protection measures are exclusivity, non-solicitation and confidentiality clauses. The directors owe a duty to act in the best interests of the company when considering deal protection measures.

A bidder obtaining 50% or more of the shares of a company may, subject to the constitutional documents, remove directors with or without cause, vote on a merger and receive dividends.

It is common to obtain irrevocable commitments from the principal shareholders of the target company to tender or support the transaction. The undertakings usually provide an “out” for the principal shareholder if a better offer is made.

There is no securities regulator or stock exchange in the BVI.

This is not applicable (see 6.13 Securities Regulator's or Stock Exchange Process).

There are no specific requirements in the BVI in relation to technology companies. However, to set up a company in the BVI, a licence is required under the Business, Professions and Trade Licences Act. All employees who are not "belongers" or BV islanders are required to obtain work permits and immigration clearance.

There is no primary securities market regulator for M&A transactions in the BVI. The BVI registry of corporate affairs attends to incorporations and mergers and may reject defective filings.

There are no restrictions on foreign investment as such in the BVI. However, investment is subject to government approval. Licensing will also be required if the investor is carrying on business in the BVI (see 7.1 Regulations Applicable to a Technology Company).

There is no national security review of acquisitions in the BVI. There are no specific restrictions/considerations for investors/buyers based in the BVI, except for the licensing requirements mentioned in 7.1 Regulations Applicable to a Technology Company.

There are no antitrust filing requirements in the BVI.

The BVI Labour Code, 2010 (the “Code”) deals with the continuing employment of employees in a surviving company. The Code provides that employees offered continuing employment will carry forward their service and accrued rights.

The BVI does not have currency control regulation or require central bank approval for an M&A transaction.

There have been no significant court decisions or legal developments in the BVI in the past three years.

Apart from what is noted in 9.2 Data Privacy, there is no restriction on the level of due diligence a public company is allowed to provide. Generally, the financials and the directors' biographies are included in the information statement. Shareholder information is not publicly available. A search can be made of the corporate registry to obtain the constitutional documents and a litigation search of the high court is usually conducted.

On 9 July 2021 the Data Protection Act, 2021 (DPA) came into force in the BVI. The DPA applies to all BVI companies, limited partnerships and other entities that process, have control over or authorise the processing of personal data anywhere in the world. This also applies to non-BVI entities that use equipment in the BVI for processing personal data other than for the purposes of transit of data through the BVI.

There is no requirement as a matter of BVI law for a bid to be made public. If the target is listed on an exchange, the laws of the exchange may, however, require this.

There is no BVI legal requirement for a prospectus to be issued for the issuance of shares in a stock-for-stock takeover or business combination. The buyers shares are not required to be listed on a specified exchange.

Bidders do not need to produce financial statements in their disclosure documents. Financial statements also do not need to be prepared in a required form, although they are typically prepared in accordance with GAAP or IFRS.

Transaction documents do not require to be filed in the BVI.

Common Law and Statutory Duties

Directors of BVI business companies are subject to certain common law and statutory duties. Chief among these duties is that a director is required to act honestly and in good faith, and in what the director believes to be in the best interests of the company. The BVI Business Companies Act provides certain qualifications to this duty. A director of a company that is a wholly owned subsidiary may, if expressly permitted by the memorandum or articles of association of the company, act in a manner which they believe is in the best interests of the company’s holding company, even though it may not be in the best interests of the company. If the subsidiary is not wholly owned, the same exception will apply but only with the consent of the other shareholders. A director of a company who is carrying out a joint venture between the shareholders may, if expressly permitted to do so by the memorandum or articles of association, act in a manner which they believe to be in the best interests of a member or members, even though it may not be in the best interests of the company. 

Fiduciary Duties

The fiduciary duties of directors are generally owed by them to the company itself (which is a separate legal entity quite distinct from the shareholders) and not, in the absence of special circumstances, to the individual shareholders.  However, the articles of association or shareholders' agreements may impose duties towards shareholders and representations made by directors to shareholders may impose fiduciary duties owed to the shareholders. Directors may stand in a fiduciary relationship to the members if, for example, they are authorised by the members to negotiate with a potential takeover bidder. Certain directors may be appointed by a particular class of shareholders to look after their interests but although such directors owe a duty to their appointor and may give special but not exclusive consideration to the interests of that class, their primary duty is nevertheless to the company, and in the performance of their duties they are bound to ignore the interests or wishes of their appointor in any conflict. 

Other Duties

Although there is no takeover code in the BVI, many countries have takeover codes which impose duties on the directors towards shareholders, and advice should be sought in those jurisdictions where relevant. The rules of any stock exchange where the company's shares are listed or traded may impose duties on directors towards shareholders.

Directors must exercise their powers for a proper corporate purpose. An example of an improper purpose is the preservation of control by the existing board or the furtherance of the director's own interests.

There is no duty on the part of directors to advise individual shareholders on the merits or otherwise of a bid; directors are not generally obliged to give shareholders advice on whether to accept or reject a bid.

As noted in 11.1 Principal Directors' Duties, there is no duty on the directors to advise individual shareholders on the merits or otherwise of a bid, and directors are not generally obliged to give shareholders advice on whether to accept or reject a bid. If, however, such advice is given, it is advisable that it be given in conjunction with advice from independent financial advisers to the board. If the directors voluntarily undertake such a duty or they are required to take a view by the rules of the stock exchange where the shares of the company are listed or traded, any statements  made by the directors should not only be factually accurate but should be given with a view to enabling shareholders to sell, if they wish, at the best price. The directors must provide shareholders with sufficient information to enable them to reach an informed decision, and must refrain from making misleading statements or exercising their fiduciary powers in ways which may inhibit a shareholder’s decision.

As a matter of BVI law, directors manage the affairs of the company. As noted in 11.1 Principal Directors' Duties, the directors have certain common law and statutory duties and must act in the best interests of the company as a whole. Unless there are special provisions in the constitutional documents that provide for shareholder pre-emption/protection rights, shareholder litigation is uncommon. A buyer should familiarise itself with the provisions of the constitutional documents.

Independent financial advice is commonly given to the directors. A fairness opinion is often given depending on the nature of the deal.

Conyers

Commerce House
Wickhams Cay 1
PO Box 3140
Road Town
Tortola, VG1110
British Virgin Islands

+1 284 852 1111

+1 284 852 1001

Audrey.Robertson@conyers.com www.conyers.com
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Law and Practice in British Virgin Islands

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Conyers is a leading international law firm with a broad client base including FTSE 100 and Fortune 500 companies, international finance houses and asset managers. The practice comprises a team of highly experienced lawyers, advising on the laws of Bermuda, the British Virgin Islands and the Cayman Islands. Through its global network of offices, it has real-time capability in the prominent financial markets of London, Hong Kong and Singapore, and it advises some of the world’s leading corporations, banks and financial institutions. It provides lenders and borrowers with high-quality, responsive and solutions-oriented advice on a wide variety of secured and unsecured financial transactions. Conyers specialises in mergers and acquisitions. From early structuring to successful closing, its lawyers advise on all aspects of M&A transactions and have experience in handling multibillion-dollar deals across multiple industry sectors.