Corporate M&A 2024 Comparisons

M&A activity remained fairly strong in 2023, mainly in the insurance and investment sector, but the authors have also seen transactions in other sectors such as shipping and energy, with a continued prevalence of mid-market deal activity, which typically involve lower risk, lower levels of equity and debt financing.

As Bermuda is an offshore financial centre, trends in Bermuda M&A tend to track those in either the US or European markets. In 2023 the authors have seen a continuance of cross-border restructurings and an increase in M&A activity in private equity transactions and take privates, such as the take-private of Textainer Group Holdings Limited (“Textainer”) that was announced in November 2023 and closed in March 2024.

The authors saw an increased number of enquiries from companies dealing with shareholder activists or contemplating defensive measures in connection with potential activism, as well as from potential stakebuilders, and the authors expect that this will continue as public company boards are coming under increasing pressure to defend their strategies and the potential for hostile acquisitions and takeovers continues. In terms of IPOs, Bermuda-based companies have been part of the 2023 revival in IPOs, however, pending the US election results in Fall 2024, the resurgence of IPOs have not fully taken off as of yet.

Bermuda is a leading domicile for (re)insurance, and the authors continued to see M&A activity in this sector, particularly private equity investment in life and other insurance vehicles.

The authors expect the challenges faced by the global technology sector overall to continue to be felt where Bermuda companies form part of the global structure (as holding companies or otherwise) and the firm anticipated in 2021/2022 that many entities may be considering their future as a listed company, which indeed led us to see some delistings and take-private transactions in the jurisdiction such as GAN Limited (subject to regulatory approvals) and Textainer (which were both deals on which Walkers’ Bermuda team advised).

A trend the authors have recently experienced in the jurisdiction has been the continued consolidation and investment in financial services. In Bermuda, this has resulted in US-based firms Teneo and Grant Thornton entering the Bermuda market as financial services providers (which were both deals on which Walkers’ Bermuda team advised). The authors have also seen a continued increase in the level of migrations into the jurisdiction due to Bermuda’s favourable tax treatment of shipping companies, who are excluded from Pillar Two.

Bermuda is a leading offshore domicile for fintech, and the authors have seen an increasing number of redomiciliations to Bermuda from other jurisdictions by companies seeking to obtain a licence from the Bermuda Monetary Authority (BMA) to conduct digital assets business and investment business activities. There are a number of Bermuda-based companies in the energy sector whereby the authors have some continued investment in the jurisdiction.

Bermuda’s Companies Act 1981 (as amended) (the “Companies Act”) offers a wide variety of options for structuring an acquisition of a company. These include:

• merger or amalgamation;
• public tender/exchange offer for shares;
• scheme of arrangement;
• private purchase of shares; and
• private purchase of the underlying assets of a target company.

Below is a summary of these options.

Statutory Merger or Amalgamation (Section 104 and Section 104H, Companies Act)

Under Bermuda law, a merger is the combination of two or more companies into one surviving entity. The surviving company will own the property of the original companies, and the respective property and liabilities will vest automatically by operation of law. The surviving company will continue to be liable for the obligations of the original companies. In comparison, an amalgamation is the combination of two or more companies where the assets and liabilities vest in the new, amalgamated company.

The Companies Act provides that the directors of each company proposing to merge or amalgamate must enter into an agreement that sets out the terms and mechanisms affecting the merger or amalgamation (the “Agreement”). Section 105 of the Companies Act lists the requirements that must be contained within the Agreement, which include the requirement to state which class(es) of shares will be cancelled in exchange for the merger consideration (in the case of the seller’s shares) and which will be exchanged for new shares of the surviving companies (in the case of the buyer’s shares). It is possible for the merger consideration to comprise cash and/or shares in the surviving company or its parent.

The directors of each amalgamating or merging company must submit the Agreement for approval to a general meeting of the shareholders. A notice of the meeting must be sent in writing to each shareholder and include a copy of the Agreement, a statement of the fair value of the shares as determined by each amalgamating or merging company, and a statement that a dissenting shareholder is entitled to be paid the fair value of his or her shares.

Unless the company’s by-laws state otherwise, the Companies Act requires that notice must be given at least five days before the meeting and that the resolutions of the shareholders must be approved by a majority of 75% of shareholders voting at the meeting, and the quorum must be at least two persons holding or representing by proxy more than one-third of the shares of the company.

Tender Offer (Section 102, Companies Act) and Compulsory Acquisition (Section 103, Companies Act)

Where an offer is made by a company for shares (or any class of shares) in a Bermuda company and, within four months of the offer, the holders of not less than 90% of the shares which are the subject of that offer accept it, the bidder can, at any time within two months after the date on which the approval is obtained, by notice, require the remaining shareholders to transfer their shares on the terms of the offer, under Section 102 of the Companies Act (compulsory acquisition of minority shareholders).

As a result, the bidder may wish to include a precondition that the offer is subject to receiving acceptances for at least 90% of the shares, so that it is in a position to forcibly acquire the remaining 10%. Dissenting shareholders can apply to the court, within one month of the notice, objecting to the transfer, though they must prove unfairness, not merely that the scheme is open to criticism.

Section 103 of the Companies Act also provides that holders of 95% or more of the shares of a company may compulsorily acquire the remainder. The principal difference between Section 103 and Section 102 is that under Section 103, a dissenting shareholder can only apply to court to appraise the value of its shares and cannot apply to vitiate the compulsory acquisition.

Scheme of Arrangement (Section 99, Companies Act)

In this case, where an application is made by a company or any of its members, the Supreme Court of Bermuda can sanction the convening of a members’ meeting to consider a proposed arrangement or compromise between a company and its members (or any class of them) (Section 99(1), Companies Act).

If a meeting of members is convened by the court in accordance with Section 99(1), the notice of meeting sent to members must include an explanatory statement explaining the effect of the proposed scheme (and, in particular, giving details of any material interests that the directors of the company may have, either as directors or as members of the company).

If the proposed scheme is then approved by a majority of the members (or class of members) in a number representing 75% of the value of shares held by those members present and voting at the meeting (either in person or by proxy), it is binding on the members (or class of members) and the company if it is subsequently sanctioned by the court (and the order sanctioning the proposed scheme is delivered to the Registrar of Companies for registration).

In exercising its discretion whether to sanction the scheme, the court must be satisfied (among other things) that:

• the approval of the scheme was reasonable;
• a majority of shareholders acted bona fide; and
• the statutory provisions have been complied with.

The court also considers whether the scheme is necessary. The sanctioning of a scheme is not merely a rubber-stamping exercise by the court once the requisite majorities have been obtained; rather, the court exercises genuine discretion.

Private Purchase of Shares of Target

The purchaser will acquire the target company’s entire issued share capital from one or several shareholders by way of a privately negotiated share sale and purchase agreement.

It is customary for the form of agreement to have warranties and protections built in, in order to protect the purchaser, which will be acquiring all of the assets and liabilities of the target company.

Private Purchase of Underlying Assets of Target

A purchaser may acquire all or specific assets of a target at an agreed price. The terms of the transaction will be governed by an asset purchase agreement with specific warranties being given to the purchaser in respect of the assets subject to the agreement. In this manner it is possible for a purchaser to “cherry pick” the assets that it wants and exclude any unwanted liabilities.

There are no regulations specifically regulating M&A activity in Bermuda, which does not have an equivalent to the UK Takeover Panel overseeing the Takeover Code.

The BMA is the sole financial services regulator in Bermuda and is responsible for regulating businesses in the banking, insurance, digital assets, trust, investment funds, investment business and corporate services sectors, as well as the Bermuda Stock Exchange (the BSX).

In circumstances where the target is operating in the regulated spaces specified above, the BMA may be involved in a transaction because a change of control application may need to be submitted under the applicable regulatory act as part of the M&A transaction. In addition, the consent of the BMA for the acquisition of the target’s shares may be required pursuant to the Exchange Control Act 1972 (and related regulations) (“Exchange Control Rules”), as explained further below.

In the event that the target is listed on the BSX, the BSX Listing Regulations would need to be complied with.

If a local company is operating in the communications networks, submarine cable or electricity sectors in Bermuda, the Regulatory Authority may be involved in any M&A transaction which results in a change of control.

There are no restrictions on foreign investment in exempted companies, being companies that can be 100% owned and controlled by non-Bermudians.

In the case of local companies, there is a requirement for these to be controlled 60% by Bermudians. As a result, at least 60% of the total voting rights must be exercisable by Bermudians and at least 60% of the directors must be Bermudian. Locally this is described as the “60:40 rule”.

Where the 60:40 rule cannot be met, it is possible to apply for a licence from the Minister of Finance under Section 114B of the Companies Act to allow a local company to conduct business in Bermuda where the ownership and control of the company is held by less than 60% of Bermudians. The granting and duration of licences is at the discretion of the Minister, but they are typically granted for five years.

In addition, pursuant to the Exchange Control Rules, the approval of the BMA is required prior to the issue and transfer of shares by Bermuda companies to foreign buyers, unless the BMA has granted a general permission (eg, if shares are listed on an appointed stock exchange).

There are no specific antitrust regulations that apply to business combinations in Bermuda. However, a change of shareholder controller of any target which is regulated by the BMA or the Regulatory Authority would be subject to regulatory scrutiny, which may include a consideration of the impact of the transaction on the Bermuda market.

In Bermuda there are four main statutes governing employment rights. These are:

• the Employment Act 2000;
• the Occupational Safety and Health Act 1982;
• the Workers’ Compensation Act 1965; and
• the Human Rights Act 1981.

In addition, the following statutes are also relevant and should be considered:

• the Bermuda Immigration and Protection Act 1956;
• the National Pension Scheme (Occupational Pensions) Act 1998;
• the Payroll Tax Act 1995; and
• the Personal Information and Protection Act 2016 (once completely in force).

There are no national security reviews of acquisitions in Bermuda.

In the matter of Nkwe Platinum Limited v Glendina Pty Limited & Others 2021, the Supreme Court of Bermuda considered the following three issues:

• the legal effect of an amalgamation under Sections 104–109 of the Companies Act;
• whether the amalgamation of two previous entities is ipso facto a new entity; and
• whether the amalgamation resulted in a “transfer” of the property from the amalgamating companies to the amalgamated company.

The Court ruled that the amalgamating companies continue to exist as one amalgamated company and the property and assets of each company becomes the property of the amalgamated company by operation of law and not by way of transfer or by operation of contract.

From a legal developments standpoint, Bermuda Courts are seeing an uptake of shareholder appraisal actions under Section 106 of the Companies Act. A shareholder’s right to seek an appraisal of the fair value of their shares arises upon a merger or amalgamation approved by the shareholders of the company. Section 106 of the Companies Act deals with shareholder approval of company in the context of amalgamations and mergers. It prescribes the requisite majorities and the procedure for the approval of amalgamations and mergers. Until recently, appraisal cases were rare, but shareholders have become more active in seeking the remedy following a merger, particularly (though not exclusively) in take private transactions. Presently there are at least three noteworthy appraisal cases before Bermuda Courts and several cases have resolved since they were commenced in 2021/2022. Appraisal actions are typically long, complex and expensive. The costs are largely borne by the company as discovery is almost entirely one-way, as the company must disclose all information necessary to conduct a fulsome valuation of the company and the transaction price. Though the appraisal remedy is not yet as commonly used, it appears to be increasingly common in Bermuda.

Corporate Income Tax

On 27 December 2023, the Bermuda government passed the Corporate Income Tax Act, 2023 (the “CIT Act”) which will become fully operative with respect to the imposition of corporate income tax on 1 January 2025. The CIT Act was passed as part of the implementation of a corporate tax regime within the scope of the Organization for Economic Co-operation and Development (OECD) and the Group of Twenty industrialised countries’ (G20) international tax agreement on Pillar Two of the Base Erosion and Profit Shifting (BEPS) project known as the Global Anti-Base Erosion Model Rules (Pillar Two) (GloBE). Under the CIT Act, Bermuda corporate income tax will be chargeable in respect of fiscal years beginning on or after 1 January 2025 and will apply only to Bermuda entities that are part of multinational enterprise (MNE) Groups with EUR750 million or more in annual revenues in at least two of the four fiscal years immediately preceding the fiscal year in question (“Bermuda Constituent Entity Group”). Where corporate income tax is chargeable to a Bermuda Constituent Entity Group, the amount of corporate income tax chargeable for a fiscal year shall be (a) 15% of the net taxable income of the Bermuda Constituent Entity Group less (b) tax credits applicable to the Bermuda Constituent Entity Group under Part 4 of the CIT Act, or as prescribed. The CIT Act introduces certain “qualified refundable tax credits” which are set to be developed during 2024 to incentivise companies to support Bermuda residents through investments in key areas such as education, healthcare, housing, and other projects to help develop Bermuda’s workforce. The CIT Act is subject to change as a result of further developments of the concepts therein and revisions are expected.

There have not been any significant changes to takeover law in the past 12 months and, to the authors’ knowledge, there are no significant changes to the legislation anticipated in the coming 12 months.

The majority of transactions in Bermuda are negotiated transactions between parties and do not involve a buyer building a stake in the target prior to the transaction.

However, in a hostile takeover scenario it is common for the bidder to have acquired a minority stake in the company in order to pursue litigation against the target in an attempt to get as much information as possible on the potential target and also to make it a less attractive proposition for other bidders to acquire it. It is customary for many public companies to often have restrictions on shareholders holding above certain thresholds (eg, 10%), as a defensive measure that is often implemented to prevent stakebuilding.

For further information as to how acquisitions occur in Bermuda, see 2.1 Acquiring a Company.

As stakebuilding is not specifically regulated in Bermuda, the restrictions that may apply are those under the Exchange Control Rules (if applicable), or under the relevant regulatory act where the entity is regulated by the BMA, or under the BSX Listing Regulations if the target’s shares are listed on the BSX.

Under the Exchange Control Rules, any individual who owns 10% or more of the shares, voting rights or interests in a company through direct or indirect ownership thereof is defined as a “beneficial owner”. When incorporating a vehicle, the beneficial owners of 10% or more must be identified and specific permission sought from the BMA prior to incorporation (unless a general permission is otherwise available). Accordingly, the impact of the Exchange Control Rules should always be considered when structuring a merger or amalgamation.

Unless a general permission is otherwise available, anyone seeking to acquire 10% or more of the voting shares of a Bermuda company must seek the prior approval of the BMA. Once that permission has been granted, that person may acquire up to 50% of the voting shares of the company without the prior approval of the BMA (subject to subsequent notification to the BMA). Prior permission of the BMA must be sought in order for an existing shareholder to hold more than 50% of the equity securities of the company.

General permissions are available which are conditional upon subsequent notification to the BMA. These include where a company’s shares are being transferred amongst affiliates, or where the company’s shares (or those of its parent) are listed on an “appointed stock exchange” (as defined pursuant to the Companies Act) or where a company is classified as an investment fund under the Investment Funds Act 2006. Permission is also not generally required for the issue or transfer of non-voting shares.

For companies that are listed on the BSX, directors must deliver written notice without delay to the BSX if they become aware of any shareholder who:

• acquires a beneficial interest in, control over or direction of 5% or more of securities; or
• has a beneficial interest in or exercises control over 5% or more of the securities and acquires, in aggregate, an additional 3% or more.

As noted above, disclosure to and consent of the BMA or Regulatory Authority may also be required where a company is regulated under one of the regulatory acts in Bermuda.

A company can adopt provisions in its by-laws that require a shareholder to notify the company of a particular percentage of direct or indirect ownership; such thresholds are often reflective of any potential onshore restrictions as well. The by-laws may also impose sanctions for the failure to disclose this information to the company, including the shares becoming null and void and disenfranchisement of the shares (whereby the shareholder is prevented from exercising any rights attaching to those shares).

While trading derivatives by a person for its own account is not generally regulated or prohibited in Bermuda, “dealing” in derivatives is a regulated activity if conducted by a company in or from within Bermuda (including by a Bermuda company or by a foreign company that held itself out as doing business in Bermuda) as a business. Where the derivatives relate to traditional investment products, the dealer would be required to be registered under the Investment Business Act 2003 (IBA). Where the derivatives have digital assets (as defined in the Digital Assets Business Act 2018 (DABA)) underlying them, the dealer would be required to hold a licence under the DABA. There are limited exemptions available under both regulatory regimes. Where the derivatives are both traditional and digital assets derivatives, then which regime would be applicable would depend on the amount of gross revenues derived from each activity.

Certain derivatives are available for trading on the BSX (eg, derivative warrants). If a person wished to trade derivatives of a Bermuda company for its own account, it would need to utilise the services of a licensed broker/dealer and trading member of the BSX in the jurisdiction.

Save as described in 4.2 Material Shareholding Disclosure Threshold, there are no specific securities disclosure requirements under the Companies Act and there are no competition laws in Bermuda.

Where an entity is registered or licensed to provide investment business or digital assets business services relating to derivatives, there would be both filing and reporting obligations on the entity that is providing such services to the BMA pursuant to the IBA and DABA, respectively, but these would apply to the entity rather than to any individual buyer or seller.

Where a company lists derivative warrants on the BSX, there are obligations on the issuers to provide price-sensitive information to the holders. Details of any changes to the terms and expiry of the warrants and of any purchase, redemption or cancellation of the warrants (among other things) to the BSX.

Disclosure of the business purpose would be required if a Section 114B licence was being sought (ie, a local company was being acquired by foreign acquirers) or a Section 129A licence (ie, an exempted company proposing to conduct business in the jurisdiction). Such application is submitted to the Minister of Finance in Bermuda and must outline the impact of the acquisition on the Bermuda economy, the advantages/disadvantages that may result from the business being carried on in Bermuda and the impact on Bermudians and their job prospects, amongst other factors that will be considered.

If the company being acquired is regulated by the BMA or the Regulatory Authority, then it is likely that this will trigger a notification under the applicable regulatory act to the regulator as a “change of shareholder controller”. In providing this notification, the target would be required to provide details of the potential purchaser, the reason for the acquisition and what is intended for the business post-acquisition, and such other information as may be required by the regulator. The regulator will typically have a period of time (typically three months) to serve a notice of objection to the change of shareholder controller. The existence of direct lines of communication regarding the acquisition process often leads to the change of control application being processed prior to the expiry of the requisite time period, and this is often a precondition to any acquisition of a regulated entity in the jurisdiction.

Public disclosure is not required under the Companies Act. However, if the company is listed on the BSX, it may be required to disclose certain information to the public. The target company would have to keep the BSX informed of any information relating to it that:

• is necessary to enable them and the public to appraise the financial position of the company and the group;
• is necessary to avoid the establishment of a false market in its securities; and
• might reasonably be expected materially to affect market activity in and the prices of its securities.

As noted, regulatory notifications (if required) would need to be made, and non-objection from the applicable regulator obtained, before the transaction may complete.

If listed on the BSX, the target company must keep members of the issuer and any holders of its listed securities informed without delay. In practice, this will be satisfied by way of public announcement or circulars of the information being provided as set out in detail in 5.1 Requirement to Disclose a Deal.

Due diligence is a standard requirement and important in every transaction. Due diligence will be conducted in the same way as in many other onshore jurisdictions (for example, in the UK and the US). The scope of due diligence undertaken will usually be limited to corporate, regulatory and (where applicable) employment matters and reviewing any contracts that are governed by Bermuda laws (where target is an exempted company). Where the target is a local company, then the scope would typically be widened to include all commercial and property matters. Following the pandemic, the authors have noted that clients are tending to have a more commercial focus on contracts, rather than being limited to considering change of control clauses. Termination and force majeure clauses are often a focus to determine the potential impact of another pandemic. As noted, the authors have seen an increasing focus on compliance with corporate governance and ESG (where applicable).

In an increasingly regulated environment, a due diligence process would also include confirmation of compliance with applicable regulatory laws, including those relating to data protection and anti-bribery and corruption, and also any specific Bermuda regulatory requirements depending on the nature of target’s business.

Certain information is publicly available in Bermuda, namely the following.

Registrar of Companies

For a fee, anyone can conduct a company search of the records held by the Registrar of Companies, which include:

• Certificate of Incorporation;
• Memorandum of Association;
• registered office address; and
• registered charges.

Supreme Court Registry

Any judgments or legal proceedings can be searched at the Bermuda Supreme Court.

Registered Office

At the registered office of the company, the register of directors and officers as well as the register of members can be requested.

BSX

Financial accounts, auditor’s reports and any other filings and announcements of a Bermuda listed company.

Exclusivity for transactions is often requested at the point of entering into formal discussions once a winning bidder has been selected. Either exclusivity clauses may be incorporated into the heads of terms or a separate exclusivity agreement may be entered into between the parties.

Standstills are not often used in Bermuda transactions.

Tender offers may be used in both friendly and hostile transactions. The Companies Act does not prescribe the manner in which a tender offer may be made (save for the timings and thresholds described in 2.1 Acquiring a Company). It is also possible for an acquisition which originally commenced as a tender offer to be converted into a merger or amalgamation when the applicable thresholds have been met. If the target’s shares are listed, the rules and regulations of the applicable stock exchange and any takeover rules (which may have been incorporated into the target’s by-laws) will also need to be complied with with respect to how the tender offer will be communicated to shareholders. Typically, a target shareholder will receive:

• an announcement to the shareholders;
• an offer document;
• an acceptance form; and
• notices of intention to acquire shares (where the remainder are being compulsorily acquired pursuant to Section 102/103).

The extent to which the target is involved in the communications will depend on whether it is recommending that shareholders accept the offer and the requirements of any applicable listing or takeover rules.

Under Bermuda law, there is no statutory timeframe for acquiring or selling a company. Timing will depend on:

• the manner in which the acquisition is being structured (and compliance with any statutory requirements or timelines);
• the provisions of the by-laws (which may include provisions which incorporate takeover code-type provisions);
• the rules of any applicable stock exchange if the target’s shares are listed;
• any governmental approvals required (for example, Section 114B and Section 129A licences);
• the implications of the Exchange Control Rules (although any related permissions can usually be obtained within two to three weeks); and
• whether or not the target is regulated (including the requirement for the approval of the Bermuda and foreign regulators, for example, where the target is a holding company and the subsidiaries are regulated in Bermuda and elsewhere).

In private acquisitions involving unregulated entities, an acquisition may be effected within a matter of weeks. Where a target is listed and/or regulated, completion usually takes a few months in order to ensure that all applicable listing rules have been complied with and approvals obtained.

During the pandemic and periods of lockdown, carrying out company and litigation searches became difficult due to the closure of government offices and buildings. In 2021, the Registrar of Companies introduced an online portal for conducting searches electronically, altering the way some due diligence is now carried out. Many filings are now carried out electronically rather than delivered in hard copy form. During lockdowns and periods with heightened restrictions, some delays were experienced but only for short periods of time, and the jurisdiction is now operating as normal.

There are no requirements under Bermuda law for a mandatory offer threshold. Please see 5.5 Definitive Agreements for information concerning the requirements for tender offers.

There are no restrictions under Bermuda law on the type of consideration that can be offered or the combination of different types of consideration (for example, shares and cash). Recently, the authors have noted a wide variety of consideration structures involving combinations of shares in either the surviving or amalgamated company (or its parent), cash or promissory notes.

There is no specific takeover code in Bermuda and there are no specific Bermuda law requirements restricting the use of offer conditions. Conditions for a takeover offer would be subject to commercial requirements of the bidder (and the target if a recommended offer).

Refer to 2.1 Acquiring a Company, which describes the applicable acceptance thresholds for a tender offer under Section 102 of the Companies Act.

Any requirement to obtain financing would need to be set out in the plan of amalgamation or merger, but it is common for transactions to be conditional upon financing being obtained and upon evidence, in the form of a commitment letter or similar, being provided. Rarely, pre-funded escrow accounts may be required to evidence the availability of the consideration.

There are no prescribed rules under statute or common law with respect to deal security measures in a transaction. However, many Bermuda companies are based in the United States or Europe, and the influence of the laws of the relevant jurisdiction is often felt. It is very common for the transaction agreement to be governed otherwise than by Bermuda law and, in that case, the availability of deal security measures may be limited or restricted in accordance with the relevant laws. In Bermuda, the measures most often seen are the following.

Break Fees

Break fees are becoming increasingly standard in transaction agreements. For example, in the case of a proposed amalgamation or merger, the agreement and plan of merger/amalgamation may include provision for a fee to be paid to the original bidder in the event that the board of the target company changes its recommendation and supports a competing bid where the acquisition takes place within a certain period of time from the date of the agreement. When a board of a target is considering whether or not to agree to accept a break fee provision, care must be exercised to ensure that the directors’ fiduciary duties at statute and common law are being properly discharged. This will be dependent on the circumstances of the transaction and the overall deal terms taking all factors into consideration.

As a matter of practice, break fees in transactions involving Bermuda companies operating in the North American market tend to range from 1% to 4% of the amalgamation or merger consideration. If the Bermuda court were to determine that a particular break fee was excessive and did not operate to provide commercial compensation a party on termination and instead constituted a penalty, the fee may be unenforceable.

“No Shop” Agreement

“No shop” agreements or “lock-out” clauses, whereby the target agrees not to solicit or engage with any other parties regarding the potential transaction during a defined period of time, can be included in transaction agreements involving Bermuda companies. The restrictions will often include provisions to prevent the target company from soliciting a transaction or accepting a proposal from a third-party prospective bidder during a defined period of exclusivity.

A “Fiduciary Out” Clause

Directors must be mindful of their fiduciary duties to the company during the course of any potential acquisition. In particular, directors will need to be cognisant to act in the best interests of the company, acting honestly and in good faith as required under the Companies Act. A “fiduciary out” provision allows the board of a target company to change its recommendation for the proposed bid and/or terminate the agreement, if following through with the transaction would result in a breach of the directors’ fiduciary duties. While these provisions are usually the subject of intense negotiation in transactions, in the authors’ experience they are often accepted in principle.

“Force the Vote”

Such provisions may require the target board to submit the transaction to its shareholders for approval, even when the board is no longer recommending the transaction, for example, where the target has received what it regards as a superior alternative proposal.

Since COVID-19, the authors have seen bidders often trying to negotiate and widen the terms of material adverse change clauses in order to encompass as many potential “knock-on” effects from the pandemic as possible, for example, government lockdowns, etc, that may impact the target’s value. However, the authors have also seen target companies insisting on cure periods and similar provisions in order to provide the management team time to navigate any changing conditions, rather than automatically providing the bidder a right to terminate the transaction.

Theoretically, a bidder could seek contractual rights to appoint and remove directors of the target upon closing/acquisition of the target in order to flood the target’s board and gain control.

Alternatively, additional governance rights could be enshrined within the target’s by-laws that would be adopted upon closing, and/or a shareholders’ agreement could be entered into which could grant a wide variety of contractual governance rights.

However, it would be difficult to force any such provisions on the remaining shareholders. Subject to any different voting thresholds in the existing by-laws, bye-laws of a Bermuda company may be amended upon the approval of a majority of shareholders present and voting in person or by proxy at a meeting and such amendments must first be recommended by the board of directors. Shareholders’ agreements entered into by some but not all shareholders will not be binding on those who do not agree to be bound, although the company will, if it is a party.

Again, care must be exercised by the directors in agreeing to any such additional governance rights as they have a fiduciary duty to act in the best interests of the company as a whole and not to act solely in the interests of a particular shareholder or shareholders.

Generally, under Bermuda law, at a general meeting, each member is entitled to one vote for each share held by him or her and such votes may be given in person or by proxy. Only shareholders with voting rights attached to their shares may attend and vote at a general meeting except in the case of an amalgamation or merger, where all shares carry the right to vote regardless of whether they otherwise do.

Refer to 2.1 Acquiring a Company for a description of the squeeze-out mechanisms under Sections 102 and 103 of the Companies Act.

Short form mergers and amalgamations (which do not require shareholder approval) are permitted in Bermuda between:

• a holding company and one or more of its wholly-owned subsidiaries; or
• two or more wholly-owned subsidiaries of the same holding company. As the subsidiaries must be wholly-owned, these provisions would not be particularly useful as a squeeze-out mechanism.

Irrevocable voting undertakings are often required in transactions where there is a shareholder who holds a significant portion of the total issued share capital of the target. Often where there are significant shareholders involved, discussions will start early on in the transaction to ensure they are supportive of the deal. Such commitments are typically irrevocable and the terms would be subject to negotiation (and may include a right to terminate if a superior proposal is received).

Under Bermuda law, there are no specific provisions requiring a bid to be made public. However, given many Bermuda M&A transactions involve companies whose shares are listed, the rules of the relevant stock exchange would apply and dictate any disclosure requirements.

If the company is listed on the BSX, it may be required to disclose certain information to the public. The company would have to keep the BSX informed of any information relating to the company that:

• is necessary to enable them and the public to appraise the financial position of the company and the group;
• is necessary to avoid the establishment of a false market in its securities; and
• might reasonably be expected materially to affect market activity in and the prices of its securities.

When an acquirer becomes a shareholder of 5% or more of a domestic issuer, the issuer must notify the BSX.

As noted in 7.1 Making a Bid Public, unless the target’s shares are listed, there is no disclosure requirement for the issuance of shares in a business combination.

There is no requirement for bidders to produce financial statements in their disclosure documents.

Under the Companies Act, there is a general requirement for Bermuda companies to lay financial statements before the company’s shareholders in general meeting. Those financial statements must include:

• a statement of the results of operations for the period;
• a statement of retained earnings or deficit;
• a balance sheet at the end of such period;
• a statement of changes in financial position or cash flows for the period;
• notes to the financial statements; and
• an auditor’s report.

It is possible to waive the laying of financial accounts and the appointment of an auditor. If all members and directors of a company, either in writing or at a general meeting, agree that in respect of a particular period no financial statements or auditor’s report thereon need be laid before a general meeting or that no auditor shall be appointed, then there shall be no obligation to lay financial statements or appoint an auditor for such period. In that circumstance, the company is still required to maintain records of account at the registered office in such form as will enable the directors to ascertain with material accuracy the financial condition of the company at least on a quarterly basis.

A company listed on the BSX need not send financial statements to the members, but may instead send them summarised financial statements. The listed company shall make a copy of the financial statements available for inspection by the public at the company’s registered office.

Generally, accepted accounting principles in Bermuda include those of Bermuda or a country or jurisdiction outside of Bermuda. GAAP and IFRS are commonly accepted international standards.

In some circumstances, particular information may be required to be disclosed as set out in 4.2 Material Shareholding Disclosure Threshold, 4.5 Filing/Reporting Obligations, 5.1 Requirement to Disclose a Deal and 7.1 Making a Bid Public. However, there is no specific requirement under Bermuda law to disclose the transaction documents in full.

Where a board of directors decides to make any disclosure concerning a transaction or the terms of any transaction documents, it should take care to ensure that it does so fairly and on the same basis to all shareholders to ensure that it is not open to allegations of breach of fiduciary duty.

In the case of an amalgamation or merger, the notice of general meetings of the shareholders of any Bermuda amalgamating or merging companies must be accompanied by a copy or a summary of the amalgamation or merger agreement. This does not necessarily mean that the agreement or plan of merger or amalgamation that contains the commercial terms must be submitted in full for approval. Where there are sensitivities about disclosure of all of the commercial terms, it is common to prepare a short form “statutory merger or amalgamation agreement”, which contains only the following information required to be included in the agreement by Section 105 of the Companies Act:

• the provisions to be included in the constitutional documents of the amalgamated or surviving company;
• the name and address of the directors of the amalgamated or surviving company;
• the manner in which the shares of each amalgamating or merging company are to be converted into shares or other securities of the amalgamated or surviving company;
• if any shares are not converting, the amount of money or securities that the holders will receive; and
• details of any perfection requirements necessary to effect the amalgamation or merger and for the subsequent operation of the company.

However, where the shares of the target are listed, the terms of the plan of merger or amalgamation are often required to be fully laid out in the circular or other communication to the target’s shareholders, which means that a separate “statutory” agreement is redundant.

In addition, the notice of the general meeting of shareholders of each company must include:

• a statement of the fair value of the shares, as determined by each amalgamating or merging company; and
• a statement that a dissenting shareholder is entitled to be paid the fair value for his or her shares.

It is very likely that the target company’s shareholders will be provided with a “fairness opinion” (or a summary of its contents) confirming the basis for the valuation of the shares and the price being offered.

Section 97 of the Companies Act sets forth the statutory duties of a director of a Bermuda company and provides that every officer of a company in exercising his or her powers and discharging his or her duties shall: (i) act honestly and in good faith with a view to the best interests of the company; and (ii) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In addition, officers must comply with the Companies Act, regulations and by-laws of the company.

In addition, Bermuda law is based on English common law, and Bermuda courts are very likely to be persuaded by the decisions of the English courts with respect to directors’ fiduciary duties.

The directors owe fiduciary duties to the company and not to the shareholders individually. These duties can be summarised as follows:

• to act in good faith and in what the director considers to be the best interests of the company;
• to exercise his or her powers for the purposes for which they are conferred;
• to avoid conflicts of interest and of duty;
• to disclose any personal interest in contracts involving the company;
• not to make secret profits from the director’s office; and
• to act with skill, care and diligence.

The duty of care, skill and diligence comprises three main elements:

• degree of skill – a director must exercise a degree of skill that a reasonably prudent person, with his or her knowledge and experience, would exercise in similar circumstances;
• attention to the business of the company – in exercising his or her duties, a director must exhibit the “reasonable care an ordinary man may be expected to take in the same circumstances on his own behalf”; and
• reliance on others – a director has the ability to rely on his or her co-directors and other company officers, and is not liable for their acts, provided that the reliance is honest and reasonable.

Under Bermuda law, there is no requirement to establish board committees. However, where there are potential conflicts of interest, it is customary for a committee of disinterested directors to be established. Accordingly, the authors do often see the appointment of such committees in M&A transactions involving shareholders who have nominated directors to the target board.

A special committee of disinterested and/or independent directors can be important for the board of the target to demonstrate they have discharged their fiduciary duties when evaluating the transaction.

While there is no formal “business judgement” rule adopted by Bermuda courts, directors of Bermuda companies are required to act in the best interests of the company, which necessarily involves the exercise of business judgement.

As long as the directors have exercised skill and care when reaching a decision considered to be in the best interests of the company, a Bermuda court would be reluctant to question the business judgement of the board. If there is a claim that a director has breached his or her duties as set out in 8.1 Principal Directors’ Duties, then the court may be called upon to examine the decisions of the board of the target.

Directors are not required to obtain independent advice. However, they are entitled to rely on advice of professional advisers and, in the context of an M&A transaction, a board of directors would typically seek one or more fairness opinions as to the valuation of the shares, in order to demonstrate that they have properly discharged their duties and have objective evidence as to the basis for such valuation.

As noted, Bermuda courts will follow decisions of the English courts with respect to cases involving conflicts of interest and there have not been any notable decisions in Bermuda recently on the subject.

Directors have a duty to avoid conflicts of interest and should not put themselves in a position where their duties to the company and personal interests conflict. A director who fails to disclose his or her interest in a transaction at the first opportunity (in writing or at a meeting of the board) is presumed not to be acting honestly and in good faith and would therefore be in breach of his or her statutory duty. In this case, any contracts entered into by the company might also be voidable.

As noted in 8.2 Special or Ad Hoc Committees, the establishment of special committees of the board (and the engagement by such committees of their own independent legal counsel and advisers) is common in the context of M&A transactions because of concerns by directors that they may be the subject of claims for breach of their fiduciary duty to avoid conflicts of interest with the company.

Hostile bids are permitted under Bermuda law but are still relatively rare in Bermuda.

Bermuda does permit directors to use defensive measures in a hostile takeover. These are most effective when prepared in advance. However, the directors must ensure that they have regard to their fiduciary duties when deciding whether or not implement a defensive measure as well as with respect to their handling of bids generally.

The directors do not generally have a duty to advise individual shareholders on the merits or otherwise of a bid, and are not generally obliged to give shareholders advice on whether to accept or reject a bid. The courts have held that directors do not generally owe to shareholders the duty to obtain for them the opportunity to accept or reject the best bid reasonably obtainable, but they must not do anything which prevents the shareholders from considering and accepting an offer.

If directors take it upon themselves to give advice to shareholders with respect to a takeover bid, then they have a duty to advise in good faith and not to mislead, whether deliberately or carelessly. When seeking shareholder approval of transactions or recommending particular courses of action, the directors are obliged to make full (as well as honest) disclosure. Directors could be held liable if shareholders were to suffer loss by relying on negligent misstatements made by the directors.

Common defensive measures that have been implemented by potential Bermuda target companies include the adoption of poison pills, also referred to as shareholders’ rights plans, often limiting the amount of the company’s shares that can be acquired by a shareholder or a group of shareholders.

There are typically two approaches, commonly known as:

• “Flip in” – these rights are usually contained in a company’s by-laws and provide that existing shareholders have the right to subscribe for more shares in the target company at a discounted price where a hostile bidder reaches a certain percentage of ownership in the target company, or where a bid is made.
• “Flip over” – these provide current shareholders the right to purchase shares in the target company from the bidder once the takeover has taken place.

Such plans are often adopted for a specific time period (eg, 364 days) as an aggressive attempt to prevent a hostile takeover to make the acquisition expensive or to make the target seem less attractive to a bidder, and potentially slowing down any future attempts of a hostile takeover. Such strategies were particularly prevalent during the pandemic as many companies sought to avoid hostile takeovers as their stock prices decreased and they became more vulnerable.

Other defensive mechanisms that could be adopted in the by-laws of the target in order to make it more difficult for the bidder to take control include:

• staggered terms for the directors;
• advance notice of shareholder proposals to nominate candidates and election of directors;
• requiring a supermajority for mergers and amalgamations and/or amending the by-laws; and
• permitting the issuance of “blank cheque” preferred stock, with terms determined by the board.

There is generally no objection to a target company’s board seeking an alternative offer for the target company from a third-party “white knight”.

See 8.1 Principal Directors’ Duties.

If the target has not adopted defence mechanisms already, then it will be difficult for the board of directors to “just say no” in the face of a determined bidder. Directors will be required to discharge their fiduciary duties by acting honestly and in good faith with the best interests of the company in mind. This does not prevent directors from sharing their views with shareholders; however, the advice must be based on full information, be fairly presented and not be influenced by personal interests. The Bermuda courts will not interfere with the judgment of the directors of a company unless it is proven that the directors have breached their fiduciary duty.

Litigation in Bermuda with respect to M&A transactions tends to be rare and would be most likely to involve derivative claims from shareholders. See 3.1 Significant Court Decisions or Legal Developments for the most recent legal developments regarding M&A deals in Bermuda.

Litigation for breach of fiduciary duties under common law or statutory duties under Section 97 of the Companies Act may be brought at any stage of the transaction.

This is not relevant to Bermuda.

When shareholders disapprove of the actions of directors, they may seek to change the composition of the board. Shareholder activism has become more frequent, especially with listed companies. Under Section 74 of the Companies Act, shareholders who hold not less than one-tenth of the paid-up share capital of a company carrying the right to vote at a general meeting can requisition a special general meeting to pass resolutions, which may include a resolution to remove a director or directors from the board. This is a powerful tool which may be used by activists.

Generally speaking, shareholder activists can work to effect social, governance and environmental change in the management of a company. A change in leadership can result in increased shareholder returns and an improvement in the overall performance of the company. The authors have seen an increase in the number of instructions involving either a company seeking to defend against shareholder activists or on behalf of shareholder activists since the pandemic, which has resulted in a number of target boards coming under increasing scrutiny in the wake of the economic impact of the pandemic.

An example of interference with completion would be in the context of the acquisition by EXOR S.p.A. of PartnerRe Ltd., a Bermuda insurance company. PartnerRe had previously announced its intention to amalgamate in a stock-for-stock merger transaction with AXIS Capital Holdings Ltd. However, EXOR, which acquired a 9.9% stake in PartnerRe, announced an unsolicited offer for PartnerRe on April 2015, which culminated in a contested proxy solicitation, and following the recommendations of two major proxy solicitation firms against the AXIS transaction, EXOR eventually succeeding in negotiating terms with a previously hostile board and closed the transaction in 2016.