Corporate M&A 2024 Comparisons

The British Virgin Islands (BVI) as a jurisdiction broadly reflects macro themes for global investment and can be used as a proxy for the activity and deal flows across the wider global M&A market. The past 12 months have been characterised by a “normalisation” following the deal frenzy of 2021/2022, as well as a shift in the buyers of assets from financial sponsors and private equity to corporates seeking to leverage their balance sheets to make strategic acquisitions. This has in a large part been driven by a higher cost of financing as well as uncertainty of the future direction of interest rates. Further, deal flow has been concentrated in certain sectors of the economy where competition for assets remains strong, including clean-energy/decarbonisation and tech. The authors continue to see strong appetite for clients making use of the BVI statutory merger regime to facilitate complex cross-border M&A, in particular this is a popular tool for implementing take-private transactions of BVI companies that are listed on US stock-exchanges, providing a relatively quick and easy route to securing 100% of a BVI target company.

Key trends in the past 12 months include:

• continuing interest in take-private transactions of BVI companies listed on the world’s major stock exchanges, however, deals characterised by longer lead-times and lower conversion rate;
• shift in buyers of assets from financial sponsors and private equity houses to corporates leveraging balance sheets to make strategic acquisitions;
• concentration of deal flow in certain sectors of the economy where competition for assets remains strong, including clean-energy/decarbonisation and tech; and
• increase in distressed M&A, including sales out of liquidation and Chapter 11 of the US bankruptcy proceedings, a function of the higher-interest-rate environment.

The last 12 months has seen M&A transactions focused in certain key sectors of the economy including clean-energy/decarbonisation and tech. In particular, the authors have seen cloud-based infrastructure providers, digital and data engineering companies and companies offering clean energy solutions being acquired.

The BVI Business Companies Act, 2004 (as amended) (the “Act”) is the principal piece of legislation for M&A matters in the BVI.

The primary techniques/legal means by which a company may be acquired in the BVI are as follows:

• a statutory merger or consolidation pursuant to Sections 169–174 of the Act (a “Merger”);
• a plan of arrangement under Section 177 of the Act (a “Plan”);
• a scheme of arrangement under Section 179A of the Act (a “Scheme”); and
• a takeover/tender offer to shareholders of the target (a “Takeover Offer”).

In addition to the above, it is also possible to enter into an asset sale/purchase transaction where the assets and business of the target are acquired by way of contractual arrangement.

Each of these methods could be used to acquire the target for cash or in exchange for an offer of securities, or a combination of both forms of consideration. Only a Takeover Offer is generally available in the context of a hostile transaction. The key advantages and disadvantages of each structure are discussed below.

Mergers

A Merger is by far the most commonly used structure for a take-private of a BVI company. Mergers do not require court approval and are a registry-based process.

The principal advantage of a Merger is that it requires the approval of a majority of in excess of 50% or, if any higher majority is required by the memorandum or articles of the BVI company, such higher majority, of the votes of those shareholders entitled to vote and actually voting on the resolution to approve the plan of merger and the Merger. As such, absent a higher approval threshold in the memorandum or articles, it is possible to obtain 100% control of a target with the approval of a simple majority of the shares voting at a quorate meeting.

Scheme

A Scheme is a compromise or arrangement between the company and its shareholders or creditors or any class of them. BVI law in relation to Schemes is heavily based on English law. A Scheme is implemented by a court-supervised procedure that, in relation to an M&A transaction, will (depending on the outcome of the shareholder vote in relation to it and the court’s approval) result in the acquisition of either all or none of the outstanding shares to which it relates.

A Scheme requires the approval of: (i) a majority in number representing 75% in value of the members of each class who attend and vote in person or by proxy at meetings of the holders of each class; and (ii) the sanction of the court.

If the Scheme is approved by the requisite majority of shareholders and sanctioned by the court as described above, it will be binding on all shareholders. There have been very few Schemes attempted under BVI law, primarily due to the relatively high approval threshold, and the timing implications of a court-based process. The crucial potential advantage of a Scheme is that dissent rights do not apply.

Plan

A Plan is an alternative court-supervised procedure to the Scheme and is based on similar processes available in Canada.

The directors propose and approve a Plan, which must contain details of the proposed arrangement. The company then makes an application to the court for approval of the Plan. The court may then make an order in relation to the Plan and in making that order the court may:

• determine what notice, if any, of the proposed Plan is to be given to any person;
• determine whether approval of the proposed arrangement by any person should be obtained and the manner of obtaining such approval;
• determine whether any holder of shares, debt obligations or other securities in the company may dissent from the proposed Plan and receive payment of the fair value of their shares, debt obligations or other securities under a statutory procedure;
• conduct a hearing and permit any interested person to appear; and
• approve or reject the plan of arrangement as proposed or with such amendments as it may direct.

The court’s approval may involve two or more hearings at which the court may give directions in relation to the notifications and approvals required in relation to the Plan. In the context of an M&A transaction, such approvals will inevitably include that of the shareholders of the company.

As with Schemes, there have been very few Plans attempted under BVI law. Although it is possible to propose lower approval thresholds than those required by a Scheme, and dissent rights are at the discretion of the court, given the lack of a body of BVI precedent Plans, the possibility or likelihood that a court would require similar approval requirements to that of a Scheme and/or would enable dissent rights to apply has reduced their popularity.

Takeover Offers

A Takeover Offer is a contractual rather than statutory transaction under which an offer is made to shareholders of the target to acquire their shares. Since the BVI does not have a takeover code, there is little restriction as a matter of BVI law on the terms of such an offer and how it is made. As such, it is generally the law, regulations, or market practice of the jurisdiction where the BVI company’s shares are listed, that are followed (subject to the company’s memorandum and articles of association).

Advantages of a Takeover Offer include speed (it can sometimes be the quickest route to 50%+ ownership) and its availability in a hostile bid, subject to defences in the company’s memorandum and articles of association. The main disadvantage is that it is invariably necessary to take a second step to obtain 100% control – either through a squeeze-out if 90% acceptances are reached, or through a second-stage Merger.

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

The Financial Services Commission is the sole financial services regulator in the British Virgin Islands and is responsible for regulating businesses in the banking, insurance, digital assets, trust, investment funds, investment business and corporate services sectors.

In circumstances where the target is operating in the regulated spaces specified, the Financial Services Commission 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.

BVI companies are designed for use in international transactions and there are no foreign exchange controls or foreign exchange regulations under BVI law. There are generally no restrictions on a foreign buyer acquiring an interest in a BVI company. However, a foreign buyer acquiring real estate in the BVI or engaging in business in the BVI itself would have to obtain the appropriate local licences.

There are no specific antitrust regulations that apply to business combinations in the British Virgin Islands. However, a change of shareholder controller of any target which is regulated by the Financial Services Commission would be subject to regulatory scrutiny, which may include a consideration of the impact of the transaction on the British Virgin Islands market.

It is rare for there to be employees physically based in the BVI in an international M&A transaction involving a BVI company, but where that is the case, the Labour Code, 2010 (as amended) may apply in respect of such employees.

There are no national security reviews of acquisitions in the British Virgin Islands.

One of the most significant cases was Nettar Group Inc v Hannover Holdings SA (December 2021) where the BVI Court considered whether a dissenting shareholder is entitled to dissent in respect of shares which they acquire after the date prescribed for giving written notice of election to dissent pursuant to Section 179(5) of the Business Companies Act. The Court held that, on a proper construction of the legislation, the dissenting shareholder’s entitlement to be bought out at fair value extends only to its existing, registered membership in the Company at the date of its election to dissent and not to any shares which it does not hold at that date.

There have also been two cases, Nam Tai Property Inc v West Ridge Investment Company Limited (March 2021, and on appeal, October 2021) and Ace Lead Profits Ltd v Hollysys Automation Technologies Ltd (September 2021) which considered the proper approach which the BVI Court must take in determining whether the directors of a company have exercised their fiduciary powers for a proper purpose. In the Hollysys case, the directors of a NASDAQ listed company, had exercised their power to make amendments to the company’s M&A in the face of a hostile takeover bid. The Court found, as a matter of fact, that the purpose for which the relevant amendments had been made was not, as the claimants had contended, to defeat the bid and did not therefore infringe the proper purpose rule.

There have been no significant changes in the last 12 months.

In the case of a tender offer, it is customary for a bidder to build a stake in the target prior to launching an offer. Tender offers with respect to BVI companies that are listed on a stock exchange are more common in hostile or competitive scenarios, given that board approval is not required to commence a tender-offer, unlike the other mechanisms for implementing public M&A involving a BVI target company which includes the BVI statutory merger regime, schemes of arrangement and plans of arrangement, where in each case board support is necessary.

Save for as mentioned below, there are no specific BVI disclosure requirements or filing obligations with respect to material shareholding disclosure triggers, although note that the disclosure rules of the applicable stock exchange will apply.

Unless a BVI company falls within an exemption, it is required to take reasonable steps to identify its beneficial owners and to report information regarding their beneficial ownership pursuant to the Beneficial Ownership Secure Search System Act 2020 (as revised) or BOSS Act. The information must then be uploaded by their registered agent onto a confidential secure database, which is not publicly searchable and may only accessible by competent regulatory authorities. Note that there are exemptions for listed companies as well as their subsidiaries.

Subject to restrictions of ownership of shares in the BVI company’s memorandum and articles of association and the rules of the applicable stock exchange there are no restrictions on stakebuilding.

Subject to the rules of the applicable stock exchange there are no restrictions on dealing in derivatives.

Subject to the rules of the applicable stock exchange and any relevant competition authority with jurisdiction there are no filing or reporting obligations for derivatives with respect to securities disclosure and/or competition regulations as a matter of BVI law.

Subject to the rules of the applicable stock exchange, there is no requirement under BVI law for shareholders to make known the purpose of their acquisition and/or their intention regarding control of the BVI target company.

Public disclosure is not required under the BVI Business Companies Act, 2004 (as amended). The BVI does not have a stock exchange, but any company listed on a foreign exchange would of course have to follow those disclosure rules.

This is not applicable in the British Virgin Islands.

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 and regulatory matters, and reviewing any contracts that are governed by British Virgin Islands laws. The pandemic did not cause any significant change to due diligence processes in the British Virgin Islands.

Certain information is publicly available in the British Virgin Islands, namely:

• Certificate of Incorporation;
• Memorandum and Articles of Association;
• current director names;
• registered agent and registered office address; and
• registered charges.

Any judgments or legal proceedings can be searched at the High Court Registry.

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

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 seen in British Virgin Islands transactions.

Tender offers may be used in both friendly and hostile transactions. The BVI Business Companies Act, 2004 (as amended) does not prescribe the manner in which a tender offer may be made. It is also possible for an acquisition which originally commenced as a tender offer to be converted into a merger or consolidation. 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 constitutional documents) 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 redeemed).

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 British Virgin Islands 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 constitutional documents (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 foreign governmental approvals required; and
• whether or not the target is regulated (including the requirement for the approval of the British Virgin Islands and foreign regulators, for example, where the target is a holding company and the subsidiaries are regulated in the British Virgin Islands 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.

There were no significant practical delays to closing caused by the pandemic. The BVI Registry of Corporate Affairs has been online for some years and searches and filings were able to continue electronically during the pandemic. High Court searches remain a manual process, although procedures were put in place during the pandemic to reduce any delays.

There are no requirements under British Virgin Islands law for a mandatory offer threshold.

There are no restrictions under British Virgin Islands 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 the British Virgin Islands and there are no specific British Virgin Islands 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).

There are no minimum acceptance conditions for tender offers under British Virgin Islands law.

Any requirement to obtain financing would need to be set out in the plan of merger or consolidation and relevant agreements, 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.

There are no prescribed rules under statute or common law with respect to deal security measures in a transaction. However, many British Virgin Islands 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 British Virgin Islands law and, in that case, the availability of deal security measures may be limited or restricted in accordance with the relevant laws. In the British Virgin Islands, the measures most often seen are as follows.

Break Fees

Break fees are becoming increasingly standard in transaction agreements. For example, in the case of a proposed merger, the agreement and plan of merger 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 British Virgin Islands companies operating in the North American market tend to range from 1% to 4% of the merger consideration. If the British Virgin Islands 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” 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 British Virgin Islands 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.

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 BVI Business Companies Act, 2004 (as amended). 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.

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.

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 constitutional documents 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 M&A, the M&A of a British Virgin Islands company may be amended upon the approval of a majority of shareholders present and voting in person or by proxy at a meeting or by way of written consent. 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 (subject to some limited exceptions) 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 British Virgin Islands 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.

The BVI Business Companies Act, 2004 (as amended) does contain squeeze-out provisions, which apply only where the hostile party holds 90% of the votes of the outstanding shares entitled to vote and 90% of the votes of each class of share entitled to vote as a class. The squeeze-out provisions may also be restricted or disapplied in the BVI company’s M&A.

Short-form mergers are available in the British Virgin Islands but apply only as between a parent company and its subsidiary company. A subsidiary company for this purpose is a company at least 90% of whose outstanding shares of each class of shares are owned by the parent and, as such, the mechanism would not be particularly useful as a squeeze-out tool over and above the dedicated squeeze-out provisions.

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).

There is no legal requirement to make a bid public under BVI law and this will be driven by the rules of the applicable stock exchange.

BVI law does not prescribe any disclosure requirements with respect to the issuance of shares.

There is no requirement under BVI law to produce financial statements (pro forma or otherwise) or for such statements to be prepared in a required form.

There is no legal requirement under BVI law to disclose any transaction documents and this will be driven by the rules of the applicable stock exchange.

Directors of BVI companies are subject to directors’ duties under the Act and at common law and in equity. The principal duties of a director of a BVI company include:

• to act honestly and in good faith and in what the director believes to be the best interests of the company; and
• to exercise his or her powers as a director for a proper purpose.

The Act allows a company’s constitutional documents to modify these duties to permit a director to act in the best interests of the company’s parent or a shareholder in some circumstances, including where it is a wholly owned subsidiary and where it is carrying out a joint venture.

Pursuant to the Act and subject to the Memorandum and Articles of Association of a BVI company, a director of a company who is interested in a transaction may:

• vote on a matter relating to the transaction;
• attend a meeting of directors at which a matter relating to the transaction arises and be included among the directors present at the meeting for the purposes of a quorum; and
• sign a document on behalf of a company, or do any other thing in his or her capacity as a director that relates to the transaction.

However, notwithstanding the above this does not derogate from the fiduciary duty of the director to act in the best interests of the company and to exercise his or her powers for a proper purpose. While generally speaking, disclosure of the relevant conflict is deemed to be sufficient to mitigate any risk of the conflict affecting the decision-making process, subject to the nature of the underlying conflict in some cases a committee of non-conflicted directors may be formed to consider certain matters relating to the business combination. However note that pursuant to the Act there are certain matters which the directors do not have the power to delegate to a committee of directors, one of which would be to approve the plan of merger, consolidation or arrangement.

The board of directors of a BVI company benefit from the “business judgement rule” which reflects the position that the BVI Courts will only interfere with the decision of the board of directors of a company if it was to be determined that it was a decision that no reasonable board could have concluded was in the best interests of the company and/or that it could not reasonably be concluded that the decision was taken for a proper purpose. Indeed, as long as a decision of the directors is made in good faith and for a proper purpose, the BVI Courts will not concern themselves with the merits of the decision from a commercial perspective.

The board of directors of a BVI company will typically take advice from the legal counsel, financial, accountancy and tax advisers on a transaction. The board may also seek a fairness opinion to be compiled by a qualified investment banker that will evaluate the fairness of the price offered with respect to the acquisition. To the extent there are any members who seek to dissent from the merger and exercise their statutory dissent right a company may also need to engage a valuation or appraisal firm to seek to agree on the fair value for the shares.

Allegations of conflicts of interest made against directors often arise in the context of shareholder disputes. However, the authors are not aware of any judicial decisions which focus on this aspect of a director’s duties.

Whilst hostile tender offers are permitted, it is much more common to see recommended offers for the acquisition of publicly-listed BVI companies. Indeed, the opportunities to effect a hostile acquisition of a BVI company are limited and, of the structures available, generally only a tender offer is practicable for a hostile bid, as each of the other mechanisms including the BVI statutory merger, the scheme or arrangement and the plan of arrangement would require a board recommendation. The Act contains squeeze-out provisions, but these apply only where the hostile party holds 90% of the votes of the outstanding shares entitled to vote and 90% of the votes of each class of share entitled to vote as a class. The squeeze-out provisions may also be restricted or disapplied in the company’s Memorandum and Articles of Association.

BVI law allows for the use of defensive measures by directors, subject to the directors complying with their fiduciary duties.

It is possible for a BVI company to structure its memorandum and articles of association to provide protection from a change of control through a “poison pill” or similar provisions. Examples of such defensive measures include the ability to issue blank cheque preference shares, staggered boards, removal of directors only by a supermajority vote, and restrictions on the ability of shareholders to requisition meetings. The authors have not seen any change in the prevalence of defensive measures as a result of the pandemic.

The board of a BVI company will be required to comply with their fiduciary duties in respect of any proposed acquisition (such as the directors’ duty to act honestly and in good faith and in what the director believes to be in the best interests of the company). See 8.1 Principal Directors’ Duties.

Any right of the directors to “just say no” and take action that prevents a business combination will be subject to the requirement to comply with their fiduciary duties in respect of their good faith consideration of any bid whether or not unsolicited and an assessment as whether or not the business combination would be in the best interests of the company, noting that as long as a decision of the directors is made in good faith and for a proper purpose, the BVI Courts will not concern themselves with the merits of the decision from a commercial perspective.

In common with other jurisdictions, BVI legislation provides remedies to members of the company dissenting from a merger. Those remedies operate entirely without the Court and involve the appointment of a panel of appraisers to determine fair value.

Litigation otherwise in connection with M&A deals is rare, not least as many deals will include provision for arbitration for disputes arising out of or in connection with the deal.

Where disputes do arise, they are more likely to arose post- rather than pre-deal, not least because any action by way of litigation directed at preventing a deal from proceeding is likely to require the applicant to accept liability for any damage which the prohibitive action may cause, should the action ultimately turn out not to have been justified.

The authors are not aware of any claims in the BVI which have arisen out of broken deals relating to the pandemic. However, BVI law will, in the absence of BVI statute or local precedent, ordinarily follow English law and so will be guided by English law, for example, on whether the doctrine of frustration applies to relieve a party from its contractual obligations in circumstances such as those which occurred in the COVID-19 pandemic. Under English law, the relevant test would require the party seeking to be relieved to show that the obligation is incapable of being performed, not merely difficult or burdensome. That being the case, parties may include an express clause in their deals, going forward, which deals with the eventuality of another pandemic and the consequences which they agree are to flow from such an event.

British Virgin Islands companies are typically held by foreign investors and as such are subject to activism forces in those countries. 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 82 of the BVI Business Companies Act, 2004 (as amended), subject to a provision in the M&A for a lesser percentage, shareholders who hold not less than 30% of the voting rights in respect of the matter for which the meeting is requested, can requisition a shareholder 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.

It is always possible that activists may seek to interfere with the completion of announced transactions and it is common to advise on such risks.