The M&A market in 2020 was curiously active compared to 12 months ago. There were 399 M&A transactions in 2020 compared with 359 in 2019. The deal value in 2019 was higher at 9,331.56 compared with 5,946 in 2020.
There were no particular trends of note in the British Virgin Islands (BVI) in 2020. The M&A market in the BVI is diverse.
The financial industry experienced the most significant M&A activity over the past 12 months.
A publicly traded or widely held BVI business company may go private under British Virgin Islands law by:
Dissenting shareholders may exercise certain dissent rights and be paid the fair value of their shares in 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 or not 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 his 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 such amendments as it may direct.
If a court approves the 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 British Virgin Islands may, on application, order a meeting of the relevant creditors or relevant 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 (for example, if it is intended to extinguish warrants), a plan of arrangement is typically the preferred form of arrangement 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 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 and consolidation
The plan of merger or consolidation must include:
The plan of merger must be approved and authorised by a resolution of shareholders. Further, shareholders not otherwise entitled to vote on the merger or consolidation (for example 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, 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. Further, some or all the shares of a class or series may be converted into a particular or mixed kind of assets while other shares of the same class or series may receive a different kind of assets. As such, not all the shares of a class or series must receive the same kind of consideration. It is on this basis that a merger or consolidation is especially useful as a going private technique.
Articles of merger or consolidation
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 primary regulator for M&A activity in the BVI is the registrar of corporate affairs. The primary source of legislation is the the Act.
There are no restrictions on foreign investment in the BVI.
There are no antitrust regulations that apply to business combinations 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.
There is no national security review of acquisitions in the BVI.
There are no significant court decisions in the BVI related to M&A.
There have been no significant changes to takeover law in the past 12 months and no significant changes are anticipated in the coming 12 months.
Stakebuilding in the target prior to the launch of an offer is not common in the BVI.
There are no material shareholder disclosure thresholds in BVI takeover law. The only legal obligations 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.
See 4.2 Material Shareholding Disclosure Threshold. There are no disclosure thresholds.
Dealings in derivatives are allowed in the BVI.
There are no filing/reporting obligations for derivatives under securities disclosure and competition laws. Please see the response at 4.2 Material Shareholding Disclosure Threshold.
As a matter of BVI law, there is no requirement to make the purpose of an acquisition known. The listing rules of the relevant stock exchange on which a BVI company is listed may provide for disclosure.
Under BVI law, there is no requirement for a target company to disclose a deal.
This is not applicable to BVI. See 5.1 Requirement to Disclose a Deal.
The scope of due diligence takes the form of reviewing the publicly available documents namely the memorandum and articles and certificate of incorporation. A search of the High Court cause list is also undertaken. The registered agent is requested to provide copies of the registers of directors, members and charges and any material contracts. The scope of due diligence has not been impacted by the pandemic.
Standstills are not common in the BVI. Exclusivity and confidentiality are the most common.
It is permissible for tender offer terms and conditions to be documented in a definitive agreement often in the form of a share purchase agreement agreed with the majority shareholder of the target.
The length of the process for acquiring/selling a BVI company varies from deal to deal. It is dependent on several factors such as the scope of due diligence, the knowledge of the acquirer of the BVI company’s business and whether finance needs to be raised.
The BVI does not have a mandatory offer threshold.
Cash is more commonly used in the BVI as consideration. The directors of a BVI company, subject to complying with their fiduciary and other duties under the Act may agree cost coverage mechanisms such as break fees with the acquirer. Cost coverage mechanisms are very much specific to the particular deal.
A person wishing to takeover a target company must own a majority of the shares. There is no regulation in BVI restricting the use of offer conditions.
The minimum acceptance condition is in excess of 50%. A shareholder needs to have a majority of the votes to appoint the board and amend the memorandum and articles of association for example.
A business combination can be conditional on the bidder obtaining financing.
The most common deal security measures a bidder seeks in the potential acquisition of a BVI company are exclusivity, non-solicitation and confidentiality clauses. There have been no new contractual considerations or tools for managing “pandemic risk” in the interim period, nor any changes to the regulatory environment that have impacted the length of interim periods.
If a bidder does not seek 100% ownership of a target it may seek representation on the board of directors of the target company. As a matter of BVI law, the affairs of a BVI company are managed by the directors.
Shareholders may vote by proxy in the BVI.
Acquiror Acquires 90% or More of the Shares
If the acquiror 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 or not the shares are, by their terms, redeemable. This is instigated by the company giving written notice to each member whose shares are to be 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 his entitlement to be paid a fair value for their shares. Within seven days of receiving the Notice to Redeem the company must make a written 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:
Acquiror Acquires Between 50% and 90% of the Shares
If the acquiror succeeds in acquiring between 50% and 90% of the shares, then it may invoke the merger/squeeze out mechanism permitted under the Act.
This mechanism involves the target merging with another BVI company into one of the constituent companies. To merge, the directors of each constituent company must approve a written plan of merger (the “Plan of Merger”) containing:
Once the directors have approved the Plan of Merger:
After the directors and members of each constituent company have approved the Plan of Merger, each constituent company is required to execute articles of merger (the “Articles of Merger”) setting out the following information:
The Articles of Merger are then filed with Registrar of Corporate Affairs in the British Virgin Islands together with any resolutions to amend the memorandum and articles of association of the surviving company.
If the Registrar is satisfied that the requirements of the Act in respect of the merger have been complied with and that the proposed name of the surviving company complies with the Act, they will:
As with a squeeze out, a member of a company is entitled to payment of the fair value of their shares upon dissenting from a merger if the company is a constituent company, unless the company is the surviving company and the member continues to hold the same or similar shares.
It is not common to obtain irrevocable commitments in 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 require it.
There is no requirement to disclose the issuance of shares in a business combination in the BVI.
Bidders do not need to produce financial statements in their disclosure documents. Financial statements do not need to be prepared in a required form although they are typically prepared in accordance with GAAP or IFRS.
Full disclosure of transaction documents does not apply in the BVI.
Laws and Statutes
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 he believes 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 that 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 he believes to be in the best interests of a member or members, even though it may not be in the best interests of the company.
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 interest or wishes of their appointor in any conflict.
Although there is no takeover code in the BVI, many countries have takeover codes which impose duties on the directors towards shareholders also 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 directors’ own interests.
There is no duty on the 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, there is no duty on the directors to advise individual shareholder 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. If, however, such advice is given it is advisable that it be given in conjunction with advice from independent financial advisors 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 and advice to enable them to reach an informed decision and thus refrain from releasing misleading statements or exercising their fiduciary powers in ways which would prevent shareholders from making an uninhibited choice.
Whilst there is no BVI case law on point, the courts would consider whether the board of directors acted in accordance with their common law and statutory duties in the exercise of their judgement in a takeover situation.
Independent financial advice is commonly given to directors whilst 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 advisors) believe that 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.
Conflicts of interest of directors, managers, shareholders and advisers have not been the subject of judicial or other scrutiny in the BVI. However, the Act provides that a director who has an interest in the transaction is required to disclose the interest to the board of directors of the company forthwith after becoming aware of the fact that they are interested in the transaction. Such director may vote on any matter relating to the transaction, attend a meeting of the directors at which a matter relating to the transaction arises, be included among the directors present at the meeting for the purposes of a quorum, and sign a document on behalf of the company, or do any other thing in their capacity as a director, that relates to the transaction. However, the transaction is voidable by the company unless:
Hostile tender offers are permitted in the BVI. However, hostile bids are not common given the requirement that the boards of both constituent companies must consent to a business combination and the limited amount of due diligence available. Generally, this is limited to the constitutional documents available from the Registrar of Corporate Affairs.
The use of defensive measure by directors is permitted in the BVI.
Under the Act there are no defensive measures. 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.
The directors owe a duty to act in the best interests of the company as a whole when enacting defensive measures.
Directors cannot “Just Say No” and take action that prevents a business combination. The directors are bound by their overriding duty to act in the best interests of the company as a whole. They must consider all factors of the offer and the likely impact of any decision to reject it.
Litigation is not common in connection with M&A deals in the BVI.
In the event litigation is brought it would likely be post-closing.
There have been no disputes of note between parties with pending transactions in early 2020.
Shareholder activism is not an important force in the BVI. There are exceptional instances where shareholders hold a blocking power for certain decisions, for example, regarding mergers.
There are few examples of activists seeking to encourage companies to enter into M&A transactions, spin-offs or major divestitures.
See 11.1 Shareholder Activism.
It would stretch credibility to suggest that developments in BVI M&A practice were the most noteworthy aspect of the last 12 months, or the one that will most interest future historians. That being said, it was certainly a year in which regulatory developments, combined with global macro events, left M&A lawyers in the BVI adapting rapidly to a new world.
The BVI continues to be a jurisdiction which is popular and well suited to M&A transactions, with a range of flexible acquisition tools for private and public deals, including statutory mergers, schemes and plans of arrangement, tender offers and of course contractual share purchases.
Not the Year Anyone Expected
As a place of incorporation for global businesses, M&A activity in the BVI is driven by its main markets, and in particular the USA and Asia.
As with those markets, the first half of the year saw a noticeable slow-down before a rebound in the second half of the year with overall activity remaining (perhaps surprisingly) strong. Most deals which were beyond the initial planning stages proceeded to completion. However, there was undoubtedly a period of time in which, facing an uncertain macro-environment, buyers opted to hold fire rather than make new offers and the flow of term sheets and LOIs seemed to pause.
As might have been predicted, those sectors of the economy which were least impacted by COVID-19 (and the global responses to the pandemic) drove M&A activity. Technology, energy (including renewables) and resources were strong. In the tech sector in particular, the BVI is an attractive proposition for start-ups due to its low set-up costs and corporate flexibility, and the last year saw the continuation of a trend that has been evident in recent years of "exits" of increasing value from BVI incorporated start-ups.
More severely impacted sectors, such as hospitality, tended to look more towards the debt and equity capital markets (which were frothy throughout the year) rather than look to distressed asset sales to patch up balance sheets. The unprecedented support governments around the world offered to struggling businesses may have also held off the wave of distressed M&A some (including the author) had expected to see.
Drafting for the Pandemic – MAC Clauses and Warranties
During the uncertain days of 2020, a number of clients on both the buy and sell side took a long look at material adverse change/effect clauses in both signed purchase agreements and in the negotiation stage. 2020 also saw the advent of the COVID-19 tailored MAC provision. Variants of this type of clause ranged from provisions specifically addressing the economic impact of lockdowns to those which were potentially triggered if there was an outbreak of illness among key staff.
Despite the focus on these types of provisions, there were no public examples of such clauses being used in BVI M&A, and they remain untested by a BVI court. The BVI courts are in any event bound to follow UK precedent, and would undoubtedly construe a MAC provision in the same manner as the UK authorities, of which the most notable followed the global financial crisis (eg, Grupo Hotelero Urvasco SA v Carey Value Added SL and Another  EWHC 1039 (Comm) and Cukurova Finance International Limited and another v Alfa Telecom Turkey Limited  UKPC). Anecdotal experience suggests that buyers who are looking for an "out" will usually find one without specifically invoking a MAC.
Other COVID-19 related developments in M&A practice included the emergence of warranties specifically arising from the crisis and its aftermath. Although these certainly crept in to some purchase agreements concerning BVI companies and governed by BVI law, these were largely driven by operational and legal risks in the jurisdictions in which target groups actually operate (which is not the BVI in the vast majority of M&A transactions involving BVI entities). The scope and scale of such warranties varied according to what industry sector the entity was in and its countries of operation, and how badly that industry or country had been impacted.
Economic Substance – Impact on M&A
Pandemic aside, the most significant legislative development in the jurisdiction of recent years (and arguably since the 2004 BVI Business Companies Act) was the BVI’s Economic Substance (Companies and Limited Partnerships) Act, 2018. Although the act came into force at the start of January 2019, and most BVI companies were required to comply with it from mid-2019, the reverberations continued into 2020 as companies grappled with reporting requirements for the first time.
Put simply, those BVI companies which carry on any of nine "relevant activities" are required to demonstrate economic substance in the jurisdiction (unless exempted via a foreign tax status), with the exact requirements varying between those activities. That substance is assessed over a twelve-month period, which for most entities runs from June 30th each year to the June 29th of the following year, with a requirement to report within six months of the end of each period. M&A practitioners thus had to determine whether any specific diligence or contractual protections were needed depending on what entities did, where they were in the reporting cycle, and their tax status. Understanding what an entity does, whether it has classified itself as carrying on a relevant activity (and which) and how (and whether) the entity has reported, is now a key part of the due diligence process. Well-advised buyers are now asking to see evidence that the entity did classify, copies of any legal advice received, and copies of any correspondence between the company and the registered agent or with the BVI International Tax Authority (which is responsible for policing compliance with the substance regime).
Although there was some discussion in the market in the BVI about whether it was necessary to include specific warranties on economic substance compliance, it should generally be caught by a properly drafted compliance with laws warranty. It may certainly be appropriate to warrant any factual statements made by the target which underpins the buyer’s analysis of the economic substance position (for example, a warranty that the only asset held by the company is real property, or that the company is and has at all relevant times been tax resident in the United Kingdom).
Assuming that the SPA is drafted on the usual "English" basis (ie, warranties are not generally given on an indemnity basis, unlike in the USA) the buyer may seek specific indemnification for any economic substance non-compliance or other risks identified in the course of its due diligence. It is anticipated sellers would therefore be expected to push hard against full indemnification for all economic substance matters unless a specific issue has been identified, and this would be consistent with how market practice is developing.
Where there is a split between signing and closing, and particularly where this is expected to be a relatively lengthy period of time (eg, where there is regulatory or competition clearance needed), it is also important to look at pre-completion undertakings from a substance perspective. Provisions requiring the target to make necessary filings (possibly after due consultation with the buyer), to maintain the current activities of the company and to notify the buyer of any correspondence from the relevant authorities should now be considered routine.
The introduction of economic substance requirements has so far not proved to be a deterrent to the use of BVI companies as acquisition vehicles, or put people off making bids for them. Given that the requirements of the rules vary between activities (and are not necessarily daunting, particularly for holding vehicles), and taking into account that similar rules exist in "competitor" jurisdictions such as the Channel Islands, Cayman and Bermuda, this is not expected to change.
SPACs – a New M&A Engine?
The Special Purpose Acquisition Vehicle (SPAC) trend was definitely the hottest topic in capital markets in 2020, but there were signs in 2020 that it is also starting to impact on the M&A markets. Based on figures in the public domain, over USD80 billion was raised in the US equity markets through these vehicles in 2020. With the BVI being one of the three largest jurisdictions of incorporation for SPACs (with Cayman and Delaware), this should increase the number of BVI vehicles seen on the buy-side of transactions and there have already been early signs of that.
Most SPACs will look to acquire by statutory merger which, somewhat ironically in the circumstances, is the process by which most sizeable BVI company take-privates have been effected. The merger process in the BVI is substantially similar to that in Delaware, and is a quick and efficient process. While the "dry powder" currently sat in SPACs is still considerably lower than the amount estimated to be held in traditional private equity, it is not insignificant by any measure. For SPACs, incentives to spend in the short term are arguably stronger (most SPACs have a two-year period in which to make an acquisition, while PE firms traditionally operate on a ten-year term).
SPACs are expected to drive up prices, and drive activity, for companies which are attractive targets for a typical SPAC investment strategy. This is likely to be mid-size to large private companies in a variety of sectors, notably including technology and telecoms, healthcare and consumer goods.
The Cloudy Crystal Ball
Overall, 2020 was a fairly compelling demonstration of the folly of making predictions about the future, in our industry as much as anywhere else. Much will depend on the nature of the global recovery.
That being said, to venture a few thoughts about the future of M&A in the jurisdiction, it is worth betting that the use of BVI vehicles will remain popular. It would not be remotely a surprise to see more distressed and insolvency related sales. More positively, there may be some pick up in struggling sectors such as hospitality, perhaps buoyed by SPAC cash. The first quarter of 2021 suggests a bull market has begun to form.
The trend, seen over a number of years, of deal value records broken should continue as BVI companies formed a number of years ago reach maturity and enter into more complex transactions. While the next 12 months may be more routine, it should not be any less busy.