The recent trends for private equity M&A transactions and deals in Bermuda in 2021 have largely followed global market trends and the forecast for M&A transactions for the year remains promising. Despite the hardships caused by the COVID-19 pandemic, Bermuda has continued to experience deal-flow, though not to the levels seen in 2020, during the height of the pandemic. These M&A deals have included some high-value transactions, although, largely, such deals have not approached mega-deal status. Primarily, these transactions have been generated in the insurance sector, including the Sirius International Insurance Group's merger with Third Point Reinsurance, valued at USD788 million.
The first part of 2021 has been largely anticipatory in nature in regard to M&A transactions, with the expectation that, as the restrictive effects of the pandemic are lifted, investor confidence will be restored and that those companies which suffered during the pandemic will be acquired by those competitors who emerged positioned to take advantage of the market conditions.
With the increasing interest in utilising special-purpose acquisition companies (SPACs) in these transactions, Bermuda is well-positioned as a premier offshore jurisdiction to establish a SPAC for the purpose of completing such acquisitions, particularly by the use of the reverse-merger concept.
Although there has been continued M&A deal-flow in Bermuda, the reinsurance sector has been the most active in M&A activity. As always, Bermuda’s reinsurance business sector has been quite active as it pertains to M&A transactions. Bermuda remains a leading offshore jurisdiction for reinsurance and it is forecast that the majority of M&A activity will involve the reinsurance sector.
It is also anticipated that there will be various attractive targets in the expanding technology sector, and potentially in the oil and gas sector, as the market leaders identify attractive targets. As Bermuda continues to expand its footprint as a leading jurisdiction for digital assets, the continued development of the M&A market and standalone acquisitions in this sector is anticipated.
Expected factors driving M&A activity in the future will be driven by:
The impact of Bermuda’s Economic Substance Regulations 2018 provides that “an entity engages in fund management if it manages investments for funds and in respect of which a licence is required in accordance with the Investment Business Act 2003 or for which a licence would be required if such activity were taking place in Bermuda”. As such, private equity funds are not subject to the various economic-substance requirements, unless they conduct the relevant activity of "fund management" or one or more of the other relevant activities as they pertain to their business. It is critical when setting up a new structure to consider the potential implications of the economic substance regime. As a result, a Bermuda company conducting a relevant activity, such as fund management, will have to meet the economic-substance requirement that it is managed and directed in Bermuda, that certain Core Income Generating Activities (CIGA) are undertaken in Bermuda, and that the company complies with adequacy thresholds in relation to physical presence, employment and operating expenditure. Companies that are conducting a relevant activity will be required to file an economic-substance declaration annually within six months of the financial year end.
Investment Funds Amendment Act 2021
It is an exciting time in Bermuda’s fund space, with the introduction of the Investment Funds Amendment Act 2021 (the IFAA). The IFAA widens the definition of “company fund” to include incorporated segregated account companies. In addition, it clarifies the provisions in relation to private funds imposing a requirement to appoint a local registrar for registered funds and amending filing requirements for all registered and overseas funds.
The IFAA now requires an operator of a private fund to ensure the appointment of an officer, trustee or representative resident in Bermuda. That person will have authority to access the books and records of the fund, as opposed to the prior requirement of appointing an authorised and regulated local service-provider.
The new amendments impose on all registered funds, not just authorised funds, the requirement to appoint a registrar in Bermuda to establish and maintain a register of the participants in the fund. That registrar may be a local corporate service-provider, a secretary or any other qualified local service-provider.
Filing requirements on registered and overseas funds
The filing deadline has been amended from on or before 30 June to within six months of the entity’s financial year end. This brings the requirements in line with those imposed on authorised funds.
Special-Purpose Acquisition Companies (SPACs)
Bermuda has seen a huge rise in initial public offerings (IPOs) of SPACs, largely due to COVID-19. SPACS are generally utilised where there is a great interest in “blank-cheque companies” or vehicles with a large amount of ready capital and well-equipped management teams. Bermuda is well-placed to facilitate these transactions, based on its corporate regime and the introduction of various corporate features that are familiar to US companies.
The responsible governing body for the regulation and supervision of all financial sectors in Bermuda is the Bermuda Monetary Authority (BMA), which takes a risk-based approach to the regulation and supervision of the entities for which it is responsible. The BMA is afforded certain enforcement powers when combating potential breaches, which include, but are not limited to, public censure, fines, and actions before the Bermuda courts.
The BMA is also the responsible body for approving ultimate beneficial ownership of a Bermuda-incorporated entity and adhering to exchange-control requirements in respect of any issue or transfer of shares, except where a general permission already exists.
The BMA also acts as the regulatory authority under the Insurance Act 1978 and the Investment Business Act 2003, which require a licence to conduct business and will also have additional regulatory approvals required in connection with a change of ownership or control.
Additionally, the principal regulatory authority governing companies, including the incorporation and administration of a Bermuda company and authority for the registration of a merger or amalgamation, is the Registrar of Companies pursuant to the Companies Act 1981 (the Companies Act). The Companies Act governs compulsory acquisitions in connection with a share acquisition or business acquisition.
Bermuda prides itself on its established reputation of robust legal due diligence in private equity transactions. A detailed due diligence exercise is assessed and is undertaken by private equity investors during the negotiation process of the transaction. In certain instances, this involves cross-border due diligence and thus co-ordination, which for onshore firms is paramount.
The level of detail and scope will vary from transaction to transaction, but, routinely, a detailed review of the corporate structure, governance, charges registered against the assets of the target and pending litigation and judgments filed against the company is required.
The method and forms of vendor due diligence are largely determined on the scale and type of the transaction by the potential buyer. Of late, there has been an increase in the request by potential buyers for vendor due diligence in transactions involving complex regulatory or financial matters.
A traditional acquisition structure consists of a cash investment in a target company or a newly formed holding company. In debt financing transactions, intermediate holding companies may be inserted for commercial or tax considerations. Shares are acquired in the target by way of a share purchase, share exchange or merger or amalgamation of the target and the newly formed holding company.
The most usual acquisition structure involves private-equity investors receiving ordinary shares, preference shares or loan notes (or a combination of shares and notes), with the manager receiving ordinary shares and/or employee options. There are usually restrictions on these shares.
Where the target is a widely held entity, the acquisition structure may involve an offer to purchase, merger or amalgamation, compulsory acquisition, or a scheme of arrangement. A summary of each of these is provided as follows.
Amalgamations and Mergers
Whilst any of these means would be open to a potential buyer, the acquisition of high-proﬁle publicly traded companies in Bermuda acquired by way of merger or amalgamation is frequently seen.
The buyer, subject to compliance with the rules and regulations of any applicable stock exchange, may present an offer to the shareholders of a Bermuda company which may, or may not, be recommended by the board of the target. A company can make an offer to the target’s shareholders to acquire all their shares in the target. In the event that the offer reaches certain thresholds of acceptance, a potential buyer can ﬁnd themselves with certain rights and obligations to obtain the remaining shares.
Schemes of Arrangement
A scheme of arrangement is a court-sanctioned compromise between a company and its creditors or its members. In the context of an acquisition, a Bermuda company or any member may apply to the Bermuda Court requesting that the Court order a meeting at which the members are asked to consider the scheme. If the approval of a majority in number representing three fourths in value of members or class of members is obtained, the Court may sanction the scheme and if so sanctioned, it becomes binding on the members (subject to delivery of the requisite order of the Court to the Registrar of Companies).
Most acquisitions by private equity funds typically involve a Bermuda entity formed as an exempted limited partnership; however, there are also a variety of other vehicles that may be used. Such vehicles include companies limited by shares, limited liability companies, segregated accounts companies or incorporated segregated accounts companies, which provide the most transactional flexibility, and unit trusts. Traditionally, Bermuda private equity funds will have a Bermuda-based fund manager.
Bermuda is well-established and has a reputation in the private equity space as being attractive to world-wide fund managers.
Where a guarantee or equity commitment is required in connection with the financing of the transaction, the private equity fund may itself be a party to the acquisition (or sale) documentation.
Private equity deals are financed by institutional banks or private equity investment firms based outside of Bermuda. In a similar way to the US and UK, sellers are provided with equity and debt financing commitment letters in most private equity transactions.
It is common to see syndicates of several private equity funds or other financial investors in larger transactions.
Subject to Bermuda’s exchange-control requirements on the issue and/or transfer of shares in a Bermuda company, there are no Bermuda-specific legal or regulatory restrictions impacting the structuring of private equity transactions. As such, the form of consideration in these transactions is driven by the private equity investors and any onshore tax requirements.
Private equity investment in Bermuda largely originates from the United States, Canada, Europe and Asia, as fund managers are typically located in these jurisdictions. Bermuda’s private equity transactions, including the consideration mechanism, will follow the investment trends of these major onshore markets.
In terms of how a closing is structured, this largely depends on where the buyer is situated and what the parties involved prefer. Typically, closing accounts and post-closing valuations and adjustments are used (with or without retentions or hold-backs); however, there has been an increase in the use of a fixed price or locked-box.
All contractual considerations are onshore-driven. There are no applicable Bermuda law provisions governing interest charged on leakage.
It is not necessary for transactions such as locked-box consideration structures or completion accounts consideration structures to be governed by Bermuda law. The choice of governing laws is determined by the parties to the transaction. The governing law of the transaction documents is traditionally foreign law, and as such would be subject to dispute resolution mechanisms in the relevant jurisdiction.
There are no mandatory or suspensory regulatory conditions imposed by Bermuda law. Traditionally, material adverse change/effect provisions are seen; however, they are not subject to input from a Bermuda-law perspective. All contractual terms and provisions are determined by the parties to the transaction.
The use of a “hell or high water" undertaking would be subject to the foreign laws governing the transaction documents as agreed by the parties.
See 6.7 Termination Rights in Acquisition Documentation.
Private equity transactions can be terminated where a board must invoke its fiduciary duty to support an alternative bid that is superior to the one tabled initially, or if it is determined that the target company would become incredibly more valuable than originally valued. In addition, it may be necessary to terminate an agreement due to lack of funding or failure to obtain regulatory consents on the part of the buyer. These events have caused the buyer to pay out break fees, or, rather, “reverse break fees”. A shareholder of a seller that did not approve the sale may appeal to the Bermuda courts for an appraisal of the fair value of his or her shares. If the appraisal is favourable to the dissenting shareholder, the target company may simply pay out the dissenting shareholder or terminate the agreement.
Where the transaction involves a share acquisition or merger or amalgamation, the associated risks would pass to the buyer on completion, unless specifically carved out in the terms of the acquisition agreement. The parties traditionally negotiate to limit the company’s transactions to the ordinary course of business to avoid any additional potential risks. During the disclosure phase of the transaction, where certain risks have been identified against the representations and warranties provided by the seller, an indemnity is provided to the buyer to cover the known risks. Where information is ascertainable by the buyer, the seller will limit its liability under the representations and warranties.
A seller normally provides the typical warranties and representations as to ownership structure, title, capacity of management team and material statements to knowledge and facts. Warranties such as these are not typically subject to time-limits, whether the buyer is a private equity fund or not. A seller may negotiate to limit its liabilities under warranties, covenants and its indemnity.
Warranty and representation insurance is available; however, its use may be limited, due to the nature of carve-outs, insurer policy limitations and scope of coverage.
Full disclosure of the data room is typical in these transactions against the warranties, thus placing the onus on the buyer to review completely all the documents in the data room to their satisfaction. On the other side, the seller needs to be sure that appropriate, accurate and specific disclosure is made, in accordance with the negotiations, in order to mitigate any risk of a claim of breach of warranty.
The Limitation Act 1984 governs periods of limitations in Bermuda. Specifically as it pertains to breach of contract, the limitation is six years from the date of the breach.
As previously noted, the contractual buyer protections are usually determined by onshore directions and would typically include customary non-compete and non-solicitation provisions to be given by the exiting management teams. Whilst the scope and extent of those provisions are subject to negotiation, they should be appropriate to protect the legitimate business interests of the buyer to ensure they are enforceable. In line with onshore markets, a private equity seller would not typically give any non-compete or non-solicitation undertakings.
As warranty and indemnity insurance has become increasingly more common in both US and European markets, there has also been an increase in the use of warranties and indemnities insurance in Bermuda. The level of coverage will depend on the terms of the sale and purchase agreement, market standards, and the level and risk of due diligence.
As previously stated, most of the transaction documents are governed by foreign laws, as such private equity transactions are rarely litigated in the Bermuda courts, except in respect of minority dissention rights exercised in the context of mergers or amalgamations.
Bermuda companies involved in privatisation transactions are most likely to be listed on exchanges outside Bermuda, specifically Asia.
The statutory material threshold for approval of an amalgamation or mergers by the target company is approval of shareholders representing 75% or more of those shareholders present and voting at a special general meeting at which a quorum of at least two persons holding or representing by proxy more than one third of the issued shares is present.
However, this can be reduced to a simple majority by a specific provision in the by-laws of the target company. However, if the by-laws contain no such provision, the company will be required to comply with the statutory requirement, or seek shareholder approval to amend the by-laws.
If shares in a Bermuda company are transferred to another company resulting in the new company holding 90% in value of the shares or any class of shares of the Bermuda company, the new company must, within one month of the date of transfer of those shares, give notice of the transfer to the remaining shareholders of the Bermuda company, pursuant to the Companies Act, 1981, as amended.
If the target company is listed on the Bermuda Stock Exchange, it will need to comply with the Bermuda Stock Exchange Regulations as to material shareholding disclosures.
Should the target company be a regulated insurance company, pursuant to the Insurance Act 1978, as amended, and there is a "material change" which includes amalgamation, merger or sale, the company must notify the Bermuda Monetary Authority within 30 days of that material change taking effect.
There are no Bermuda law requirements or obligations imposed on making a mandatory offer.
Previously, cash was the most common form of consideration. However, recently, a trend where consideration is now increasingly in the form of shares in the buyer or in the merged company or a combination of cash and shares in Bermuda transactions has been seen.
There are no restrictions on the type of consideration that can be offered under Bermuda law.
Bermuda does not have a takeover code. If the target is listed on the Bermuda Stock Exchange, the listing rules and the constitutional documents of the target company will set the requirements/conditions.
Break fees and “no-shop” provisions are permissible under Bermuda law and there are no restrictions or requirements under Bermuda law governing their application. The break fee is based on a genuine valuation of compensation for losses and not a penalty. Typically, it is common to see break fees range from 2% to 4% of the transaction value.
There is a fiduciary duty imposed on each director of a Bermuda company to act honestly and in good faith in the best interests of the company. It is not uncommon for directors to ensure an exemption clause to permit the directors to comply with these fiduciary duties.
If a buyer acquires 90% or more of the target’s shares, in a tender or exchange offer, they can give the remaining minority shareholders one month's notice of the buyer’s intention to acquire their shares on the same terms as the offer, and the remaining minority shareholders will be bound to sell to the buyer on those terms.
A shareholder with 95% of the shares can, on one month's notice, acquire the remaining minority shares on the terms set out in the notice. A dissenting shareholder can apply to a court within one month of having been given the notice.
An amalgamation or merger that has been approved by the requisite majorities causes the minority shareholders to be "dragged along" by the majority and they are therefore squeezed out, although dissenters have appraisal rights.
A buyer can seek irrevocable undertakings from key shareholders of the target company before making the offer. In the case of a proposed amalgamation or merger, the undertaking would be to vote to approve the amalgamation or merger on the terms set out in the notice of shareholders' meeting circulated by the target company.
There are no disclosure requirements or other restrictions on the nature or terms of the agreement.
Traditionally, hostile bids were very rare. However, the past decade has seen a slight increase in the number of successful hostile takeovers.
Takeovers are incredibly time-consuming, which makes them an unfavourable process. In the normal course of practice, the buyer would issue an offer document and prospectus directly to the shareholders of the target company when engaging in a hostile bid. However, the directors and management of the target company may opt to issue an announcement rejecting the offer or distribute a defence document or other documents setting out the arguments for not accepting the bid to its shareholders at regular intervals over the offer period (including, for example, profit forecasts and asset values).
Management incentivisation is often dictated by the tax implications for the management team, based on their place of residence and/or domicile of origin. However, where management incentivisation is an option it would typically be subject to various conditions and it would be expected that any issued management shares would be subject to repurchase upon the termination of the employment.
The typical level of equity ownership in the management team ranges from 5% to 20%. This follows the trend of the onshore market and so can be variable.
Transactions are structured to accommodate the specific commercial, tax or regulatory requirements of each transaction. As such, the structure of the transaction may vary from transaction to transaction in order to ensure that the buyer is able to optimise the regulatory benefits permissible under the applicable governing laws of its tax residency or the applicable jurisdiction.
The preferred instruments are typically a particular class of shares set out in the company’s by-laws. These can include share options, warrants or issuing restricted shares with customary vesting provisions.
Vesting provisions follow the same customs found in European and US markets.
Leaver provisions are dependent on whether the leaver is a "good" or "bad" leaver. What constitutes a "good" or "bad" leaver is not subject to Bermuda’s employment laws, but rather to what has been contractually agreed. Bad leavers would include those who have voluntarily resigned, breached non-competition or other covenants or were otherwise terminated for cause. Good leavers would include those leaving employment due to death, injury or retirement or any other reason that does not fall under the category of a bad leaver.
Aside from the shares' rights stipulated in the company’s by-laws, it would be unusual for manager-shareholder arrangements to be governed by Bermuda law. However, the generally accepted principle would be that any such customary restrictive covenants should not be greater than would be necessary to protect the legitimate business interests of the contracting parties.
Management does typically enjoy vetoes over certain matters involving the running of the company, but most vetoes remain at the shareholder level.
Minority protection for manager shareholders is obtained through structuring considerations such as pre-emption rights on new issues, drag/tag-along rights, other change of control provisions and/or veto rights of the investor (in certain circumstances).
There are no specific Bermuda law requirements which would dictate which exit strategy is the most favourable. This leaves the flexibility for the managers to select the most preferable route, which would lead to the maximum value for investors.
Directors of a Bermuda company cannot prioritise the interests of shareholders over the interest of the company. Due to this, voting and veto powers should remain primarily at the shareholder level in the shareholders’ agreement. It would be highly unusual to see veto powers at a shareholder or director level regarding changes to share capital, debt, constitutional documents, the composition of the board or management, the nature of business and as regards anti-dilution (whether by the issue of new issues or share transfers), major acquisitions or dispositions and change of control.
The Companies Act and the constitutional documents will govern the requirements of the company. The liability of shareholders is limited to the value of unpaid shares held by a shareholder.
Limited liability partnerships do not have the privilege of being treated as separate entities unless they specifically elect to have separate legal personality and notify the Registrar of Companies of that declaration. The General Partners of the partnership are fully liable for its debts and obligations, while the limited partner’s liability is limited to the value of the money and property they may contribute.
In a Bermuda context, it is common for the private equity fund shareholders to rely on the fund manager’s robust compliance policies and procedures that are already established (and in most cases regulated), rather than for the individual shareholder to try to impose its own compliance policies on the portfolio companies.
The typical holding period varies, depending on the structure of the transaction.
As previously stated, there are no specific Bermuda-law requirements which would dictate which exit strategy is the most favourable, giving the managers the flexibility to select whichever route will lead to maximum value for investors.
Drag rights would be determined by the by-laws of the company and/or the shareholders’ agreement. The utilisation of the drag mechanism is dependent on the complexity of the transaction. The drag provisions are typically determined by onshore commercial factors in entities with multiple shareholders, rather than institutional co-investors.
The drag threshold is 75%, pursuant to the Bermuda Companies Act, Section 47(7), but the typical drag threshold in these transactions is 90–95%.
As with drag rights, tag rights would be determined by the by-laws of the company and/or the shareholders' agreement and are usual for Bermuda entities with multiple shareholders. The utilisation of the tag mechanism is dependent on the complexity of the transaction.
Bermuda entities are often used when considering an IPO on a number of international stock exchanges. The terms of any lock-up or other relationship agreements between the private equity seller and the target company are traditionally determined by the rules, requirements and conventions of the relevant international stock exchange.