Knowledge

Introduction

This briefing will review the statutory procedure for mergers and consolidations in the Cayman Islands ("Cayman"). These are relatively simple, cost-effective, and straightforward mechanisms for restructuring and they provide broad flexibility to meet the commercial aims of merging parties.

The Cayman merger and consolidation regime is governed primarily by the Companies Act, as revised (the "Companies Act") and (specifically in relation to that form of company) the Limited Liability Companies Act, as revised (respectively, "LLCs" and the "LLC Act"). This legislation provides a simple and robust statutory framework for undertaking mergers or consolidations and is by far the most common form of merger/consolidation used for M&A transactions in the jurisdiction.

As Cayman companies and LLCs closely mirror their overseas equivalents (e.g. a BVI limited company or a Delaware LLC), merging/combining with a Cayman entity is an attractive proposition for investors, clients and companies based elsewhere. The statutory merger process is aligned and familiar to commonly used overseas corporate vehicles and statute.

Mergers and consolidations

Vesting the assets, undertakings, property and liabilities of the constituent companies (two or more) into one surviving company, is considered a "merger", while vesting the assets, undertakings, property and liabilities of the constituent companies (two or more) into a new consolidated company (i.e. producing a new company different from the constituent companies) is considered a "consolidation".

The Companies Act allows for: (i) the merger or consolidation of two or more Cayman companies and (ii) the merger or consolidation of one or more Cayman companies with one or more overseas companies. Cayman segregated portfolio companies are ineligible to take part in a merger or consolidation.

The LLC Act provides for mergers and consolidations between LLCs (two or more), as well as permitting Cayman LLCs to merge or consolidate with Cayman exempted companies or overseas companies. An entity with a legal personality (including some trusts or unincorporated business) is included.

Any merger with an overseas company or foreign entity must be permitted by all applicable foreign laws and constitutional documents.

A Cayman company and a Cayman LLC may merge or consolidate.

Statutory procedure

The board of directors of each constituent company (or the managers of an LLC) approve a written plan of the merger (the "Plan").

The Plan must contain:

• the (i) name, (ii) registered office and (iii) designation and number of each class of shares in respect of each constituent company (or LLC Interests in respect of LLCs), and the name of the surviving or consolidated company;
• the names and addresses of the directors (or managers in respect of an LLC) of the surviving or consolidated company;
• the terms and conditions of the proposed merger or consolidation (including how the shares or LLC interests are to be converted), along with the date on which the merger or consolidation is intended to take effect;
• the rights or restrictions attaching to the shares (or LLC interests) of the surviving company;
• any amendments required to be made to the memorandum and articles of association (or LLC agreement) of the surviving company (in the case of a merger) or a statement that no change is required;
• the new memorandum and articles of association (or LLC agreement) of the surviving company (in the case of a consolidation);
• whether any benefit or payment is payable to any director of a constituent, consolidated or surviving company upon the merger or consolidation; and
• details of any secured creditor of the surviving or consolidated company (it is likely that under any financing arrangements, formal consent will be required from any existing secured creditor – see below).

The Plan must be authorised by a special resolution of the members of each constituent company (other than LLCs) and such other authorisation as may be required by the articles of association of the respective constituent company. For a constituent company which is an LLC, two-thirds of the members are required to consent. Members are not required to approve a merger of a Cayman parent with its Cayman subsidiary, provided that the parent owns at least 90% of the voting shares in such subsidiary, and a copy of the Plan is given to each other member of the subsidiary.

The constitutional documents (articles of association or LLC agreement) must permit the merger or consolidation. If not, the constitutional documents will need to be amended by the consent mechanism of that company or LLC.

Every secured creditor of a constituent company (i.e. holding a fixed of floating security interest) must consent to the Plan, unless the court waives consent after an application to the court by a constituent company. It is likely a secured creditor will require specific conditions to their consent.

If a constituent company is regulated or licensed with the Cayman Islands Monetary Authority ("CIMA"), then CIMA must consent to the Plan. If any constituent company is registered or licensed with CIMA, then the consolidated or continuing company will require a similar registration or license.

The Plan is filed with the registrar of companies in Cayman (the "Registrar"), along with:

• all applicable fees of the Registrar (or CIMA);
• a certificate of good standing for each constituent company or LLC;
• a director's declaration (or manager, in respect of an LLC) that the constituent company is, and the surviving company will (immediately after the merger or consolidation), be able to pay its debts as they fall due;
• the merger or consolidation is bona fide and not intended to defraud unsecured creditors of the constituent companies;
• no petition or other similar proceeding has been filed and remains outstanding, and that no order has been made or resolution adopted to wind up the constituent company in any jurisdiction
• no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the constituent company, its affairs, or its property or any part thereof;
• no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the constituent company are, and continue to be, suspended or restricted;
• the assets and liabilities of the constituent company (or LLC) is made up to the latest practicable date before making the declaration; and
• (in the case of a constituent company or LLC that is not a surviving company), the constituent company has retired from any fiduciary office held or will do so immediately prior to merger;
• an undertaking that a copy of the certificate of merger will be given to the members and creditors of the constituent company, and that notification of the merger will be published in the Cayman Gazette; and
• a director’s declaration (or manager, in respect of an LLC), where relevant, that the constituent company has complied with any applicable requirements under the regulatory laws.

Notice of the merger or consolidation is published in the Cayman Gazette.

As soon as the merger or consolidation becomes effective:

• the Registrar will issue a certificate of merger or consolidation and this will constitute, prima facie evidence of compliance with all statutory requirements;
• the rights, the property of every description, including choses in action, and the business, undertaking, goodwill, benefits, immunities and privileges of each of the constituent companies, shall immediately vest in the surviving/consolidated company or LLC;
• subject to any specific arrangements entered into by the relevant parties, the surviving company or LLC shall be liable for and subject, in the same manner as the constituent companies, to all mortgages, charges or security interests, and all contracts, obligations, claims, debts, and liabilities of each of the constituent companies or LLCs;
• in the case of a consolidation, the new memorandum and articles of association filed with the Plan immediately are in force;
• the Registrar will strike off the constituent company or LLC that is not the surviving company; and
• to the extent the surviving company becomes creditor or debtor to the same obligation, such obligation is extinguished by operation of law. For good order, this can be recorded in board resolutions of the surviving company.

Depending on a variety of factors (e.g. foreign law requirements, shareholder meeting notice periods, commercial issues etc.) the process usually takes anywhere from two weeks to three months.

Dissenting shareholders

In certain circumstances, the Companies Act provides members of a constituent company a statutory right to dissent from the merger of a Cayman company, and to be paid a fair value for their shares (judicially determined). The LLC Act contains equivalent provisions, provided that the LLC Agreement provides that the dissenting member is entitled to such payment.

Where the parties cannot agree on price, either party may file a petition with the Cayman court, to determine the fair value. Often, a dissenting shareholder will agree the fair value of the shares with the company prior to the matter being determined by the court.

Conclusion

The statutory merger procedure provides a simple yet effective method to restructure companies or LLCs. As Cayman entities are regularly used in corporate (and exchange-listed) and asset holding structures, the use of the regime is becoming ever more prevalent. If you require advice or information on mergers or consolidations in the Cayman Islands, please contact us.

This briefing is in broad terms and for the purpose of giving general information, it is not to be relied upon in relation to any particular set of circumstances.