Private Equity 2021 Comparisons

The Current Status

The use of the Cayman Islands as jurisdiction for private equity fund sponsors based in North America and Asia is now well established, where Cayman has long been the default jurisdiction for international transaction structuring. As a consequence of the recent boom in SPAC transactions, the use of Cayman Islands-incorporated entities has increased significantly. There has been exponential growth in the establishment of Cayman Islands entities listed as SPACs on the US exchanges and, increasingly, the Asian and European exchanges. The inevitable follow-on transactions in which such entities consummate the international acquisitions for they are established, and the consequent engagement of these entities in a series of complex cross-border acquisitions, promises to be the most important driver of M&A activity for the next 18 months.

It is anticipated, in particular, that Cayman structures will continue to afford high tech European industries such as pharma, transaction processing and alternative energy vehicles with access to international capital and the other benefits that listing in the USA affords.

The Cayman Islands Standing in the Global Market

The ever-more complex global M&A marketplace, in which most significant deals have multiple transacting parties in multiple jurisdictions, and the position of the Cayman Islands within that context, should ensure that this fastest-growing aspect of Cayman's legal economy continues to offer reasons for optimism. In a world of increasing uncertainty, the Cayman Islands offer certainty from a structuring perspective, the flexibility and sophistication necessary to consummate the complex cross-border mergers and sensible outcomes to dispute resolution.

Buyers and sellers alike are able to avail themselves of a flexible, commercially focused corporate and governance regime that offers a variety of entity structuring options that provide solutions to the often otherwise intractable problems posed by onshore cross-border merger regimes.

The USA and Europe

Familiarity of use lends itself to predictable outcomes. US-based sponsors used to dealing with LLCs and limited partnerships can use their Cayman equivalents to ensure that the fiduciary and economic matters are structured in familiar ways. Parties in the UK and Asia can exploit the certainty and commercial sensibility afforded by more than a century of English common law and its application to Cayman Islands companies.

Europeans too are warming to the benefits afforded by employing entities formed in a jurisdiction where the consummation of transactions is not hampered by labyrinthine decrees and, because Cayman-incorporated entities are tax-neutral in the jurisdiction of incorporation, the use of the flexible, malleable and familiar corporate governance regime can be installed above a group of portfolio assets and operating companies without affecting the taxation of the structure.

Continued levels of robust activity in the public markets involving Cayman Islands entities has been of particular note.

Special Purpose Acquisition Companies (SPACs)

The SPAC market has certainly seen remarkable growth, and has reached a level of maturity in the US that may be flattening. However, increasing interest in Asia, Europe and the EMEA may continue to fuel the flames for a little longer yet. Moreover, the consummation by these myriad entities of the acquisitions for which they were formed has only started to gain momentum and the next 18 months should see a frenzy of deal activity from sponsors eager not to lose their precious trust funds.

Cayman Entities and Transactions

Traditional foreign issuers seeking access to the public markets in the United States will also typically employ a Cayman holding company structure. From an Asian perspective, the ease of use of Cayman Islands structures and the familiarity of the SEC with such entities means that IPOs can be consummated quickly and efficiently.

For issuers based in Europe, the flexibility afforded by the use of Cayman entities means that sponsors and founders looking to raise public capital whilst retaining voting control are able to benefit from the acceptance in the US markets of bespoke and sophisticated multiple share class structures.

Take-private transactions involving Cayman-incorporated companies listed in the USA and Hong Kong continue to keep corporate and dispute resolution counsel busy. There is a perception that foreign-managed companies are routinely undervalued in the US markets. This, coupled with pressure from sources such as the Chinese government in relation variable interest entities (VIEs) and strategic industries such as online tutoring, should continue to drive large volumes of work.

These are often the transactions that give rise to the most complex Cayman legal questions, particularly in relation to the fiduciary position of board members and to questions of valuation in anticipation of action by aggrieved shareholders. The law in this regard is developing fast, with a number of matters currently before the Cayman courts, and it is an area where early engagement and the working relationship between Cayman counsel and onshore counsel is absolutely critical to successful outcomes.

Sector-Specific Activity

As regards sector-specific activity, and in addition to the very broad spectrum of ordinary commercial M&A transactions that are consummated either using Cayman Islands acquisition vehicles or involving Cayman-incorporated targets, the following sectors are witnessing significant activity.

Financial services

Cayman has long been a preferred jurisdiction for the establishment of acquisition structures intent on acquiring financial services assets. In the aftermath of the global financial crisis, trillions of dollars were raised using Cayman structures and deployed to assist in the stabilisation of the US banking system. The use by private equity fund sponsors of Cayman-registered companies, limited partnerships and trusts has afforded opportunities to achieve the sophisticated and highly bespoke transaction structuring that is often necessary for acquisitions on behalf of funds with multiple underlying investors of regulated financial assets.

More recently, the growth in the number of banks, insurance companies and corporate service providers registered and regulated in the Cayman Islands has translated into an encouraging stream of locally relevant M&A activity as such entities are bought and sold in the ordinary course. The growth of the Cayman-incorporated fintech industry – much of it located in the Special Economic Zone (SEZ) established by the Cayman Islands government to encourage the physical relocation of such businesses to the Cayman Islands – has already seen significant interest develop and promises much in terms of Cayman-focused M&A activity in the future. The exemplary response by local government to the pandemic has ensured that Cayman has been a safe, open and virus-free community that offers an exceptional standard of living for fintech entrepreneurs.

Energy and infrastructure

The employment of Cayman-incorporated structures to consummate oil and gas transactions is perhaps the longest-standing tradition in the Cayman Islands M&A industry. More latterly, that has translated into the robust infrastructure and renewables sectors. These are industries of critical importance to global security, stability and the macro economy, and they rely heavily on the long-term stability of Cayman as a jurisdiction of incorporation, on the ability to put in place robust and certain financing arrangements, and on the complete freedom from local political interference in these most sensitive of assets.

Aircraft and other structured asset financings

It seems inevitable that there will be a significant amount of work to be done in the aircraft industry when the dust of 2020 settles. Restructuring existing arrangements, and the introduction of new players and new technologies to the marketplace, mean that this already most international of businesses will require the introduction of nimble and robust products to survive the next decade. Innovation of this kind has always been at the core of what the Cayman legal infrastructure provides.

Alternative motor vehicles

There is currently a global rush to market for electric and autonomous vehicles, and Cayman offers an excellent opportunity for ambitious manufacturers to access international capital, either by direct investment or using the IPO markets. Two high profile transactions in 2021 have set the scene for what it is anticipated will be a robust period of growth whilst new entrants jockey for position and private equity sponsors look for the right horses to back.

Pharmaceuticals

It goes without saying that pharma is at the forefront of global thinking. An industry that relies so critically on international co-operation and investment is always going to find Cayman an attractive home, and transactions in Asia, Europe and (increasingly) the US continue to drive significant volumes of work for Cayman firms.

A good illustration of this principle is the market in cannabis: whilst not without regulatory challenges, the Cayman Islands is the jurisdiction of choice for fund sponsors who are keen to raise and deploy international and tax-exempt investment capital in this cash-rich enterprise.

More detailed and specific law and regulation in relation to the formation of funds by private equity sponsors has been the story of the last few years, and the Cayman Islands has been no exception there. For the world’s most prominent financial institutions and international investors, it is critical to remain relevant and innovative in response to market reality, as well as being credible, and that is why most see Cayman as the favoured tax-neutral jurisdiction for private equity funds. Key to this market is the existence of architecture that allows fund sponsors to structure and manage entities with many investors, a variety of strategies and multiple layers of debt and equity efficiently and effectively in a multinational environment.

In this context, Cayman legislation and regulation continue to be responsive to trends and challenges in current market practice, and to embrace transparency and anti-avoidance initiatives.

Automatic Exchange of Information

Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting processes, the broadening of practices and procedures in relation to anti-money laundering compliance and the like are all now well established. From an M&A perspective, it has meant that fund sponsors are required to be more conscious of such matters when engaging in due diligence on any target, and are required to include an anti-money laundering investigation as part of their due diligence: the material increase in the culture of compliance across the industry has been encouraging.

Economic Substance

The Economic Substance (ES) regime is now more than a year into its application and, as with most law and regulation introduced in Cayman, shows the expected signs of being applied in a sensible and proportionate manner. The ES regime was introduced as part of the Cayman Islands’ ongoing commitment to assisting global tax recovery efforts in combatting base erosion and profit shifting (BEPS). It is worth noting that BEPS relies for its effectiveness on the presence of two key elements:

• a system of taxation (ideally at a very low rate); and
• tax treaties that enable companies to exploit that system of taxation.

Being tax-neutral and without tax treaties, Cayman is not a jurisdiction that offers much succour to any multinational organisation that is pursuing a BEPS strategy to reduce its tax bill. For that reason, the ES regime has had little meaningful impact on Cayman as a jurisdiction for structuring M&A acquisition vehicles. That is particularly the case for Cayman Islands structures employed by private equity fund sponsors, so it is not surprising that such structures are typically out of scope for the purposes of such economic substance law and regulation.

In the limited circumstances where Cayman Islands-incorporated entities are subject to economic substance requirements, and required to comply with them, it has not proven especially onerous to comply. Again, understanding that such entities are not typically engaged in BEPS, it is not difficult to see why this might be the case. The application of the law and regulation in this regard is in the very nascent stages: guidance notes published by the Cayman Islands regulator are in a state of development and specific outcomes will not be apparent for almost two years, when the first examinations by the Cayman Islands regulator are due to be completed.

Registration of Private Equity Funds

Most recently, Cayman has introduced a regime for the registration and regulation of private funds formed in Cayman. The Private Funds Law (PFL) now sits alongside the long-established Mutual Funds Law and promises to offer the same level of sensible and proportionate oversight and regulation that the jurisdiction has brought to hedge funds for more than two decades. The legislation is in its most early stages, but in its first year more than 13,000 private funds and alternative investment vehicles (AIVs) have been registered. This is a remarkable achievement that illustrates the strong working relationship between fund sponsors, Cayman lawyers and the Cayman Islands Monetary Authority.

Whilst each of these initiatives brings with them their own benefits for transparency and certainty and addresses unfounded concerns about legitimacy, none materially affect the cost or the efficiency of execution of M&A transactions in Cayman. 

Cayman Islands entities are engaged in transactions in most active jurisdictions around the world, and in each case it will be the relevant local regulatory regime that is relevant to the transaction. It is extremely rare for any M&A transaction involving Cayman Islands entities to have a material Cayman regulatory element. There are no relevant antitrust or business combination rules and, unless securities are being offered to the public in Cayman (which would be highly unusual), no relevant foreign investment restrictions or local national security regime. However, there are some areas where Cayman Islands regulatory issues arise.

If the target of any M&A transaction is regulated in Cayman, then an application may be required to be made to the Cayman Islands Monetary Authority (CIMA) to approve a change of control. This process can take six to eight weeks to complete, and that timing should be factored into any completion schedule. Entities affected will usually be Cayman-regulated banks, insurance companies and corporate services businesses.

Investment in industries that are engaged in the manufacture of cannabis products can be difficult for Cayman Islands-incorporated fund sponsors. The obligation of the fund sponsor to ensure portfolio companies comply with anti-money laundering rules can present challenges if their income is generated by activity that is considered illegal. In the USA, the federal illegality of the cannabis industry, despite the state-by-state legality, means that it is important to tread carefully and to ensure that Cayman Islands advice is taken at an early stage.

Because it is rare for target companies to conduct material operational activity in the Cayman Islands, due diligence is ordinarily limited to relatively binary matters, such as examining statutory registers and constitutional documents, and, in relation to regulated targets, investigating compliance with registration and regulatory obligations in relation to the Cayman Islands regulator.

In relation to transactions with a broader Caribbean context that may involve collating advice from across the region, it is not unusual to engage Cayman counsel who are locally placed and experienced in the consummation of international M&A transactions to co-ordinate the due diligence process.

Because the vendor due diligence questions in Cayman can be rather binary, and not particularly controversial, it is not uncommon for a buyer to rely on vendor due diligence. Where more complex local regulatory or financial matters arise, buyers will prefer the comfort of a due diligence report prepared with their particular interests in mind.

Acquisition of Shares

The process for the acquisition of shares in a Cayman company will depend to a significant degree on whether the target's shares are closely held. If they are, then a private treaty executed by all affected parties (or using drag-along provisions) is the usual approach for such transactions.

Where shares are widely held so as to preclude the specific execution of a sale and purchase agreement by or on behalf of each seller, it is usual for such transactions to be prosecuted using the statutory merger process prescribed by the Cayman Islands Companies Law. The Cayman merger statute is procedurally familiar to contracting parties located in the USA and, increasingly, in Asia. Moreover, the adjudication by the Cayman courts of the principal area of dispute in Cayman statutory mergers – the assessment of claims for fair value by dissenting shareholders – borrows materially from the jurisprudence of the Delaware courts.

Court-Sanctioned Scheme of Arrangement

In certain limited circumstances, it may be advisable to proceed instead by means of a court-sanctioned scheme of arrangement. The process for a scheme of arrangement under Cayman Islands law derives from English law, and standards for judicial approval and shareholder consent are as they would be in the English courts. Circumstances that tend to suggest a court-driven scheme rather than a statutory merger may include the following:

• where the buyer is offering its shares as consideration – because a court opines on fairness, the shares are exempt from registration with the US Securities and Exchange Commission;
• where the target company is insolvent and so cannot give the "going concern" confirmation necessary for a merger, or where the offer includes a compromise, particularly with the creditors of the target company;
• where there are concerns about significant disruption or post-merger litigation by dissenting shareholders (a scheme affords no process for dissent on value by minority shareholders); or
• where the consent necessary to be obtained from secured creditors in relation to a merger cannot be obtained.

It is typical for a separate private equity-backed acquisition structure to be established in relation to each transaction undertaken by the fund. Cayman entities really prove their worth in relation to such transactions, particularly where multiple fund entities and/or co-investors are to be aggregated, or where a coalition of a joint venture or club deal partners is to be assembled. The usual acquisition structure will involve a Cayman-incorporated holding company or limited liability company containing the corporate governance and funding arrangements. Beneath that entity there may be one or more entities established in jurisdictions that lend tax, regulatory or financing efficiency to the structure.

The only circumstance in which it is usual for the private equity fund itself to be party to the acquisition documents is where a guarantee to lenders for transaction finance or an undertaking for the vendor to ascertain that the acquisition structure is duly-funded (an "equity commitment" undertaking) is required.

There is no particular form of transaction finance or ownership structure that is typical in a Cayman context. It is precisely because Cayman-incorporated structures are able to be adapted to the specific requirements of any given transaction that such structures are so ubiquitous. Rather, it will be the commercial custom and practice of the relevant jurisdiction in which the Cayman-incorporated structure is to be deployed that will determine the approach adopted.

From the perspective of persons charged with the fiduciary responsibility of directing the actions of the Cayman-relevant entities, compliance with the customs and practices of relevance to the context of the particular transaction will often constitute the discharge of those responsibilities.

Consortium transactions and other aggregator arrangements are, in many respects, the raison d'etre for the Cayman Islands M&A industry.

It is typical for co-investors to participate in aggregator structures established by fund sponsors. It is usual for such investors to be entirely passive in a legal and economic sense, though it is increasingly apparent that persons co-investing alongside private equity funds into which they are invested are making use of the opportunity to learn from private equity fund sponsors with a view to making their own direct investments at a later stage.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

See 7.5 Conditions in Takeovers for a discussion on break fees.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

There is no meaningful response from a Cayman perspective.

Other than in respect of minority dissention rights exercised in the context of statutory mergers, private equity transactions are very rarely litigated in Cayman. Any such litigation would tend to involve deadlock between joint venture partners, and would ordinarily be pursued as a petition to wind up the relevant company on the basis that it is just and equitable to do so.

There has been some recent increase – not unique to Cayman – of US securities law litigation in relation to certain kinds of SPAC transaction in the USA. The issues in dispute tend to be focussed on the adequacy of disclosure in the offering documentation.

Take-private transactions of Cayman companies listed in the USA and in Asia continue to generate significant levels of activity. There is a perception that Asian-managed companies are routinely undervalued in the US markets and this, coupled with pressure from sources such as the Chinese government in relation variable interest entities (VIEs) and strategic industries such as online tutoring, should continue to drive large volumes of work. Each of these transactions typically involves private equity fund sponsors , often as a plaintiff in dissenting shareholder proceedings.

Other than in respect of the small number of entities listed on the Cayman Islands Stock Exchange, there are no material shareholding or disclosure thresholds relevant under Cayman Islands law.

Other than in respect of the small number of entities listed on the Cayman Islands Stock Exchange, there are no material offer thresholds relevant under Cayman Islands law.

Traditionally, M&A transactions involving Cayman entities would have had cash as the most common consideration of Cayman entities. The increasing relevance of SPACs has led to a material increase in the number of transactions where shares have been the primary consideration. That is also true of a number of high tech listings, where companies have exploited high valuation-to-revenue ratios to make strategic acquisitions.

Share-for-share transactions have the effect of excluding minority shareholder dissention rights in a merger context, so shares are sometimes offered as an alternative to cash.

Where a public company employs a Cayman Islands scheme of arrangement to offer shares as consideration, and because a court opines on fairness, the shares so offered will be excluded from certain registration requirements in the USA. This is the most common reason for employing a scheme of arrangement in Cayman.

Conditions

The conditions associated with an offer involving a Cayman Islands entity will be determined by the jurisdiction in which the Cayman entity operates. Apart from entities listed on the Cayman Islands Stock Exchange (and there is only a small handful of those), no additional Cayman rules apply.

It is not uncommon for a Cayman entity listed on a UK stock exchange to include in its constitutional documents compliance with the provisions relating to the Code on Takeovers and Mergers applicable to companies incorporated in the UK.

Similarly, there is some increase in the appetite for Cayman entities listed in the USA to introduce into their constitutional documents the regime under Delaware law for the governance and management of substantial business combination transactions.

Break Fees

It is now common practice to employ break fees in relation to takeovers of public companies incorporated in Cayman. The concern that arises in relation to inducement fee arrangements and other deal protection measures is that they act to inhibit competing offers, and may preclude directors from recommending such offers. There are several issues that the board of a target should consider before agreeing to pay a break fee.

An agreement to pay a break fee must not be outside the scope of the target's express or implied powers, as set out in its constitutional documents.

At common law, the directors are required to exercise their power and authority in an informed and independent fashion, in what they consider to be in good faith in the interests of the company. Any agreement that conflicts with the duty of good faith, as perceived by the directors judged by reference to the circumstances at the time when the agreement is entered into, may be unenforceable.

Any decision to agree to a break fee must be predicated on the grounds that the directors believe that the arrangement is likely to promote the success of the target for the benefit of its members as a whole. It may be legitimate to agree to pay a break fee if doing so is necessary to induce the offeror to make his offer, or to secure a strategic benefit for the target (such as a reverse break fee). The board of the target must be able to conclude, and should record in its meeting minutes, that the directors believe on reasonable grounds that the offer would not have been forthcoming if the arrangement were not entered into.

An agreement to pay a break fee should not be entered into for a collateral purpose. Where the purpose of the break fee is simply to discourage a competing bid, agreeing to its payment in those circumstances would be an improper exercise of the directors' powers.

Level of the Break Fee

Whilst the point has never been considered by a court of relevant jurisdiction, considered wisdom is that the level of the break fee will be determined by reference to market practice in the jurisdiction of operation. In relation to a UK-listed company, that may be 1%; in relation to a US-listed company, 4% of the value of the offer may not be objectionable.

Match Rights, Force-the-Vote Provisions, Non-solicitation Provisions and the Like

As with break fees, there is no specific prohibition in Cayman with regard to the use of any of these deal mechanisms, and the same principles apply. It is recognised in Cayman that such provisions can be meaningful or necessary to ensure certainty in the conduct of commercial transactions. In all instances, the board of the target should be satisfied that the provisions are beneficial to the interests of the company and are reasonably consistent with common market practice in the relevant jurisdiction.

There are no Cayman restrictions on what shareholders might agree when establishing governance rights for shareholders that hold less than 100% of a company. In addition to what the parties might otherwise agree, a shareholder acquiring sufficient shares to control a special resolution of a target Cayman Islands company will be able to:

• authorise a plan of merger, subject to any separately entrenched class rights (though it will also need the approval of the board in order to be consummated);
• amend the memorandum and articles of association of the Cayman company (the constitutional documents), subject to any separately entrenched class rights; and
• resolve to wind up the company.

It is usual that a special resolution requires the consent of two thirds of the votes cast at a quorate meeting, though the constitutional documents may raise this threshold.

Squeeze-Out of Minority Shareholders

The Cayman Islands Companies Law permits an offeror for all of a target's capital who has received acceptances in respect of 90% of the issued and outstanding shares to acquire the remaining 10% by a compulsory acquisition procedure (a "squeeze-out"). Where an offer to acquire all of the shares of the target not held by the offeror has been approved by the holders of not less than 90% in value of the shares in the capital of the target, within four months of the making of the offer, then:

• the offeror may, at any time within two months of the expiry of said four-month period, give notice to any dissenting shareholder that it shall (subject to the following paragraph) be entitled and bound to acquire those shares on the terms on which under the contract the shares are to be acquired from approving shareholders;
• within one month from the date on which such notice is given, a dissenting shareholder may apply to court for an order excluding it from the compulsory acquisition procedure;
• within one month of the notice being given to a dissenting or non-accepting shareholder (if no application has been made to court for an order under the preceding paragraph, or if an application has been made and an order is pending, following such order being disposed of), the offeror shall transmit a copy of the notice to the target and pay the target (or transfer to the target) the amount in cash or other consideration representing the price for the dissenting shares, and the target shall be bound to reflect the offeror as the holder of the relevant shares; and
• the target is then required to hold the consideration in a separate bank account on trust for the various dissenting shareholders.

Alternative Squeeze-Out by Statutory Merger

The Companies Law provides that a resolution of shareholders shall not be required to authorise a plan of merger in circumstances where a parent company seeks to merge with a subsidiary company (ie, a company in which it owns 90% of the issued and outstanding shares). In that event, provided that the remaining requirements for a merger have been met, once the offeror has acquired 90% of the target, it will be able to effectively “squeeze out” the remaining minority shareholders without having to wait out the four-month period described above.

There are a few relevant considerations.

• It is not certain in the context of a parent/subsidiary merger whether the provisions relating to appraisal rights described below would apply. The Cayman courts have recently held that such rights are available, though the point is heavily contested and at the time of writing that judgement is the subject of an appeal. In the circumstances, however, it may be advisable for an offeror to make such rights available in order to resist any suggestion by a minority shareholder that in invoking the statutory merger, parties have sought to commit a fraud on the minority by denying it the dissenting rights that it would otherwise have had under the squeeze-out process described above.
• Invoking the statutory merger rules gives rise to the need to obtain the prior consent of secured creditors, which would not otherwise be the case in the context of a tender offer.

Of course, a buyer acquiring sufficient shares by tender offer to control the adoption of a special resolution in respect of the target company will then be able to control the outcome of a meeting convened to authorise a plan of merger. In that instance, though, dealing with dissenting shareholder rights may be a relevant consideration.

In the context of both a tender offer and a statutory merger, shares that are the subject of an irrevocable undertaking to accept such offer will normally count towards the relevant threshold necessary to consummate the relevant transaction. Moreover, neither the tender offer nor the statutory merger provisions of the Companies Law require a consideration that persons may be regarded as acting in concert. In both of those contexts, the existence of an irrevocable undertaking should have no adverse legal consequences.

Under a scheme of arrangement, on the other hand, there is some concern that the existence of an irrevocable undertaking may be sufficient to differentiate the interests of such shareholders from others, such that they would form a separate class of shareholders for the purpose of approving the scheme (and consequently be required to vote separately on the matter, not counting toward the majorities necessary for the approval of the scheme by the general body of shareholders). The terms of any irrevocable undertaking given in the context of a scheme of arrangement would therefore require particular attention and may require a "fiduciary out", in the event of a competitive offer arising (a so-called soft irrevocable).

The Cayman Islands courts are likely to exclude any shareholders that it deems to be acting in concert with the offeror from voting on a scheme of arrangement.

Hostile acquisitions are extremely rare in relation to Cayman Islands companies. The process can be extremely time-consuming and almost never concludes in an effective hostile acquisition. There are very few instances, if any, of Cayman companies being subject to protracted hostile bids, and transactions that may start out in that manner are usually concluded with a degree of amicability. That is not to say that target companies have not been adept at exploiting the takeover protections described below to improve their respective bargaining positions. Apart from in respect of a general tender offer, the acquisition of a Cayman Islands company will invariably require the support of the board of directors of the target company. For that reason, it is typical for any hostile bid to be predicated on an attempt to procure the appointment of persons sympathetic to the bid to the board of directors.

Obtaining the consent of sufficient numbers of shareholders to alter the composition of the board of directors is a hurdle not easily overcome. In relation to private companies, it is only overcome with the support of significant shareholders. Where the shares are public or otherwise widely held, constitutional barriers such as staggered boards or limited rights on the part of shareholders to convene meetings will often frustrate a hostile bidder. Because the register of members of a Cayman company is not a public document, the battle for proxies is extremely difficult, unless the rules of the exchange on which shares are listed require disclosure of the beneficial holders.

The protections generally available to Cayman companies to prevent hostile takeovers are likely to be determined to a significant degree by the rules and conventions that apply to entities listed upon the exchange upon which its shares may be listed. Because their structure contains so much flexibility, Cayman companies are able to adapt their constitutional documents to incorporate provisions that investors in a variety of jurisdictions may expect to see.

Takeover Protections

It has become common for public Cayman companies to adopt takeover protections that closely mirror the protections adopted by companies incorporated in Delaware and elsewhere in the United States. In the final analysis, these protections act to a greater or lesser extent as a deterrent.

The most common protections included in the memoranda and articles of public Cayman companies are:

• a prohibition on business combinations with any “interested” shareholder unless:
1. there is advance approval by the board;
2. the interested shareholder owns at least 85% of the voting shares of the company at the time the business combination commences; or
3. the combination is approved by at least two thirds of the voting shares that are not held by the interested shareholder;
• blank cheque preferred shares;
• a staggered board (where directors are appointed in three separate classes for fixed terms that expire at different times);
• the entrenchment of directors' appointment providing for removal only for cause or by supermajority vote; and
• prohibitions, or at least severe restrictions, on the ability of shareholders to call special meetings and/or to have matters added to meeting agendas.

There are a number of more aggressive provisions that have not often been included in the constitutional documents of Cayman companies. Chief amongst these is the traditional "poison pill" arrangement permitting existing shareholders to subscribe additional shares, or to acquire the shares of the offeror, in each case at a discount to their value. For the directors of a Cayman company, the employment of a poison pill mechanism as a defence to a hostile bid poses substantial challenges to the discharge of their fiduciary duties.

The nature and extent of equity incentivisation is determined by reference to the jurisdiction of the relevant entity's operation and management. There is no Cayman-specific approach that informs the outcome here.

See 8.1 Equity Incentivisation and Ownership.

See 8.1 Equity Incentivisation and Ownership.

See 8.1 Equity Incentivisation and Ownership.

As regards the enforceability of restrictions on manager shareholders, and assuming such arrangements are to be governed by Cayman Islands law (which would be unusual), the general principle (on the basis that the Cayman courts would follow the English common law authorities) is that restrictions should be no wider than is necessary to protect the legitimate business interests of the contractual counterparty. The key aspects to consider in the context of enforceability are the geographic scope, the length of the restriction, and the business activities that the restrictions cover. In order to maximise enforceability, the beneficiary should draw each of these as narrowly as it feels is reasonably necessary to protect its interests.

See 8.1 Equity Incentivisation and Ownership.

The level of control to be exercised by a private equity fund holding shares in a portfolio company is determined entirely by reference to the corporate and commercial practices of the jurisdiction and industry in which the relevant entity operates. This is rarely a Cayman-relevant question.

It is ordinarily possible, though, to include the full gamut of commercial and governance arrangements that may be considered necessary or desirable by the transacting parties in the agreement between shareholders and the constitutional documents of the relevant Cayman entity. Shares with weighted voting rights or preferential economic rights, the ability to veto certain transactions of the portfolio company and the right to appoint and remove directors at will are all available to shareholders. Moreover, in the exercise of its rights, the shareholders of a Cayman company owe no fiduciary duties to their fellow (including minority) shareholders.

The principle of corporate personality was firmly established by the English House of Lords, which held more than a century ago that however large the proportion of the shares and debentures of a company owned by an individual and even if all other shares of such company were also held in trust for him, the acts of such company are not the acts of such individual, and its liabilities are not his liabilities. This principle is accepted under Cayman Islands law.

The relevant English law authorities broadly illustrate that only in exceptional circumstances can the basic principle of the separate legal personality of a company be ignored and the "corporate veil" be "lifted" – for instance, where the device of incorporation is used for some illegal or immoral purpose, or is a sham, or where the company is otherwise party to some form of fraud, or where public interest concerns must prevail.

The small number of reported Cayman Islands cases that have examined the principle that a company has a separate legal personality from that of its members have closely followed the English authorities.

The obligation of the manager of a Cayman-incorporated private equity fund to ensure compliance with the applicable anti-money laundering rules extends to portfolio companies of that fund, so it is necessary and usual for a private equity fund sponsor to insist on the existence of practices and procedures for such compliance.

It is also common for investors – and particularly investors in funds established to invest in emerging markets – to insist that both the fund and its portfolio companies undertake to comply with prescribed policies on environmental, social and governance (ESG) issues.

Regardless of whether or not investors insist upon the adoption of such policies, most private equity fund sponsors will adopt ESG policies and procedures as part of the ordinary course of their business as good corporate citizens, and will encourage portfolio companies to do the same.

Cayman Islands private equity funds are established with a large variety of strategies that will determine the holding period for relevant assets.

It is far less common for dual track listing and sale processes to be pursued than historically was the case, although this experience is entirely anecdotal.

Drag rights for arm's-length third-party offers are entirely usual for Cayman-established entities with multiple shareholders. The terms of any drag provision, however, will be determined by the commercial and geographic context in which the transaction is negotiated, rather than by any Cayman-specific factors.

As with drag rights, tag rights are entirely usual for Cayman-established entities with multiple shareholders. However, the specific commercial terms are not determined by reference to Cayman-relevant factors.

Cayman entities are utilised to pursue IPOs on a variety of exchanges around the world. The terms of any lock-up or other continuing relationship between the private equity sponsor seeking to exit an investment by an IPO and the issuer company or its underwriters will be determined by the practices, conventions and expectations of the relevant exchange.