Bermuda has long served as a gateway to the US capital markets. As of the end of 2017, the combined market capitalisation of Bermuda companies listed on the NYSE and Nasdaq was approximately $240 billion. Elsewhere in the world, Bermuda remains a preferred jurisdiction for companies listed on the main board of the Hong Kong Stock Exchange, with approximately 25% of HKSE-listed companies being incorporated in Bermuda. In addition, Bermuda companies are to be found listed on many other major exchanges across the world including the London Stock Exchange, the Toronto Stock Exchange, the Oslo Børs and the Stock Exchange of Singapore.
Amongst the Bermuda companies accessing capital markets, there has traditionally been strong representation from both shipping companies and insurers, reflecting the underlying strength of Bermuda's ship registry and the island's status as a domicile of choice for the international insurance/reinsurance market. Recent years have seen a diversification of issuers opting for a Bermuda company as a listing vehicle including in the biotech (Axovant Sciences, Myovant Sciences), information technology (IHS Markit), financial services (Lazard and The Bank of N.T. Butterfield & Son) and telecommunications (Liberty Latin America) industries. In recent years, the number of Bermuda companies pursuing an IPO on the NYSE or Nasdaq has remained relatively stable, with between 5 and 10 Bermuda companies completing an IPO on those exchanges each year.
Many listed Bermuda companies are outward-facing in the sense that little, if any, of their business is conducted in the domestic Bermuda economy. Businesses using Bermuda companies as a listing entity often do so in order to leverage Bermuda's unique jurisdictional advantages. Organisations with multi-jurisdictional business find Bermuda's tax neutrality and deference to onshore regulation to be conducive to the establishment of a holding company vehicle that can be used as an efficient way to raise public capital for an entire corporate group without adding unnecessary fiscal or regulatory complexity to the group's operations. Bermuda law also permits public companies a degree of flexibility in structuring their corporate governance arrangements, as well as providing a suite of statutory tools under its company law, that may not be available in other jurisdictions. For example, Bermuda law permits companies to set their own criteria for the composition and proceedings of their boards of directors, to adopt varied takeover protections, and to formulate complex and novel capital structures.
Bermuda has served as a jurisdiction for establishing international companies longer than any other international financial centre, and has consistently demonstrated its commitment to meeting international standards of co-operation and transparency: since 2009, Bermuda has been on the Organization for Economic Cooperation and Development's "white list" of countries meeting tax transparency standards. The strength of the island's reputation and profile are repeatedly evidenced by onshore regulators' familiarity with the jurisdiction, as well as by the fact that a large majority of the Fortune 100 companies maintain some presence in Bermuda.
2 The IPO process: steps, timing and parties and market practice
A Bermuda IPO starts with the establishment of a Bermuda company. This can be done in several ways and will, in many cases, be dictated by what is most workable under the laws of the other jurisdictions in which the corporate group operates. Typical methods of establishing the Bermuda company include:
- Incorporation of a new Bermuda company and subsequent public offering of this new company's shares; if this new company is to serve as an interposed holding company for the entire group, its shares are often exchanged for the "old" holding company's shares.
- Incorporation of a new Bermuda company, and subsequent merger/amalgamation of this Bermuda company with an existing company (either in Bermuda or another jurisdiction), with the surviving or continuing company being a Bermuda company holding the assets of both companies and serving as the listing vehicle.
- "Continuation" (redomiciliation) of an existing company from another jurisdiction into Bermuda; this continuation has to be permitted under the laws of the original jurisdiction.
Incorporation of a new Bermuda company is a straightforward process and can be carried out quickly and largely online. Timing constraints for other methods of establishment can arise if, as part of the process, a merger/amalgamation/continuation from another jurisdiction requires the consent of a regulator in another jurisdiction, and/or consent from a large body of shareholders.
Almost all Bermuda public companies are established as "exempted" companies. The designation "exempted" under Bermuda law means that the company is not required to comply with a Bermuda legal requirement that the company be owned and controlled by Bermudians. As a consequence of being "exempted", the Bermuda public company is not, without special permission from the Bermuda authorities, permitted to carry on business in Bermuda, i.e. to compete with local businesses in the domestic economy. In practice, this creates few (if any) issues, given that there are no corresponding restrictions on the ability of the exempted company to carry on business with other entities outside of Bermuda (or even other exempted entities in Bermuda in furtherance of business carried on outside Bermuda). Exempted companies can maintain registered offices (including entering into leases for premises, although no physical presence of the company on the island is required) and bank accounts as well as procuring services in Bermuda without requiring any further government consents or permissions.
Once established, the Bermuda exempted company is not subject to any Bermuda income, profit, withholding or capital gains taxes, and is also entitled to apply for an assurance from the Bermuda government that no such taxes will be levied on the exempted company for a period lasting until 31 March 2035.
Much of the Bermuda IPO process can be run in parallel with the listing/approval on the proposed stock exchange, and indeed can be started prior to the actual establishment of the Bermuda public company. Since no prospectus is usually required to be filed in Bermuda (see further below), establishing the public company's corporate governance regime and capital structure is usually run in conjunction with any "onshore" legal process. Reflecting Bermuda's deference to onshore regulators and exchanges, the IPO process is usually led by an "onshore" firm with expertise in the regulations and practice of the exchange on which the Bermuda company's shares are to be listed, with Bermuda counsel providing specialised advice on matters of Bermuda company law. Beyond engaging Bermuda counsel, the key players in the IPO process are exactly the same as they would be for an IPO of, for example, a Delaware company.
3 Regulatory architecture: overview of the regulators and key regulations
Bermuda companies are regulated by the Bermuda Registrar of Companies (the "Registrar") and (to a lesser extent, except in the case of companies in certain regulated industries) the Bermuda Monetary Authority (the "BMA"). The Registrar is part of the Bermuda Government's Ministry of Economic Development, whereas the BMA is a quasi-autonomous non-governmental organisation, with an independent board of directors.
Bermuda public companies are subject to the Companies Act 1981 (as amended, the "Companies Act"), the principal Bermuda corporate legislation, and the Registrar has powers of inspection in relation to matters of statutory compliance. The Companies Act has good provenance, being based on UK corporate legislation, but has been adapted to allow companies great flexibility. Its requirements are not generally felt to be onerous for a company seeking to go public, and include:
- The requirement for a company to pay an annual Bermuda government fee and file a simple annual return with the Registrar.
- The requirement to hold an annual general meeting of shareholders (which may be waived by the shareholders).
- The requirement to produce audited financial statements and lay them before shareholders.
- The requirement to keep minutes of proceedings of shareholder and director meetings and to keep proper records of account.
Significantly, the Companies Act imposes no requirement on a company to produce and file a prospectus if the company is offering its shares to the public but has already filed a prospectus with either "an appointed stock exchange" (which includes most of the world's major exchanges) or a "competent regulatory authority" (which includes organisations such as the US Securities Exchange Commission, the UK's Financial Conduct Authority, the Ontario Securities Commission and the Securities and Futures Commission of Hong Kong). In addition, if the company is subject to the rules or regulations of such a stock exchange or regulatory authority and those rules or regulations do not require a prospectus, Bermuda law defers to the rules of the stock exchange or regulatory authority by also not requiring a prospectus. The net effect is that Bermuda companies with shares listed on an appointed stock exchange never need to file a prospectus in Bermuda, nor comply with any statutory disclosure requirements under Bermuda law. Furthermore, Bermuda law does not prescribe any particular method of presenting or auditing a company's financial statements, other than that the principles used must be recognised in another jurisdiction. This means Bermuda public companies are not constrained under Bermuda law in their choice of financial reporting principles and do not encounter the extra cost and complexity that is entailed when a company's jurisdiction of incorporation imposes reporting requirements different from those of the exchange upon which its shares are listed.
The Bermuda law approach to prospectus requirements and financial reporting reflects the historical co-operation of Bermuda's government and business community working to ensure that the integrity of the jurisdiction is preserved without the need for overly burdensome regulation. In most cases, the Bermuda government is receptive to the needs of the business community and is cognisant that Bermuda's reputation rests upon it being an open jurisdiction in which it is not unduly difficult to do business. The elimination of unnecessary, overlapping prospectus and accounting requirements is just one example of this dynamic.
Aside from those provisions where compliance is mandatory, many elements of the Companies Act emphasise flexibility by providing a basic company law framework and then permitting a company to refine or vary aspects of this framework through its bye-laws (the main constitutional document of a Bermuda company governing the rights, powers and obligations of a company's shareholders and directors). Examples include:
- Business combinations: the Companies Act lays down a statutory framework for mergers and amalgamations, but permits a company to make business combinations either easier or more difficult to effect than under the statutory provisions by permitting a company to either relax or enhance the statutory voting and quorum requirements.
- Significant corporate transactions: Bermuda companies are permitted to make certain specified transactions of their choosing subject to more onerous approvals from shareholders and/or the board of directors than would otherwise be the case under the default Companies Act position. For example, super majority approval can be required for business combinations (or other transactions) with a significant shareholder.
- Novel capital structures: the Companies Act requires that a company limited by shares has a share capital, but it is up to the company itself how this share capital is classified and the rights and other characteristics attaching to each class of shares (e.g. denominations of shares, voting rights of shares, special dividend rights). In addition, the Companies Act permits Bermuda companies to issue redeemable shares and redeemable preference shares, the latter of which may be established by the company's board (rather than its shareholders), making these instruments the equivalent of "blank cheque preferred shares" seen in the US market. The flexibility given to Bermuda companies in establishing their capital structures means a Bermuda company typically has a range of options when looking to raise capital either in conjunction with, or outside of, the IPO process. It is even possible for shares of Bermuda companies to be held either by the company itself as treasury, or to be held by one of its subsidiaries. This latter option has been used somewhat controversially in a few instances to enable two companies to hold voting control of each other, creating a circular ownership structure that is very difficult for a hostile bidder to break up or acquire.
- Board stability: Bermuda companies have the option under the Companies Act of having directors elected each year at a company's annual general meeting, or of being elected or appointed in such other manner as the company's bye-laws may provide. The latter option means it is possible to make only a portion of directors subject to annual re-election (thereby allowing staggered boards) or even to give the right to elect directors to only a certain class of shares, thereby allowing enhanced control mechanisms for key shareholders, or alternatively providing a safeguard for a class of minority shareholders.
- "Poison pills": the Bermuda court has held that shareholder rights plans (sometimes known as "poison pills") commonly found in the US market (entitling shareholders, other than an acquiring shareholder, to acquire shares at a significant discount once the acquiring shareholder reaches a specified level of ownership, thereby diluting the acquiring shareholder) can be a proper and constitutional exercise of the powers of a Bermuda company's board. As a result, Bermuda public companies have the option to adopt this form of takeover protection, or to prepare a rights plan to sit on the "shelf" (i.e. to be approved and implemented following the emergence of a hostile bidder).
- Indemnification of directors and officers: under Bermuda law, a company may indemnify its directors and officers against all liability except in cases where such liability arises from their fraud or dishonesty. In addition, the bye-laws of the Bermuda company can provide that the shareholders waive all claims or rights of action that they might have, individually or in right of the company (that is, by derivative action), against any of the company's directors or officers, except in respect of the director's or officer's fraud or dishonesty. Such protections can provide significant comfort for directors and officers honestly carrying on a company's business.
Many of the above aspects are negotiated on a case-by-case basis to suit the investor profile and market risk associated with a particular issuer. Despite the Companies Act deriving from UK legislation originally, many of the provisions often appearing in Bermuda public company bye-laws have a distinct US flavour, reflecting the influence of US market practice on Bermuda company listings.
Apart from the Companies Act and the supervisory function exercised by the Registrar, ownership of Bermuda companies may also be regulated by the BMA. One of the BMA's primary responsibilities is to regulate the beneficial ownership of securities issued by Bermuda companies. However, in the case of shares listed on an appointed stock exchange (i.e. most of the world's major exchanges), this regulation – which would be unworkable for a public company – is eliminated by the BMA's standing permission for the issuance and free transferability of all securities of a Bermuda company listed on an appointed stock exchange. This standing permission is based on Bermuda's recognition of the regulation inherent in such listings.
4 Public company responsibilities
Bermuda law does not impose any "special" or extra requirements on public companies that are not imposed on private companies. Even the requirement under Bermuda law for a company to produce a prospectus if its shares are offered to the public which applies to all companies is not generally applicable for companies listed on most internationally recognised exchanges.
5 Potential risks, liabilities and pitfalls
The rights of holders of a Bermuda public company's shares are governed by Bermuda law and the company's constitutional documents. These rights can differ from those that investors may be familiar with in connection with companies incorporated in other jurisdictions. It is also doubtful whether a Bermuda court would enforce a judgment or entertain a suit against a Bermuda company obtained or pursued on the basis of the securities laws of other jurisdictions.
Furthermore, if a need arose to restructure the financial obligations or capital structure of a Bermuda public company, the form of restructuring protections and the types of legal tools available to effectuate a restructuring of the Bermuda public company may be unfamiliar to investors. Although Bermuda courts have a history of adopting a commercial, pragmatic approach to implementing restructurings, Bermuda insolvency law is largely derived from historic English law and statute. As a consequence, there is no strict equivalent to debtor-in-possession proceedings offered under US Bankruptcy Code; nor is there the equivalent of administration proceedings under the UK Insolvency Act 1986. Therefore to give effect to protections afforded to debtor companies under other jurisdictions' bankruptcy regimes (such as the automatic stay in US Chapter 11 proceedings), it is often necessary to couple any "onshore" process with a local Bermuda process. Historically, the tools available under Bermuda law have proved capable of replicating the required protections for a debtor to successfully restructure, but care must be taken in each particular case to develop a workable "local" solution, given discrepancies between the insolvency laws of Bermuda and those of other jurisdictions in which the company's shares may be listed.
Originally published by Global Legal Insights.
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