British Virgin Islands: Mergers & Acquisitions Laws And Regulations 2021

1.1 What regulates M&A?

M&A activity involving a British Virgin Islands company is principally regulated under Part IX of the BVI Business Companies Act, 2004 (as amended, the "Act"). 

The key sections of the Act contain rules relating to:

• mergers and consolidations (whether between BVI companies or between BVI companies and foreign companies);
• "squeeze-out" of minority shareholders;
• plans of arrangement and schemes of arrangement; and
• rights of dissenting shareholders.

1.2 Are there different rules for different types of company?

The Act generally applies to all BVI companies involved in M&A activity, whether private or public.

The BVI does not have its own stock exchange or any takeover code or rules applicable to public companies. However, BVI companies are listed on major exchanges, such as the New York Stock Exchange and the London Stock Exchange, and the rules of any relevant exchange would need to be considered.

1.3 Are there special rules for foreign buyers?

BVI companies are designed for use in international transactions and there are no foreign exchange controls or foreign exchange regulations under BVI law. There are generally no restrictions on a foreign buyer acquiring an interest in a BVI company. However, a foreign buyer acquiring real estate in the BVI or engaging in business in the BVI itself would have to obtain the appropriate local licences.

1.4 Are there any special sector-related rules?

Special rules may apply to BVI companies regulated under specific financial services legislation, such as the Securities and Investment Business Act, Banks and Trust Companies Act and Insurance Act. This may include entities such as banks, insurers, trust companies and those engaging in investment business. Typically, a change of control in a regulated entity requires the approval of the Financial Services Commission in the BVI.

1.5 What are the principal sources of liability?

Directors of BVI companies are subject to directors' duties under the Act and at common law and in equity. The principal duties of a director of a BVI company include:

• to act honestly and in good faith and in what the director believes to be the best interests of the company; and
• to exercise his or her powers as a director for a proper purpose.

The Act allows a company's constitutional documents to modify these duties to permit a director to act in the best interests of the company's parent or a shareholder in some circumstances, including where it is a wholly owned subsidiary and where it is carrying out a joint venture.

A director may be indemnified by a BVI company from liability, but only where the director acted honestly and in good faith and in what he or she believed to be in the best interests of the company (and, in the case of criminal proceedings, the person had no reasonable cause to believe that his or her conduct was unlawful).

Aside from a limited ability for a shareholder to bring a derivative claim against a director in the name of the company, generally only a company itself may claim against a director for breach of duty.

2.1 What alternative means of acquisition are there?

There are four principal takeover structures available in relation to a listed BVI company:

1. a statutory merger or consolidation pursuant to sections 169-174 of the Act (a "Merger");
2. a plan of arrangement under section 177 of the Act (a "Plan");
3. a scheme of arrangement under section 179A of the Act (a "Scheme"); and
4. a takeover/tender offer to shareholders of the target (a "Takeover Offer").

In addition to the above, it is also possible to enter into an asset sale/purchase transaction where the assets and business of the target are acquired by way of contractual arrangement.

Each of these methods could be used to acquire the target for cash or in exchange for an offer of securities, or a combination of both forms of consideration.

Only a Takeover Offer is generally available in the context of a hostile transaction.

The key advantages and disadvantages of each structure are discussed below.

Mergers

A Merger is by far the most commonly used structure for a take-private of a BVI company.

Mergers do not require court approval and are a registry-based process.

The principal advantage of a Merger is that it requires the approval of a majority in excess of 50% or, if any higher majority is required by the memorandum or articles of the BVI company, such higher majority, of the votes of those shareholders entitled to vote and actually voting on the resolution to approve the plan of merger and the Merger. As such, absent a higher approval threshold in the memorandum or articles, it is possible to obtain 100% control of a target with the approval of a simple majority of the shares voting at a quorate meeting.

Scheme

A Scheme is a compromise or arrangement between the company and its shareholders or creditors or any class of them. BVI law in relation to Schemes is heavily based on English law. A Scheme is implemented by a court-supervised procedure, which, in relation to an M&A transaction, will (depending on the outcome of the shareholder vote in relation to it and the court's approval) result in the acquisition of either all or none of the outstanding shares to which it relates.

A Scheme requires the approval of: (i) a majority in number representing 75% in value of the members of each class who attend and vote in person or by proxy at meetings of the holders of each class; and (ii) the sanction of the court.

If the Scheme is approved by the requisite majority of shareholders and sanctioned by the court as described above, it will be binding on all shareholders.

There have been very few Schemes attempted under BVI law, primarily due to the relatively high approval threshold, and the timing implications of a court-based process.

The crucial potential advantage of a Scheme is that dissent rights do not apply.

Plan

A Plan is an alternative court-supervised procedure to the Scheme and is based on similar processes available in Canada.

The directors propose and approve a Plan, which must contain details of the proposed arrangement. The company then makes an application to the court for approval of the Plan. The court may then make an order in relation to the Plan, and in making that order the court may:

1. determine what notice, if any, of the proposed Plan is to be given to any person;
2. determine whether approval of the proposed arrangement by any person should be obtained and the manner of obtaining such approval;
3. determine whether any holder of shares, debt obligations or other securities in the company may dissent from the proposed Plan and receive payment of the fair value of their shares, debt obligations or other securities under a statutory procedure;
4. conduct a hearing and permit any interested person to appear; and
5. approve or reject the Plan as proposed or with such amendments as it may direct.

The court's approval may involve two or more hearings at which the court may give directions in relation to the notifications and approvals required in relation to the Plan. In the context of an M&A transaction, such approvals will inevitably include that of the shareholders of the company.

As with Schemes, there have been very few Plans attempted under BVI law. Although it is possible to propose lower approval thresholds than those required by a Scheme, and dissent rights are at the discretion of the court, given the lack of a body of BVI precedent Plans, the possibility or likelihood that a court would require similar approval requirements to that of a Scheme and/or would enable dissent rights to apply has reduced their popularity.

Takeover Offers

A Takeover Offer is a contractual rather than statutory transaction under which an offer is made to shareholders of the target to acquire their shares. Since the BVI does not have a takeover code, there is little restriction as a matter of BVI law on the terms of such an offer and how it is made. As such, it is generally the law, regulations or market practice of the jurisdiction where the BVI company's shares are listed which are followed (subject to the company's memorandum and articles of association).

Advantages of a Takeover Offer include speed (it can sometimes be the quickest route to 50%+ ownership) and its availability in a hostile bid, subject to defences in the company's memorandum and articles of association. The main disadvantage is that it is invariably necessary to take a second step to obtain 100% control - either through a squeeze-out if 90% acceptances are reached, or through a second-stage Merger.

2.2 What advisers do the parties need?

Parties should engage BVI legal counsel, in addition to their usual legal counsel. Typically, international financial advisors, tax advisors and accountancy firms are also involved in structuring transactions and advising on financial aspects.

2.3 How long does it take?

The time required depends largely on the complexity of the transaction, the method chosen and any rules of any relevant stock exchange.

For a Merger, this can be effected as soon as the Merger terms can be agreed and the requisite approvals can be obtained (potentially within a few weeks). Plans and Schemes take longer, due to the requirement for court involvement, and can be expected to take at least six months.

There is no specific timeframe required as a matter of BVI law for a Takeover Offer, so timing requirements will depend on the time required to obtain the requisite acceptances and any rules of any relevant stock exchange.

2.4 What are the main hurdles?

The main hurdle is to obtain the requisite level of target shareholder approval to the transaction. In relation to listed BVI companies, it is necessary to consider the requirements of both the Act and the company's memorandum and articles of association in respect of the chosen acquisition method, as well as the rules and regulations of the relevant stock exchange.

For Mergers, asset sales (unless disapplied by the target's memorandum and articles of association) and Plans (if required by the court), dissent rights will apply, which enable dissenting shareholders to demand fair value for the redemption of their shares, rather than participating in the transaction. There is a short period for fair value to be agreed with the company, and if not agreed within such timeframe, it is determined pursuant to an independent appraisal process.

For Schemes, dissent rights do not apply.

2.5 How much flexibility is there over deal terms and price?

As there is no takeover code in the BVI, there are few BVI specific restrictions on the parties' agreement as to deal terms and price. However: (i) directors of BVI companies are subject to statutory and fiduciary duties, including a duty to act bona fide in the best interests of the company; (ii) any applicable rules and regulations of the relevant stock exchange will need to be complied with; and (iii) dissent rights (discussed at question 2.4 above) could, if exercised, lead to significant differences in the quantum of consideration if the appraisal process determines a different fair value for the shares from the consideration for the shares under the acquisition.

2.6 What differences are there between offering cash and other consideration?

The parties are free to agree the make-up of consideration for the transaction, which may consist of (among other things) cash, securities, debt obligations or a combination. Where shareholders exercise dissent rights in respect of the transaction, they will be entitled to payment of cash in the amount determined to be the fair value for their shares, irrespective of the form of consideration for the transaction.

2.7 Do the same terms have to be offered to all shareholders?

Subject to the rules and regulations of any relevant stock exchange, and the directors' statutory and fiduciary duties, different terms can be agreed with and consideration offered to different shareholders, whether the transaction is a Merger, Plan, Scheme or Offer. Consideration should be given as to disclosure requirements (including under the applicable laws, rules and regulations of the jurisdiction of any relevant stock exchange) and, in respect of any statutory squeeze-out, the redemption price would need to be the same for each share to be redeemed.

2.8 Are there obligations to purchase other classes of target securities?

Subject to any rules or regulations of a relevant exchange, there is no statutory requirement to purchase other classes of securities.

2.9 Are there any limits on agreeing terms with employees?

There are no restrictions under BVI law, assuming the target does not have employees located in the BVI.

2.10 What role do employees, pension trustees and other stakeholders play?

There is no BVI law requirement that the target company or the acquiring company consult with the employees of the target company with respect to a potential offer or Merger.

For a Merger, if the surviving company is a BVI company it will remain liable for and subject to all contracts, obligations, claims debts and liabilities of each of the constituent companies (including any employment liabilities).

For a Scheme, where the rights of creditors are affected or compromised, the consent of the requisite majority will be required.

It is rare for there to be employees physically based in the BVI in an international M&A transaction involving a BVI company, but where that is the case, the Labour Code, 2010 (as amended) may apply in respect of such employees.

2.11 What documentation is needed?

In respect of a Merger, the Act requires each constituent company to enter into a plan and articles of merger containing specific information. As these documents are invariably kept simple and only contain the minimum required information for the BVI merger filing, there is usually a separate long form merger agreement setting out the wider terms and conditions of the Merger. For transactions involving a listed or widely held BVI company, there will typically also be a disclosure statement, which accompanies the shareholder materials. For a listed entity this will also need to comply with applicable rules and regulations of the relevant exchange.

For Schemes or Plans, the documents will include court documents, a Scheme or Plan circular to be provided to the relevant participants (and which must include sufficient information to enable them to make an informed decision as to whether or not to approve the Scheme or Plan) and there will also usually be a long form agreement of Scheme or Plan of arrangement (which will set out the terms and process of the Scheme or Plan, and the actions to be taken by the board of the target - it may also provide for the ability to change to a Merger at the election of the acquirer).

In relation to a Takeover Offer, there is no specific documentation required by BVI law, but this will tend to follow the customary form and requirements of the jurisdiction in which the shares of the target are listed.

For an asset sale, there are no specific documentation requirements, and the parties may enter into such agreements as they consider necessary or desirable.

2.12 Are there any special disclosure requirements?

There are no specific disclosure requirements prescribed by BVI law, but applicable rules and regulations of any relevant exchange will need to be complied with and, as a general principle, shareholder communications and circulars must contain sufficient information as to the transaction to enable shareholders to make an informed decision in relation to their consent. Generally, shareholder notices and circulars will follow the approach of the relevant onshore jurisdiction in which the shares are listed or the transaction is being led from, such as New York, London or Hong Kong.

In addition to the general points above: (i) for a Merger, the plan of merger (containing limited prescribed information) must be sent to all shareholders of the target, whether or not entitled to vote on the transaction; and (ii) for a Plan or Scheme, the Scheme or Plan circular must be provided to the relevant participants in the Plan or Scheme.

2.13 What are the key costs?

The key costs will comprise: service provider fees, including those of financial advisers, corporate brokers, lawyers, accountants and other advisers; documentation and administrative expenses; and commitment fees for any debt financing. Government filing fees are generally minimal and no BVI stamp duty will be payable unless a BVI company party to the transaction (or any of its subsidiaries) owns an interest in land situated in the BVI (an extremely unusual occurrence in an international M&A transaction).

2.14 What consents are needed?

Save in relation to an entity to which question 1.4 applies, there are generally no requirements for the consent or approval of any BVI governmental authority or agency in connection with M&A transactions.

In respect of a Merger, the plan and articles of merger must be filed with the BVI Registrar of Corporate Affairs, who will register the plan and articles of merger and issue a certificate of merger upon being satisfied as to compliance with the statutory requirements.

In respect of a Scheme, this involves a court-based process and requires the approval of the court, although this is not approval of the merits of the deal but to ensure the appropriate processes are followed.

For a Plan, the board of directors of the target proposes the required consents, and this is then approved or varied by the court.

For each of a Merger, Scheme and Plan, shareholder approval will be required (as noted in questions 2.1 and 2.15). For a Takeover Offer, a sufficient number of acceptances from target shareholders will be required in order to obtain control.

Applicable listing rules and regulations may require additional consents.

2.15 What levels of approval or acceptance are needed?

Subject to the constitutional documents of the BVI company, a Merger requires both board and shareholder approval (absent a higher threshold in the constitutional documents, typically a simple majority of the votes of the shares voted at a quorate shareholder meeting).

A Scheme requires approval of a majority in number, representing 75% in value of the shareholders or creditors (or class of shareholders or creditors) present and voting, either in person or by proxy at the meeting, of each class whose rights are to be subject to the Scheme.

For a Plan, the board of directors of the target proposes the required consents, and this is then approved or varied by the court. Although there have been few Plans to date, there is a reasonable likelihood that if dissent rights are not determined to apply by the court, then the approval thresholds would be closer to the higher thresholds of a Scheme than a Merger (and vice versa).

2.16 When does cash consideration need to be committed and available?

There are no BVI-specific requirements as to cash being committed and available; rules and regulations of any relevant exchange may, however, apply.

3.1 Is there a choice?

The opportunities to effect a hostile acquisition of a BVI company are limited and, of the structures available, generally only a Takeover Offer is practicable for a hostile bid. The Act contains squeeze-out provisions, but these apply only where the hostile party holds 90% of the votes of the outstanding shares entitled to vote and 90% of the votes of each class of share entitled to vote as a class. The squeeze-out provisions may also be restricted or disapplied in the company's memorandum and articles of association. 

3.2 Are there rules about an approach to the target?

There are no takeover rules in the BVI.

3.3 How relevant is the target board?

The business and affairs of a BVI company are managed by, or under the direction or supervision of, the directors of the company. The board of a BVI company target will play a crucial role in any Merger or acquisition of the BVI company.

Where the acquisition of a BVI company is consummated by way of Merger, the board must approve a written plan of merger or consolidation. Likewise, for a Plan, the board is required to approve a Plan. In contrast, an application for a Scheme may technically be made by a range of applicants, including a shareholder, without board approval but, in practice, a hostile Scheme is generally considered very difficult to achieve.

The board of a non-listed BVI company will typically need to approve any transfer of shares in the company.

As noted above, directors of a BVI company are subject to directors' duties under the Act and at common law and in equity. The principal duties of a BVI company director include:

• to act honestly and in good faith and in what the director believes to be in the best interests of the company; and
• to exercise his or her powers as a director for a proper purpose.

A director having a conflict of interest in respect of a particular M&A transaction may still be able to attend meetings and vote on the transaction, assuming they have followed a proper procedure to declare their interest (and subject to the BVI company's memorandum and articles of association).

3.4 Does the choice affect process?

The structure will affect process, timing and approval requirements. In addition, a friendly transaction may proceed by way of contract in a manner that would be familiar to common law jurisdictions, while for a hostile transaction a Takeover Offer is likely the only realistic option given the role of the board in other structures. The memorandum and articles of association may contain further defensive measures against hostile transactions.

4.1 What information is available to a buyer?

There is a limited amount of information about BVI companies available to the public. The information that is available includes:

• the company's registered agent and registered office;
• information on the company's good standing;
• the company's constitutional documents (its memorandum and articles of association);
• any public filings of security interests (such filings are not mandatory but are often undertaken by lenders to preserve priority); and
• information on BVI court proceedings involving the company.

The BVI company's registered agent will hold further information, but this will only be made available to third parties with approval.

Further information may be available for listed companies via the relevant stock exchange.

4.2 Is negotiation confidential and is access restricted?

It is open to the parties to make their negotiations confidential.

4.3 When is an announcement required and what will become public?

BVI law does not prescribe any requirements for announcements (although this may be varied by the requirements of any relevant exchange).

4.4 What if the information is wrong or changes?

BVI law does not prescribe any requirements for the updating of announcements. Parties should consider any potential for tortious liability, including for misrepresentation or negligence.

5.1 Can shares be bought outside the offer process?

Subject to restrictions on ownership of shares in the company's memorandum and articles of association and rules of any applicable exchange, there are no restrictions on stakebuilding generally applicable as a matter of BVI law.

5.2 Can derivatives be bought outside the offer process?

As above, subject to the rules of any applicable exchange, there are no restrictions on acquiring derivatives outside the offer process.

5.3 What are the disclosure triggers for shares and derivatives stakebuilding before the offer and during the offer period?

As there is neither a takeover code nor rules in the BVI, there are no BVI disclosure triggers (although these may apply under the rules of any applicable exchange).

5.4 What are the limitations and consequences?

See above; there are none as a matter of BVI law.

6.1 Are break fees available?

Break fees are not specifically restricted under BVI law and the primary consideration will be the directors' statutory and fiduciary duties to act bona fide in the best interests of the company. The break fee should also not be set at a level that would constitute a penalty.

6.2 Can the target agree not to shop the company or its assets?

Subject to the directors' statutory and fiduciary duties, yes. Generally, "no-shop" provisions will be possible provided that the directors consider it in the best interests of the company to agree to such provisions at the time the agreement is made.

6.3 Can the target agree to issue shares or sell assets?

This is again subject to the directors' statutory and fiduciary duties, including exercising their powers and discretion (for example, to issue shares) for a proper purpose, and not to frustrate or protect a particular deal.

6.4 What commitments are available to tie up a deal?

No-shop and lock-up agreements are, in principle, acceptable under BVI law, as are voting agreements whereby key shareholders irrevocably agree to vote in favour of a transaction. No-deal provisions may be agreed with fiduciary outs (which may, for example, require specific conditions as to better terms or certainty - for example, that a competing offer is all cash and that the offer price be at least a specified threshold higher than the first transaction).

7.1 What deal conditions are permitted and is their invocation restricted?

The parties are generally free to agree any deal conditions that suit (subject to the BVI company's board complying with their directors' duties and subject to limitations as described above).

7.2 What control does the bidder have over the target during the process?

A bidder will not typically control a BVI company target until the transaction has closed. However, the parties are free to contract for controls if they wish. It is common to see parties contract for control over the running of the target's business in the period between signing and closing.

7.3 When does control pass to the bidder?

For a non-listed BVI company target, a bidder gains control of the shares of the BVI company target once they are registered as owner in the company's Register of Members. Control of the shares of a listed BVI company target will depend on the rules of the relevant stock exchange. Once registered as shareholder and having obtained control, the bidder would normally be able to replace the company's board (depending on the terms of the company's memorandum and articles of association).

7.4 How can the bidder get 100% control?

A Merger, Plan or Scheme approved by the requisite majority can usually all achieve 100% control.

For a Takeover Offer, section 176 of the Act provides for a statutory squeeze-out mechanism where a bidder holds 90% of the votes of the outstanding shares entitled to vote and 90% of the votes of the outstanding shares of each class of shares entitled to vote as a class. However, this may be modified or disapplied in the company's memorandum and articles of association.

Agreement with all shareholders can, of course, also achieve 100% control.

8.1 What can the target do to resist change of control?

It is possible for a BVI company to structure its memorandum and articles of association to provide protection from a change of control, such as through a "poison pill" or similar provisions. Absent any such provisions, the board of a BVI company will be required to comply with their fiduciary duties in respect of any proposed acquisition (such as the directors' duty to act honestly and in good faith and in what the director believes to be in the best interests of the company).

8.2 Is it a fair fight?

The terms of the memorandum and articles of association of the company may ultimately determine how "fair" the fight may be (and relevant protection mechanisms previously entrenched therein). However, the directors of the BVI company must be mindful of their fiduciary duties when considering any acquisition.

9.1 What are the major influences on the success of an acquisition?

Price and market considerations are, of course, key, while the cooperation of the target's board is crucial to a Merger, Plan, Scheme or asset sale. Support and irrevocable commitments from strategic shareholders may be an important factor.

9.2 What happens if it fails?

Subject to the rules of any applicable exchange, there are no BVI limitations on a bidder making a new offer or consummating a subsequent transaction upon failure of the initial bid.

10.1 Please provide a summary of any relevant new law or practices in M&A in your jurisdiction.

There have been few (if any) instances of dissent rights being exercised on BVI public takeovers. However, recent court guidance and case law in other common law jurisdictions with similar merger regimes continue to lead to this being an area of focus in structuring transactions. The brevity of the statutory dissent rights provisions create an element of uncertainty as to how practically suitable they are for use in the context of a public takeover, and questions remain over the methodology that should be used to reach a valuation. Given this, Mergers or Plans are commonly subject to conditions requiring shareholders holding no more than a small percentage (e.g. 1-5%) of the shares of the company to dissent from the transaction, while we have seen a number of transactions considering the possible use of a Scheme as an alternative to avoid the application of dissent rights.