This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Guernsey.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The Companies (Guernsey) Law, 2008, as amended (Guernsey Companies Law) provides the legal framework for a Guernsey company’s operation in all areas, including any merger and acquisition (M&A) of the Guernsey company.
The UK Panel on Takeovers and Mergers (Takeovers Panel) regulates takeovers and mergers in Guernsey that fall within the ambit of the UK City Code on Takeovers and Mergers (Takeover Code). The Takeover Code will apply to a Guernsey company when either:
- the company’s securities are admitted to trading on a regulated market or multilateral trading facility (MTF) in the UK or on any stock exchange in the Channel Islands or the Isle of Man; or
- if the company has its place of central management and control in the UK, Channel Islands or Isle of Man and one or more of the following apply:
- any of its securities have been admitted to trading on a regulated market or MTF in the UK, Channel Islands or Isle of Man at any time in the last 10 years;
- dealings or prices for dealings have been published for a continuous period of at least 6 months in the previous 10 years;
- any of the company’s securities have been subject to a marketing arrangement as defined under UK Companies legislation at any time in the previous 10 years;
- the company has publicly filed a prospectus with the Registrar of Companies or any other relevant authority in the UK, Channel Islands or Isle of Man at any time in the previous 10 years.
The Takeover Code does not apply to open-ended investment companies.
If the M&A involves a business which is regulated in Guernsey (this includes banks, insurance companies, investment businesses and trust and fiduciary businesses), the consent of the Guernsey Financial Services Commission (GFSC) will be required. Change of control notifications may also need to be made where a parent undertaking of a GFSC licensed entity is acquired or subject to a merger.
The Channel Islands Competition and Regulatory Authorities (CICRA) regulate any merger or acquisition which satisfies a turnover test relating to turnover arising in Guernsey and the Channel Islands.
What is the current state of the market?
The M&A environment is currently very healthy and the end of 2015 saw a bumper number of billion-dollar deals being reported and deal volumes settling at consistently strong levels, including deals with a Guernsey element. Analysis of deal activity across the offshore jurisdictions shows that Guernsey vehicles are mostly on the target side (rather than acquisition side).
Which market sectors have been particularly active recently?
The top 5 target sectors by volume in 2015 were financial and insurance activities, manufacturing, information and communication, construction and mining and quarrying. Within Guernsey financial services the fiduciary and fund administration sectors have been particularly active in recent years, and there has been and continues to be significant restructuring of banks.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
We believe the three most significant factors will be:
- the continuing changes to the regulatory framework for banks in the UK;
- the continuing consolidation within the fiduciary sector; and
- the value of sterling and global investor confidence.
What are the key means of effecting a merger?
The key means of effecting a merger in Guernsey are:
- an amalgamation of two or more bodies corporate to become one body corporate (being one of the original bodies corporate or an entirely new body corporate) pursuant to Part VI of the Guernsey Companies Law – this process does not require a court order; consent of the GFSC is required in certain cases and the amalgamation proposal must be approved by special resolution of the members of each amalgamating body corporate;
- a scheme of arrangement pursuant to Part VIII of the Guernsey Companies Law whereby the target puts a proposal to its shareholders for approval and once approved by a majority in number representing 75% in value of the shareholders present and voting, the arrangement may be sanctioned by the Royal Court of Guernsey; or
- establishment of a Topco to own the merging businesses, with the owners of the merging businesses being given shares in in the Topco under a share for share exchange arrangement.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
The following information in respect of a Guernsey company is available from the Guernsey Companies Registry:
- information on the Company including its registered office and the details of its directors and (if applicable) resident agent;
- an annual validation which must be filed by the end of January each year confirming the total number of shares in issue as at 31 December of the previous year;
- certificate of registration and memorandum and articles of incorporation; and
- special resolutions (and any other resolutions which are required to be filed under the Guernsey Companies Law).
A search can also be undertaken at the Guernsey court to ascertain if any order has been made or proceedings commenced for the winding up of the company.
Shareholder details and annual accounts are not publicly available at the Guernsey Companies Registry. However, the Guernsey Companies Law sets out a procedure whereby a company’s register of shareholders may be inspected and/or a copy of the register may be obtained upon payment of a prescribed fee, provided the request is made for a proper purpose.
If the company is listed on an exchange, copies of its annual accounts, interim reports and regulatory news announcements can be obtained; the relevant rules of the exchange will apply.
If the Takeover Code applies there are certain requirements on provision of information.
To what level of detail is due diligence customarily undertaken?
A bidder would usually obtain as much information from public sources as possible in combination with approaching the target with a list of financial, legal, regulatory and operational due diligence questions and requests.
The Takeover Code contains provisions relevant to due diligence requests in a hostile bid.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The shareholders of the target company (or the relevant requisite majority of shareholders) ultimately decide whether to approve the proposed acquisition/merger and there would usually also be Board approval.
The requisite shareholder majorities to approve an amalgamation or scheme of arrangement are set out at 5. above.
In order for the offeror to exercise statutory squeeze out rights (as discussed at 26. below), the takeover offer must be approved by shareholders comprising not less than 90% in value of the shares affected.
What are the duties of the directors and controlling shareholders of a target company?
The directors should always have regard to their fiduciary duties as directors of a Guernsey company; directors must act in the best interest of the company at all times. Additionally, where applicable the directors must act in accordance with the provisions of the Takeover Code and the rules of any stock exchanges upon which the shares are listed.
The directors and shareholders of a Guernsey target company must also ensure that they do not commit an offence of market abuse or insider dealing or, for example, if the company is a GFSC regulated collective investment scheme, breach any relevant regulatory rules or fund documents.
Do employees/other stakeholders have any specific approval, consultation or other rights?
There is no requirement to consult with or obtain the specific approval of employees but the Takeover Code (if applicable) does require that certain documents (including the offer document and announcement) are provided to an appointed employee representative (or to the employees if there is no appointed representative).
For an amalgamation under Part VI of the Guernsey Companies Law, creditors of the company must be given written notice of the proposed amalgamation and have a right of inspection of the amalgamation proposal and a right to a free copy of the amalgamation proposal upon request.
For a scheme of arrangement under Part VIII of the Guernsey Companies Law, the Court may make provision for any persons who, within such time and in such manner as the Court directs, dissent from the arrangement.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
Where the approval of CICRA is required, there are two application routes available:
- if the acquiring entity is a credit or financial institution, the shortened merger application route may be used. Upon receipt of the application, CICRA will register the application and post a notice on its website inviting comments from the public for a period of 7 days. If no comments are received and CICRA has no concerns over the proposed merger or acquisition, a short form decision will be published on the next working day after expiry of 14 days from the date of registration of the application. If CICRA does have concerns, it will require the parties to prepare a standard application form;
- in all other circumstances, the standard application route must be used. If the transaction is unlikely to raise substantive competition issues, a draft application form should be submitted to CICRA at least 5 working days in advance of the intended final form being filed. If the application is likely to raise significant issues, CICRA also expects the parties to request a pre-filing meeting to discuss the proposal and potential issues. Upon receipt of the application, CICRA will register the application and publish a notice on their website inviting comments from the pubic for a period of 2 weeks. Whilst there is no deadline for a response on the application form, CICRA endeavours to reach a decision within 25 working days of registration, subject to requiring any further information. If issues arise that mean that CICRA may refuse the application or grant consent but with conditions, CICRA will undertake a second detailed review. Again, there is no statutory deadline for a response but CICRA aims to reach a final decision within 6 months from the date of first registration.
If a proposed merger or acquisition involves a company which is itself, or which is a (direct or indirect) parent undertaking of, a GFSC regulated entity, certain notifications or applications will need to be made to the GFSC. These will depend on the type of regulatory licence held by the Guernsey entity and the particular transaction. By way of example, the GFSC may take up to 60 days to consent to a change of controller application whereas some changes need only be notified to the GFSC within 14 days after the event has taken place.
The Takeovers Panel regulates M&A of Guernsey companies which are subject to the Takeover Code.
Additional regulatory approvals may be required depending on the specific business sector of the target, for example, the Alderney Gambling Control Commission; CICRA in exercise of its regulatory powers over utilities companies.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is an accepted market feature on acquisitions, for example, making the transaction conditional upon, amongst other things, obtaining all necessary regulatory approvals.
What steps can an acquirer of a target company take to secure deal exclusivity?
The use of exclusivity agreements is standard practice in Guernsey. Where the provisions of the Takeover Code apply, the board of the target company are not permitted to agree to not solicit or recommend other offers.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
If the target company is not listed and not subject to the Takeover Code, the parties can reach a commercial arrangement. If the Takeover Code applies, it prohibits “offer-related arrangements” between a bidder, or any person acting in concert with it, and the target.
Which forms of consideration are most commonly used?
Cash and shares are the most commonly used forms of consideration but loan notes may also be offered.
If the Takeover Code applies with respect to a mandatory offer, the consideration must be in cash, or be accompanied by a cash alternative of at least equal value, and must comply with the minimum price rules.
At what stages of an acquisition is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
If the transaction requires merger control approval by CICRA the proposed transaction will be made public upon CICRA’s receipt of the application, as set out in 11. above.
Where the provisions of the Takeover Code apply, there are requirements for the bidder, target and certain persons interested in relevant securities to make a public opening position disclosure following the commencement of the offer period.
Where the target is listed on a stock exchange, the rules of the exchange will apply to the timing of the public disclosure.
Where no specific regulatory regime applies to the company or transaction, it is for the parties to decide as to when they want to disclose the offer to the public.
Are there any circumstances where a minimum price may be set for the shares in a target company?
Where the company’s shares are listed on a stock exchange, the rules of the exchange may make provision on this.
If the Takeover Code applies, the bid price must not be less than the highest price that the bidder (or any person acting in concert with the bidder) has paid for any interest in the target’s shares during the three months prior to the commencement of the offer period, and during the offer period (Rule 6). Rule 6 also specifies circumstances in which the offer price must also not be less than the highest price paid by the bidder for shares in the 12 months prior to the offer period.
Is it possible for target companies to provide financial assistance?
Where a person is acquiring or is proposing to acquire shares in a Guernsey company, section 329 of the Guernsey Companies Law permits a company and any of its subsidiaries to give financial assistance directly or indirectly for the purpose of or in connection with that acquisition before or at the same time as the acquisition takes place. In addition, where a person has acquired shares in a Guernsey company and any liability has been incurred (by that or any other person) for the purpose of or in connection with that acquisition, the company and any of its subsidiaries may give financial assistance directly or indirectly for the purpose of or in connection with reducing or discharging the liability incurred.
Financial assistance is defined as, and may be given by way of, gift, guarantee, security, indemnity, release or waiver, loan or similar or any other assistance which reduces the net assets of the company to a material extent. It is considered to be a distribution for the purposes of the Guernsey Companies Law and the solvency process set out in section 303 of the Guernsey Companies Law in relation to distributions must be followed.
Which governing law is customarily used on acquisitions?
Acquisitions in Guernsey are most commonly governed by either the laws of the Island of Guernsey or the laws of England and Wales.
What public-facing documentation is it necessary for a buyer to produce in connection with the acquisition of a listed company?
The requirements for public facing documentation will be determined by the rules of the stock exchange on which the target is listed.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
If shares are held in certificated form, an instrument of transfer compliant with the requirements of the company’s articles of incorporation will need to be completed, signed and delivered to the company secretary. If the shares are held in uncertificated form and are traded on a computerised settlement system, for example on CREST, a transfer of shares will need to be carried out in accordance with the relevant CREST rules and the Uncertificated Securities (Guernsey) Regulations, 2009.
No stamp duty, registration tax or similar documentary tax or charge is currently payable in Guernsey for the sale of shares in a Guernsey company.
Are hostile acquisitions a common feature?
There are no rules preventing hostile takeovers in Guernsey but they are not particularly common.
What protections do directors of a target company have against a hostile approach?
There are no specific protections provided by Guernsey law, however there are various methods available to the target to defend itself against a hostile bid, including seeking a third party to make an alternative offer for the target company.
The Takeover Code (where applicable) contains certain restrictions on defensive actions which the target may take.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Pursuant to Rule 9 of the Takeover Code (where applicable), a mandatory offer must be made when the bidder (and parties acting in concert) either:
- acquires an interest in shares which carry 30% of more of the voting rights of the company; or
- is interested in shares which in the aggregate carry not less than 30% of the voting rights of a company but does not hold shares carrying more than 50% of such voting rights, and the bidder (or any person acting in concert with them) acquires an interest in any other voting shares of the company .
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Where an acquirer has exercised the squeeze out rights provided under the Guernsey Companies Law (see question 26 below), a shareholder who has not assented to the acquisition may within 1 month after the date of the acquirer’s notice to acquire, apply to the Royal Court of Guernsey to cancel that notice. The Court may cancel the notice or make such order as it thinks fit.
A shareholder may apply to the Guernsey Court for relief on the ground that –
- the affairs of the company are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
- an actual or proposed act or omission of the company is or would be so prejudicial.
The target’s constitutional documents may provide additional rights for its minority shareholders.
Is a mechanism available to compulsorily acquire minority stakes?
The Guernsey Companies Law provides that if within 4 months of the date of an offer the offer has been approved or accepted by shareholders comprising not less than 90% in value of the shares subject to the offer, the offeror may, within a period of 2 months immediately after the last day on which the offer can be approved or accepted, give notice to any dissenting shareholder that it desires to acquire his shares (“notice to acquire”). Subject to the Court’s powers referred to in 25. above, on the expiration of 1 month from the date of the notice to acquire, the offeror must send a copy of the notice to the target and pay the necessary consideration for the dissenting shareholder’s shares, and the offeror shall then be registered as the holder of those shares.
For the purposes of calculating the 90% threshold, shares held as treasury shares and shares held by the offeror or its affiliates are not taken into account.