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 the Isle of Man.
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?
In the Isle of Man a company may be incorporated under either the traditional Isle of Man Companies Acts 1931-2004 (1931 Act) or the modern Isle of Man Companies Act 2006 (2006 Act). The act under which a company is incorporated will provide the legal framework for its operation in all areas including any merger and acquisition (M&A).
The United Kingdom (UK) City Code on Takeovers and Mergers (Takeover Code) extends to the Isle of Man and applies in relation to certain Isle of Man listed companies. The Takeover Code will apply to a Manx company if any of its securities are admitted to a regulated market or multilateral trading facility in the UK (such as AIM or ISDX Growth Market) or any stock exchange in the Isle of Man or Channel Islands.
The Takeover Code may also apply to any other public company incorporated in the Isle of Man if it has its place of central management and control in the UK.
What is the current state of the market?
The M&A market in the Isle of Man is currently best described as being fairly active.
Which market sectors have been particularly active recently?
There has been recent activity within the financial services sector with considerable private equity investment into fiduciary businesses, takeovers involving life assurance companies and significant restructuring of banks in the Isle of Man.
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?
A merger may be effected for both 1931 Act and 2006 Act companies by way of a scheme of arrangement between the target and its shareholders. A scheme of arrangement must be sanctioned by the Manx High Court (Court) and results in the bidder acquiring the target’s shares.
Under the 2006 Act a merger may also be effected by way of a statutory merger. A statutory merger has the advantage of not requiring the sanction of the Court, which can make it a more time and cost efficient method of effecting a merger.
There are also statutory provisions specifically for the transfer of business of deposit takers which have recently been used for the first time.
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?
Publically available information for a 1931 Act company includes:
- memorandum and articles of association;
- filed annual returns;
- details of current directors and shareholders;
- shareholder special resolutions;
- register of charges; and
The information publically available for a 2006 Act company is more limited but includes:
- memorandum and articles of association;
- filed annual returns; and
- registered agent details.
Other information may be available for both types of company through other sources such as public announcements issued by the target.
With regard to disclosure of information, save where the target is listed on a foreign stock exchange, in which case the rules of the foreign stock exchange will apply, there is no regime applicable for compulsory disclosure.
If the Takeover Code applies, a bidder will be entitled to receive, upon request, the same information that has been provided to a competing bidder.
To what level of detail is due diligence customarily undertaken?
This will depend upon the nature of the transaction but legal practice in the Isle of Man follows the legal practice in England and Wales.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
In an asset sale, subject to the provisions of the target’s constitutional documents, the board of directors have legal power to act without shareholder consent, however in practice, the directors would seek the approval of the shareholders.
A takeover offer must be approved by shareholders representing more than 50% of the voting rights in the target, although a higher threshold may be specified.
A scheme of arrangement requires the approval of a majority in number representing at least 75% in value of the shareholders or class of shareholders present and voting at the relevant shareholder meeting, together with the approval of the Court.
A statutory merger must be authorised by:
- a resolution passed by a shareholder or shareholders holding at least 75% of the voting rights exercised at the relevant shareholder meeting; and
- a resolution passed by a shareholder or shareholders holding at least 75% of the voting rights exercised by each class entitled to vote as a class (at the time of the vote and following any amendments to the constitutional documents of the target).
What are the duties of the directors and controlling shareholders of a target company?
The directors and controlling shareholders must continue to act in the best interests of the target.
Do employees/other stakeholders have any specific approval, consultation or other rights?
There are no specific obligations under Manx law to consult with, or obtain approval from, employees or other stakeholders.
If applicable, the Takeover Code contains provisions relating to engagement with employee representatives and the provision of information.
If the target is a regulated business, regulatory approval may be required – see question 11.
What regulatory/third party approvals are required and what waiting periods do these impose, if any?
Regulatory approval may be required by the relevant authority for companies within the financial services and insurance, gambling and telecommunications sectors. Notification periods and consent requirements vary depending upon sector and business type and are subject to policy requirements.
A company licensed by the Isle of Man Financial Services Authority (FSA) to carry on deposit taking activities must gain the consent of the FSA before entering into a transaction involving the acquisition of, or any change in, a controlling interest in the company.
A financial services company is required to notify the FSA of an acquisition of, or any change in, a controlling interest at least 20 business days before the transaction takes place.
In the case of an insurance company the FSA would require notification at least 28 days in advance of any change in controller.
With regard to Isle of Man licenced online gambling operations, all changes in beneficial ownership in excess of 5%, or 20% if the shares are publically listed, must be notified to the Isle of Man Gambling Supervision Commission.
The Panel on Takeovers and Mergers regulate M&As of companies which are subject to the Takeover Code.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is an accepted standard practice in accordance with practice in the UK.
What steps can an acquirer of a target company take to secure deal exclusivity?
The use of exclusivity agreements is standard practice in the Isle of Man and follows market practice in the UK.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
All deal protection measures used in the UK may be used in the Isle of Man, however the most frequently used measures are conditionality and exclusivity agreements.
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?
Forms of consideration most commonly used are cash, shares and loan notes. The prohibition against financial assistance has been abolished save in respect of public companies formed under the 1931 Act and their subsidiaries.
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)?
Save where the target is listed on a foreign stock exchange, in which case the rules of the foreign stock exchange will apply, there are no specific requirements in the Isle of Man for public disclosure during an acquisition.
If the Takeover Code applies, Rule 8 requires the following public disclosure:
- a bidder must make a public Opening Position Disclosure following the start of an offer period or an announcement first identifying it as the bidder or identifying a competing securities exchange offeror.
- the target must make a public Opening Position Disclosure following the commencement of the offer period and, if later, after the announcement that first identifies any securities exchange offeror.
- any person interested in 1% or more of any class of relevant securities of a target or of any securities exchange offeror must make an Opening Position Disclosure following the commencement of the offer period and, if later, following the announcement in which any securities exchange offeror is first identified.
In the Isle of Man, ownership of shares of a 1931 Act becomes a matter of public record upon transfer.
Are there any circumstances where a minimum price may be set for the shares in a target company?
If the Takeover Code applies, Rule 6 specifies that the bid price must not be less than the highest price paid by the bidder (or person acting in concert) for any interest in shares in the target during the period commencing three months prior to the offer period.
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 and during the offer period.
Separate rules apply to mandatory offers under Rule 9 of the Takeover Code.
Is it possible for target companies to provide financial assistance?
There is no prohibition of financial assistance for companies incorporated under the 2006 Act.
With respect to 1931 Act Companies, it is unlawful for a public company or its subsidiaries to give financial assistance for the acquisition of shares in that public company. Equally it is unlawful for a public company to give financial assistance for the acquisition of shares in its private holding company. However there is no prohibition against a private company giving financial assistance for the acquisition of shares in itself or its private holding company.
Which governing law is customarily used on acquisitions?
Acquisitions in the Isle of Man are most commonly governed by either the laws of the Isle of Man 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?
Subject to any restrictions contained within a company’s constitutional documents, shares in 1931 Act and 2006 Act companies are transferable by a written instrument of transfer. There is no stamp duty on shares payable in the Isle of Man.
Are hostile acquisitions a common feature?
Hostile acquisitions are not common in the Isle of Man.
What protections do directors of a target company have against a hostile approach?
There are no specific provisions contained in Manx law for the protection of directors of a target company against a hostile approach.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
If the Takeover Code applies, Rule 9 specifies that a mandatory offer must be made where the bidder (and parties acting in concert):
- acquires shares carrying 30% or more of the voting rights of a target; or
- is interested in shares carrying not less than 30% but not more than 50% of the target's voting rights, and that person acquires an interest in any other voting shares in the target.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Directors must call a meeting of the Company if requested in writing to do so by a shareholder or shareholders holding at least 10% (or such smaller percentage as may be specified in the constitutional documents) of the voting rights in relation thereto.
A shareholder of a 1931 Act company may apply to the Court for an order if the affairs of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or some part of the members (including himself), or in disregard of his or their proper interests as shareholder(s).
A shareholder of a 2006 Act company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or have been, or are, likely to be oppressive or unfairly prejudicial to such member in that capacity, may apply to the Court for an order.
The target’s constitutional documents may provide additional rights for its minority shareholders.
If the acquirer obtains at least 90% in value of the target’s shares and gives notice for the acquisition of share from a dissenting shareholder, the dissenting shareholder may, within one month from the date on which the notice was given, make an application to the Court for an order.
Is a mechanism available to compulsorily acquire minority stakes?
Both the 1931 Act and the 2006 Act contain provisions for the compulsory acquisition of shares from minority shareholders which apply to all takeover offers that constitute a scheme or contract (which expression includes a series of contracts) involving the transfer of shares to another person. If the bidder has had its offer approved within a specified period of time by not less than 90% in value of the shares affected the bidder may compulsorily acquire the remaining shares.
There is no bar on the shares owned by an affiliate of a bidder being taken into account when determining whether the 90 per cent threshold has been crossed.