New law assists offshore business

The Companies (Amendment) Law, 2009 came into force on 11 May 2009.  It introduces a new, simpler and more cost-effective mechanism for mergers and consolidations between Cayman Islands companies and between Cayman companies and foreign companies.

Previously, the only mechanism available under the Companies Law for a merger or consolidation between companies was the somewhat cumbersome provisions contained in sections 86 or 87 of the Companies Law (2007 Revision) (as amended) for schemes of arrangement to facilitate amalgamations and reconstructions which require court approval in order to be effective. These court approved schemes will continue to be available for more complex mergers.

Under the new provisions, “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of them as the surviving company. “Consolidation” is defined as the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies in the consolidated company. The essential difference is that a consolidation produces a new company different from either of its constituent companies, while in a merger one of the constituent companies will continue to exist as the other is merged into it. The procedure does not apply to segregated portfolio companies. 

The procedure to effect a merger or consolidation is as follows:

The directors of each constituent company must approve a written plan of merger or consolidation (the “Plan”), which will include certain specified information including the name of each constituent company and the name of the surviving or consolidated company; the date on which the merger or consolidation is intended to take effect; the terms and conditions of the proposed merger or consolidation, including the manner and basis of converting shares in each constituent company into shares in the consolidated or surviving company; and the rights and restrictions attaching to the shares in the consolidated company.

The Plan must be authorized by each constituent company by (a) a shareholder resolution by majority in number representing 75% in value of the shareholders voting together as one class; and (b) if the shares to be issued to each shareholder in the consolidated or surviving company are to have the same rights and economic value as the shares held in the constituent company, a special resolution of the shareholders voting together as one class. A proposed merger between a Cayman parent company and its Cayman subsidiary or subsidiaries will not require authorization by shareholder resolution.

The consent of each holder of a fixed or floating security interest of a constituent company in a proposed merger or consolidation is required unless the court (upon theapplication of the constituent company that has issued the security) waives the requirement for consent.

The Plan must be signed by a director on behalf of each constituent company and filed with the Registrar of Companies together with the required supporting documents including various director’s declarations such as a declaration of solvency of the constituent company and the consolidated or surviving company, that the merger or consolidation is bona fide and not intended to defraud unsecured creditors of the constituent companies, an undertaking that a copy of the certificate of merger or consolidation will be given to members and creditors of the constituent company and published in the Gazette, and the applicable fees.   

A certificate of merger or consolidation is issued by the Registrar which is prima facie evidence of compliance with all statutory requirements in respect of the merger or consolidation. All rights and property of each of the constituent companies will then vest in the surviving or consolidated company which will also be liable for all debts, contracts, obligations and liabilities of each constituent company. Similarly, any existing claims, proceedings or rulings of each constituent company will automatically be continued against the surviving or consolidated company.

Provision is also made for a merger or consolidation between a Cayman company and one or more foreign companies where the surviving or consolidated company is or is to be a Cayman company.

Further, provision is made for a dissenting shareholder of a Cayman constituent company to be entitled to payment of the fair value of his shares upon dissenting to the merger or consolidation. Where the parties cannot agree on the price to be paid to the dissenting shareholder, either party may file a petition to the court to determine fair value of the shares.  These rights are not available where an open market exists on a recognized stock exchange for the shares of the class held by the dissenting shareholder.

These amendments,increase the flexibility and agility of Cayman Islands companies whilst reducing the costs of a simple restructuring.

Submitted by Olivaire Watler, Conyers Dill & Pearman