Guernsey: Mergers & Acquisitions

Which market sectors have been particularly active recently?

The top 5 target sectors by volume in 2017 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:

1. the continuing changes to the regulatory framework for banks in the UK;

2. the continuing consolidation within the fiduciary sector; and

3. the value of sterling and global investor confidence.

What are the key means of effecting the acquisition of a publicly traded company?

The Guernsey Companies Law does not differentiate between a public and private company, as such the key means of effecting an acquisition are as follows:

1. a takeover offer under which an offer is proposed to the board and shareholders;

2. a scheme of arrangement as set out in Part VIII of the Guernsey Companies Law. In a scheme of arrangement the acquisition of the entire share capital of the target may be approved by 75% of the shareholders providing that it is also sanctioned by the Royal Court of Guernsey;

3, an amalgamation whereby two or more companies merge to form one company. This company can either be one of the merging companies or a new company. The shareholders of each of the amalgamating companies are required to approve the amalgamation by special resolution and if any of the companies are regulated or are yet to be incorporated then consent will also be required from the GFSC;

4. a legal merger in which two or more companies are merged by order of the Royal Court. The process for this is similar to that of a scheme of arrangement with the same shareholder consent required.

It is important to note that if the target is regulated then an application will need to be made to the GFSC for consent to the change in control. Consent is normally deemed to be automatically granted 60 days after the application is made unless the parties are informed to the contrary. The transfer in ownership is unable to occur before this consent is received.

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 February each year confirming information such as the directors of the company and whether the company has waived the requirement to hold AGMs or to be audited. The details contained within the annual validation should reflect the company’s position as at 31 December of the previous year;

certificate of registration and memorandum and articles of incorporation; and

any resolution requiring 75% or above shareholder approval, i.e. special, waiver and unanimous resolutions.

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?

This varies between transactions, however as a minimum a bidder would usually obtain as much information from public sources as possible in combination with approaching the target’s board of directors with a comprehensive list of financial, legal, regulatory and operational due diligence questions and requests.

Physical assets may also be inspected and certain assets, such as real property, may be valued independently.

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. Typically the board will deal with much of the negotiations and preparations in relation to a transaction, presenting the results to the shareholders for approval and execution where necessary.

Statutory squeeze out rights exist in Guernsey that allow for a decision approved by 90% of the shareholders to sell the entire issued share capital of a company to bind any remaining dissenting shareholders. This figure is reduced to 75% shareholder approval for a scheme of arrangement, however such a scheme requires the sanctioning of the Royal Court of Guernsey who will consider the rights and potential impacts on all of the shareholders and creditors of the company when deciding on whether to approve such a scheme.

Further details on the required shareholder majorities to approve an amalgamation or scheme of arrangement are set out at 5 above.

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 and as such directors must act in the best interest of the company at all times. Director duties have not been codified in Guernsey, however the recent case of Carlyle Capital Corporation Limited v Conway & Others decided in the Royal Court of Guernsey has provided greater certainty over what these duties are, essentially mirroring the fiduciary duties and duty of care that directors have in the UK. 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. It should also be noted that as part of a scheme of arrangement the target is obliged to provide notice of the proposal to the company’s creditors. The rights of these creditors and any submissions that they may make will be considered by the Court when deciding whether to sanction the scheme.

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.

Where the approval of CICRA is required, there are two application routes available:

1. 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; and

2. 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.

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.

In a transaction that is subject to the Takeover Code, the terms of any agreement between the bidder and the target are heavily restricted by Rule 21.2 of the Code. Any such agreement is generally prohibited, except to the extent that it deals with irrevocable commitments and letters of intent (for example, the shareholder directors of the target may provide an undertaking to accept the offer in respect of their own shares, if the bid is made on the terms indicated).

Where the Takeover Code does not apply (for example, in relation to a company listed on the TSX with a majority of directors outside the UK, Channel Islands and Isle of Man) it is common to have an implementation agreement or an arrangement agreement which may include the following:

1. The target board agreeing to take certain steps in relation to the transaction (such as providing information to the bidder, recommending the offer, preparing documentation for a scheme of arrangement and so on) in accordance with a proposed timetable;

2. Undertakings from the target not to solicit a competing offer and to inform the bidder if a competing offer is received;

3. Actions which the target can take if a superior competing offer is received; and

4. A break fee payable to the bidder in certain circumstances.

The target board can generally agree not to solicit other offers, but the directors should carefully consider their fiduciary duties in the context of any commitment not to recommend a superior offer. If such a commitment is given, it should bind the target only, and not the directors, so that the directors are free to recommend a superior offer in accordance with their fiduciary duties, even if a break fee may then become payable by the target.

In addition, the target’s board of directors are not permitted to agree to not solicit or recommend other offers (Rule 21.2, Code).

Which forms of consideration are most commonly used?

The most common forms of consideration are:

1. Cash; and

3. Listed securities.

Loan notes may also be offered, but are less common.

At what ownership levels by an acquirer 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.