A guide to Mergers & Acquisitions (M&A)
law in Isle of Man, with a focus on key areas including deal
structure, due diligence requirements, regulatory frameworks,
treatment of seller liability, deal process, hostile bids and other
trends across the M&A sector in the jurisdiction.
This guide to mergers and acquisitions
(M&A) in Isle of Man covers the following
topics:
- DEAL STRUCTURE OF M&A DEALS
- INITIAL STEPS OF AN M&A TRANSACTION
- M&A DUE DILIGENCE
- REGULATORY FRAMEWORK
- TREATMENT OF SELLER LIABILITY IN M&A TRANSACTIONS
- DEAL PROCESS IN A PUBLIC M&A TRANSACTIONS
- HOSTILE BIDS
- M&A TRENDS AND PREDICTIONS FOR ISLE OF MAN
- M&A TIPS AND TRAPS IN ISLE OF MAN
DEAL STRUCTURE OF M&A DEALS
1.1 HOW ARE PRIVATE AND PUBLIC M&A TRANSACTIONS
TYPICALLY STRUCTURED IN ISLE OF MAN?
The Isle of Man has two company law regimes, which operate in
parallel. Companies can be incorporated under either the Companies Acts 1931-2004 (‘1931 act’)
or the Companies Act 2006 (‘2006
act‘). The legislation under which a company is
incorporated will provide the legal framework for its operation in
all areas, including in relation to mergers and acquisitions.
Private deals
Private M&A transactions are typically structured as:
- share sales (which involve the transfer of ownership of the
target, including all of its assets and liabilities, unless there
is a pre-transaction carve-out of specific assets or the definitive
transaction documents include express indemnities in respect of
specific liabilities); or - asset sales (which involve the transfer of specific assets and
rights, and often certain associated liabilities, relating to the
target business).
Public deals
Public M&A transactions can be structured as schemes of
arrangement, contractual takeover offers and, in certain
circumstances, statutory mergers. Schemes of arrangement have been
the most common structure for public-to-private transactions in
recent years due to the advantages, which we consider in question
1.2.
The City Code on Takeovers and Mergers
(‘Takeover Code‘) applies in relation to
takeovers of certain Isle of Man listed companies, whether
structured as contractual offers or schemes of arrangement. The
Takeover Code was amended with effect from 20 February 2023 to
introduce new presumptions as to when parties are acting in concert
under the Takeover Code. On 22 May 2023, several more amendments
became effective in relation to, among other things, how the offer
timetable applies in a competitive situation if:
- separate bids are proceeding by way of a scheme of arrangement
and contractual offer; and/or - a bid is subject to regulatory approval that cannot be
satisfied within the normal 60-day timetable.
A small number of statutory mergers have taken place in recent
years; but since they are relatively uncommon, we do not consider
them further in this Q&A.
1.2 WHAT ARE THE KEY DIFFERENCES AND POTENTIAL
ADVANTAGES AND DISADVANTAGES OF THE VARIOUS
STRUCTURES?
Private deals
On a private transaction, a share sale is simpler to document
and, from the seller’s perspective, involves the transfer of
all of the target’s liabilities to the buyer.
An asset sale provides more flexibility over the choice of
assets to be transferred and, from the buyer’s perspective,
allows it not to assume liabilities that it would prefer to be
retained by the seller.
Public deals
On a public transaction, the thresholds for a successful scheme
takeover are often considered easier to achieve than for a
contractual offer.
Under a contractual offer, the bidder requires more than 50%
acceptances to obtain control of the target and more than 90%
acceptances to obtain 100% of the target’s shares.
A scheme, on the other hand, need only be approved by a majority
by number representing at least 75% in value of the target’s
shareholders that vote at the relevant shareholders’ meeting.
If, as often happens, a large number of shareholders do not vote at
the relevant meeting, either in person or by proxy, a scheme can
often be approved by substantially less than 75% of all
shareholders. On the other hand, however, shareholders that are
opposed to a scheme will need less support to be able to block a
scheme than they would need to prevent a contractual offer becoming
unconditional as to acceptances. Once a scheme becomes effective,
the bidder will obtain 100% of the target’s shares, including
the shares of shareholders that voted against the scheme and those
that did not vote at all.
1.3 WHAT FACTORS COMMONLY INFLUENCE THE CHOICE OF SALE
PROCESS/TRANSACTION STRUCTURE?
The advantages and disadvantages listed in question 1.2, and tax
considerations, tend to be most influential in terms of transaction
structure. The choice of sale process is usually driven by
commercial dynamics – most private M&A transactions
involving Isle of Man targets tend to be conducted by bilateral
negotiations, with auctions being reserved for higher-value
targets.
INITIAL STEPS OF AN M&A TRANSACTION
2.1 WHAT DOCUMENTS ARE TYPICALLY ENTERED INTO DURING THE
INITIAL PREPARATORY STAGE OF AN M&A TRANSACTION?
A non-disclosure agreement (NDA) will typically
be entered into at the beginning of an M&A transaction
requiring the parties to keep confidential the existence and terms
of the negotiations, as well as any other confidential information
that they receive from the other party as the negotiations
progress. NDAs can include other restrictions, such as
non-solicitation and exclusivity provisions.
On many transactions, the parties will also enter into a
document setting out the headline terms of the proposed
transaction. These documents (which are referred to by several
different names, including ‘term sheets’, ‘letters of
intent’ and ‘heads of terms’) are not intended to be
legally binding, except in respect of specific provisions, such as
exclusivity, confidentiality and costs.
2.2 ARE BREAK FEES PERMITTED IN ISLE OF MAN (BY A BUYER
AND/OR THE TARGET)? IF SO, UNDER WHAT CONDITIONS WILL THEY
GENERALLY BE PAYABLE? WHAT RESTRICTIONS AND OTHER CONSIDERATIONS
SHOULD BE ADDRESSED IN FORMULATING BREAK FEES?
Isle of Man law does not prohibit a proposed buyer or the target
from agreeing to pay break fees in appropriate circumstances, if
the directors (of an Isle of Man buyer or the target) consider them
to be appropriate and consistent with their fiduciary duties.
However, break fees are not commonly used for private M&A
transactions involving Isle of Man targets, and break fee
agreements are generally prohibited for public M&A transactions
that are subject to the Takeover Code.
2.3 WHAT ARE THE MOST COMMONLY USED METHODS OF FINANCING
TRANSACTIONS IN ISLE OF MAN (DEBT/EQUITY)?
The Isle of Man is no different in this regard from any other
jurisdiction. Transactions can be funded entirely by cash, debt,
equity or by a mix of them.
In certain transactions, such as management buyouts, the
financing will consist of a mix of:
- institutional and management equity;
- debt financing (potentially including senior and subordinated
debt); and - possibly also vendor loan notes if the parties agree to defer a
portion of the purchase price (eg, if the purchase price is subject
to an earn-out).
The choice of (and, where relevant, the split between different
methods of) financing will vary from deal to deal, depending
on:
- the transaction structure;
- the type of buyer (trade buyer or private equity);
- the nature of the target and its underlying business; and
- the relative cost of cash, debt and equity.
2.4 WHICH ADVISERS AND STAKEHOLDERS SHOULD BE INVOLVED
IN THE INITIAL PREPARATORY STAGE OF A TRANSACTION?
This will depend on the transaction structure (different
considerations apply for private and public M&A
transactions).
Private deals
Generally speaking, for a private M&A transaction, the buyer
and the seller should engage with Isle of Man lawyers, as well as
international legal advisers where appropriate. They may also wish
to engage financial and tax advisers (and actuaries for certain
transactions in the insurance industry).
Public deals
A larger range of advisers and other stakeholders will be
involved in a public M&A transaction, including the directors
of the target, any substantial shareholders, financial advisers,
international and Isle of Man lawyers (for the target, the bidder
and the financial advisers), brokers, sponsors, analysts, PR
advisers, stock exchanges and registrars.
On a transaction that is subject to the Takeover Code,
confidential information concerning the proposed transaction must
be kept secret until announcement. The Takeover Code requires an
announcement to be made when discussions relating to a possible bid
are extended to more than a very restricted number of people, and
this fundamental rule must always be borne in mind before engaging
with advisers and stakeholders before such a transaction has been
announced.
2.5 CAN THE TARGET IN A PRIVATE M&A TRANSACTION PAY
ADVISER COSTS OR IS THIS LIMITED BY RULES AGAINST FINANCIAL
ASSISTANCE OR SIMILAR?
Yes, this is permitted if the target is an Isle of Man company,
and it is relatively common on a primary fund raising for the
target to bear some or all of the subscriber’s adviser
costs.
There is no prohibition against a private Isle of Man company
providing financial assistance in connection with the acquisition
of its own shares. However, the following company law principles
continue to apply:
- The provision of the financial assistance must be in the
company’s best interests; - The provision of the financial assistance must not breach the
Isle of Man law rules on distributions or otherwise constitute an
unlawful reduction of capital; and - The provision of the financial assistance must not otherwise
represent a fraud on the company’s creditors under Isle of Man
insolvency laws.
M&A DUE DILIGENCE
3.1 ARE THERE ANY JURISDICTION-SPECIFIC POINTS RELATING
TO THE FOLLOWING ASPECTS OF THE TARGET THAT A BUYER SHOULD CONSIDER
WHEN CONDUCTING DUE DILIGENCE ON THE TARGET?
- Commercial/corporate
- Financial
- Litigation
- Tax
- Employment
- Intellectual property/information technology
- Data protection
- Cybersecurity
- Real estate
It is important for buyers to review each of the above aspects
as part of their due diligence process together with their Isle of
Man lawyers and their international legal advisers, if any. The
precise considerations in each of these areas will depend more on
the nature of the target’s underlying business than on any
jurisdiction-specific issues.
One important jurisdiction-specific item to consider, which
straddles corporate and tax, is whether the target is within the
scope of the Isle of Man’s economic substance rules and, if so,
whether it complies with those rules. The economic substance regime
was introduced in 2019 and any in-scope companies that are
non-compliant could be liable for significant financial penalties;
if there is no realistic possibility of becoming compliant, they
will be at risk of being struck off the companies register. It is
increasingly important that buyers identify any economic substance
issues during their due diligence.
3.2 WHAT PUBLIC SEARCHES ARE COMMONLY CONDUCTED AS PART
OF DUE DILIGENCE IN ISLE OF MAN?
Searches of the target’s file at the Isle of Man Companies Registry, as well as
searches against the entries and filings shown and available for
inspection in respect of the target at the Rolls Office of the Isle
of Man High Court of Justice.
It is also advisable to search the Isle of Man Financial
Services Authority‘s register to ascertain whether the
target holds any financial services licences, authorisations or
registrations.
Depending on the industry in which the target conducts its
business and what the due diligence reveals, certain other searches
might also be advisable, including:
- searches of the Isle of Man Gambling Supervision
Commission’s register; and - searches of the Isle of Man Deeds Registry or Land
Registry.
3.3 IS PRE-SALE VENDOR LEGAL DUE DILIGENCE COMMON IN
ISLE OF MAN? IF SO, DO THE RELEVANT FORMS TYPICALLY GIVE RELIANCE
AND WITH WHAT LIABILITY CAP?
Financial vendor due diligence tends to be more common than
legal vendor due diligence on Isle of Man M&A transactions,
although legal vendor due diligence is becoming more common,
especially on auction sales and sales by private equity
investors.
If legal vendor due diligence is carried out, it is customary
for the report to be provided to bidders on a non-reliance basis as
part of the auction process. The successful bidder will often be
permitted to rely on the report by signing a reliance letter at the
same time as the definitive transaction documents, but subject to
customary limitations, including a cap on the report provider’s
liability. Isle of Man lawyers tend to be guided by UK market
practice and to set the level of the cap by reference to the deal
value.
REGULATORY FRAMEWORK
4.1 WHAT KINDS OF (SECTOR-SPECIFIC AND NON-SECTOR
SPECIFIC) REGULATORY APPROVALS MUST BE OBTAINED BEFORE A
TRANSACTION CAN CLOSE IN ISLE OF MAN?
There are no compulsory non-sector specific regulatory approvals
in the Isle of Man.
Sector-specific regulatory approvals apply to transactions in
certain sectors. For example, the Isle of Man Financial Services
Authority must consent to changes of control of financial services
licence holders, authorised insurers and certain other entities;
and the Isle of Man Gambling Supervision Commission must consent to
changes of control of certain businesses in the gambling/betting
sectors.
Transactions involving companies in the telecommunications
sector are generally subject to notification only, rather than
requiring prior regulatory approval.
For each transaction, advice should be obtained from Isle of Man
lawyers as early as possible in the process to ensure that the
necessary consents are obtained and, where necessary, that
appropriate conditions precedent are included in the definitive
transaction documents.
4.2 WHICH BODIES ARE RESPONSIBLE FOR SUPERVISING M&A
ACTIVITY IN ISLE OF MAN? WHAT POWERS DO THEY HAVE?
This will depend on the sector in which the target conducts
business. For both public and private M&A transactions, certain
sector-specific regulatory approvals might be required (see
question 4.1).
It will also depend on the transaction structure. The Takeover
Panel is responsible for supervising all transactions that are
subject to the Takeover Code.
Transactions that are structured as schemes of arrangement must
be sanctioned by the Isle of Man High Court of Justice. The role of
the court in relation to a scheme of arrangement is not limited to
rubber-stamping the scheme once it has been approved by the
requisite majorities of shareholders. The court has a duty to
ensure, among other things, that:
- the approval of the scheme is reasonable;
- each class of shareholders was fairly represented and acted in
good faith; and - the scheme of arrangement was proposed and approved in
accordance with the statutory procedure.
So long as the scheme appears fair and reasonable, the court
will be unlikely to judge its commercial merits. Although the
court’s role in a scheme is not a mere formality, on a takeover
scheme, the court tends to take a great degree of comfort from the
fact that:
- independent financial advisers have advised on the fairness of
the scheme; and - the requisite majorities of shareholders have approved the
scheme.
4.3 WHAT TRANSFER TAXES APPLY AND WHO TYPICALLY BEARS
THEM?
No stamp duty is payable in the Isle of Man on the transfer of
shares in an Isle of Man company. For this reason, it is common to
include the delivery of an updated register of members as a
completion deliverable, meaning that it is not necessary to include
a power of attorney in the definitive transaction documents.
TREATMENT OF SELLER LIABILITY IN M&A TRANSACTIONS
5.1 WHAT ARE CUSTOMARY REPRESENTATIONS AND WARRANTIES?
WHAT ARE THE CONSEQUENCES OF BREACHING THEM?
It is not customary for the seller to give representations on an
Isle of Man M&A transaction. The established market practice is
for the seller to give warranties only. Generally speaking, the
warranties are given only at signing.
As is the case in any other jurisdiction, the exact scope of the
warranties will depend on a number of things, including:
- the transaction structure (warranties being more comprehensive
for a private transaction and typically more comprehensive on a
bilateral negotiation than an auction sale); - the nature of the target’s underlying business; and
- the relative bargaining power of the parties.
The customary warranties on an Isle of Man M&A transaction
are no different from those in other jurisdictions and will
typically cover, among other things:
- title/capacity/authority;
- accounts;
- assets;
- real estate;
- material contracts;
- IP/IT;
- employment/pensions;
- insurance;
- environmental;
- compliance with law/litigation;
- solvency;
- data protection;
- anti-bribery; and
- corruption and anti-money laundering.
If a warranty is inaccurate, the warrantor will typically be
liable for damages in an amount necessary to place the buyer in the
position that it would have been had the warranty been accurate. It
is uncommon for warranties to be provided on an indemnity basis,
but buyers may seek to include specific indemnities for ‘known
risks’ identified during due diligence.
5.2 WHAT LIMITATIONS TO LIABILITIES UNDER TRANSACTION
DOCUMENTS (INCLUDING FOR REPRESENTATIONS, WARRANTIES AND SPECIFIC
INDEMNITIES) WHICH TYPICALLY APPLY TO M&A TRANSACTIONS IN ISLE
OF MAN?
The seller will typically include limitations as to:
- quantum (de minimis, threshold (which can be tipping
or deductible) and cap); - time (survival period and requirement for prompt notification
upon discovery); - disclosure (public records, data room, and disclosure letter);
and - knowledge (actual and, in certain instances, constructive and
imputed).
It is common on private M&A transactions involving Isle of
Man targets for the seller’s liability to be capped at £1
and the buyer’s exclusive recourse to be against a buy-side
warranty and indemnity (W&I) insurance policy (see question
5.3).
5.3 WHAT ARE THE TRENDS OBSERVED IN RESPECT OF BUYERS
SEEKING TO OBTAIN WARRANTY AND INDEMNITY INSURANCE IN ISLE OF
MAN?
W&I insurance is common for private M&A transactions
involving Isle of Man targets.
Sellers often ask buyers to limit the seller’s liability at
£1 and to obtain a W&I insurance policy including an
express subrogation waiver (ie, a waiver of the insurer’s right
to pursue the seller to recover amounts paid out on a successful
claim, except in the case of fraud). Even if not requested by the
seller, a buyer in a competitive situation can make its offer more
attractive by proposing such an arrangement.
The pricing of policies for transactions involving Isle of Man
targets tends to be broadly the same as for transactions involving
UK targets.
W&I insurance underwriters tend to propose a number of
exclusions in policies relating to Isle of Man targets. It is often
possible to address their concerns by focusing on the relevant
areas during due diligence, in which case the underwriters can be
persuaded to remove the relevant exclusions. Buyers should ask
their Isle of Man lawyers to advise on what the relevant exclusions
are likely to be and how they can be addressed.
5.4 WHAT IS THE USUAL APPROACH TAKEN IN ISLE OF MAN TO
ENSURE THAT A SELLER HAS SUFFICIENT SUBSTANCE TO MEET ANY CLAIMS BY
A BUYER?
The first and most obvious step is to ask for evidence of the
seller’s creditworthiness in the form of a recent set of
financial statements.
If the buyer has any reason to doubt the seller’s
creditworthiness, it will often ask for a guarantee from a group
entity with greater substance. Other options include the buyer
retaining a part of the purchase price or paying it into escrow
with an independent escrow agent.
If the payment of any portion of the consideration is deferred,
another option is to insert provisions in the definitive
transaction documents allowing the buyer to offset any claims
against the deferred payments.
W&I insurance can also be used to address concerns about the
seller’s creditworthiness (see question 5.3).
5.5 DO SELLERS IN ISLE OF MAN OFTEN GIVE RESTRICTIVE
COVENANTS IN SALE AND PURCHASE AGREEMENTS? WHAT TIMEFRAMES ARE
GENERALLY THOUGHT TO BE ENFORCEABLE?
Yes, restrictive covenants are often requested by buyers in
private M&A transactions involving Isle of Man targets. The
scope and duration of such covenants are matters for negotiation
and will differ from one transaction to another.
The Isle of Man High Court of Justice will generally enforce
longer restrictive covenants in sale and purchase agreements than
in an employment context in view of the buyer’s legitimate
expectation that, having paid the seller for the target’s
business, the seller will not set up a competing business for a
period of time after completion.
The precise timeframe will vary from one transaction to another
and input should be obtained from experienced Isle of Man lawyers.
As a general rule of thumb, a covenant in a sale and purchase
agreement with a duration of two or three years will generally be
thought to be enforceable in the Isle of Man High Court of Justice
if the buyer has paid the seller for the goodwill in the
target.
5.6 WHERE THERE IS A GAP BETWEEN SIGNING AND CLOSING, IS
IT COMMON TO HAVE CONDITIONS TO CLOSING, SUCH AS NO MATERIAL
ADVERSE CHANGE (MAC) AND BRING-DOWN OF WARRANTIES?
Conditions precedent are a common feature of M&A
transactions involving Isle of Man targets, but the Isle of Man
tends to follow English market practice in this regard, meaning
that MAC conditions or conditions relating to the continued
accuracy of the warranties are less common than on the other side
of the Atlantic (as noted at question 5.1, warranties are typically
only given at signing).
Instead, conditions tend to relate to specific items arising
from the buyer’s due diligence that must be addressed before
completion. These can include regulatory and antitrust approvals,
where required, and any required third-party consents.
If a buyer manages to negotiate the inclusion of a warranty
bring-down condition precedent, the seller will typically look to
include a materiality qualifier to prevent minor warranty breaches
from scuppering the deal.
DEAL PROCESS IN A PUBLIC M&A TRANSACTION
6.1 WHAT IS THE TYPICAL TIMETABLE FOR AN OFFER? WHAT ARE
THE KEY MILESTONES IN THIS TIMETABLE?
As the Isle of Man does not have its own stock exchange, all of
the responses in question 6 assume that the transaction is subject
to the Takeover Code.
Isle of Man companies are listed on many of the world’s
major stock exchanges so, if an Isle of Man target is listed in a
jurisdiction outside the British Isles, local advice should be
obtained in respect of the requirements of applicable stock
exchange rules.
The following discussion assumes that the bid is
recommended.
Scheme
As noted at question 1.1, schemes of arrangement have been the
most common structure for public-to-private transactions in recent
years, so we consider these first.
Once the bidder has completed its due diligence, it will
formally announce the bid. Within 28 days, the target must send the
formal scheme circular. The shareholders’ meetings will be held
at least three weeks after the scheme circular is posted, and the
Isle of Man High Court of Justice hearing to sanction the scheme
can be held as soon as two business days after the
shareholders’ meetings. The scheme becomes effective upon the
court order and various ancillary documents being filed at the Isle
of Man Companies Registry, which typically takes place within one
or two business days after the sanction hearing.
The consideration must be paid to the shareholders of the target
within 14 days after the scheme becomes effective (unless that
period is extended with the consent of the Takeover Panel).
Contractual offer
Once the bidder has completed its due diligence, it will
formally announce its bid, including a high-level description of
the terms. The bidder must send the offer document within 28 days
after the announcement, provided that the offer document can only
be sent within the first 14 days with the consent of the
target’s board. The earliest first closing date for acceptances
is three weeks after the offer document is posted, and the offer
must be declared unconditional as to acceptances before midnight on
the day falling 60 days after the offer document is posted (unless
that period is extended with the consent of the Takeover
Panel).
The consideration must be paid to the shareholders of the target
within 14 days after the offer becomes unconditional in all
respects (unless that period is extended with the consent of the
Takeover Panel).
6.2 CAN A BUYER BUILD UP A STAKE IN THE TARGET BEFORE
AND/OR DURING THE TRANSACTION PROCESS? WHAT DISCLOSURE OBLIGATIONS
APPLY IN THIS REGARD?
Subject to anything to the contrary in the Isle of Man
target’s constitutional documents, there is generally no
restriction on stake-building under Isle of Man law, although care
must be taken to ensure that any dealings do not constitute an
offence under Isle of Man insider dealing legislation.
Separately, the Takeover Code restricts dealings in the
target’s shares by:
- any person (other than the bidder) that has confidential
price-sensitive information about the bid or contemplated bid after
there is reason to suppose that a bid is contemplated and before
the bid being announced; and - the bidder and its concert parties during the offer
period.
There are no specific requirements in the Isle of Man for public
disclosure during the transaction process, but the Takeover Code
requires the bidder to make a public disclosure after the
announcement that first identifies it as a bidder and during the
offer period if it deals in any shares of the target.
Isle of Man counsel should work closely with UK counsel in
respect of the above matters, and UK counsel should also be
consulted about whether purchases before or during the offer period
could constitute offences under UK insider dealing or market abuse
legislation.
6.3 ARE THERE PROVISIONS FOR THE SQUEEZE-OUT OF ANY
REMAINING MINORITY SHAREHOLDERS (AND THE ABILITY FOR MINORITY
SHAREHOLDERS TO ‘SELL OUT’)? WHAT KIND OF MINORITY
SHAREHOLDERS RIGHTS ARE TYPICAL IN ISLE OF MAN?
Yes. Both the 1931 act and the 2006 act permit the compulsory
acquisition of shares from minority shareholders if the bid is
approved within a specified period by at least 90% in value of the
shares affected. The relevant provisions do not expressly exclude
any shares owned by the bidder or its affiliates from being taken
into account when determining whether this threshold is met.
The precise rights of minority shareholders in an Isle of Man
company will depend on whether it is incorporated under the 1931
act or the 2006 act, and what protections (if any) are included in
its articles.
As a general protection, a shareholder in an Isle of Man company
may apply to court for an appropriate order if:
- in the case of a 1931 act company, the affairs of the company
are being conducted or the powers of the directors are being
exercised in a manner that is oppressive to, or that disregards the
proper interests of, that shareholder or some part of the
shareholders (including that shareholder); or - in the case of a 2006 act company, the affairs of the company
have been, are being or are likely to be conducted in a manner that
is, or any act or acts of the company have been or are likely to
be, oppressive or unfairly prejudicial to that shareholder in its
capacity as such.
6.4 HOW DOES A BIDDER DEMONSTRATE THAT IT HAS COMMITTED
FINANCING FOR THE TRANSACTION?
The Takeover Code requires the bidder’s financial adviser to
confirm that the bidder has access to sufficient cash resources to
satisfy full acceptance of the bid.
Before giving such a confirmation, the bidder’s financial
adviser will conduct due diligence together with its own legal
advisers to ensure that, whatever the source of financing, the
bidder has sufficient funds committed to it to enable it to satisfy
the consideration under the bid. Where relevant, this will include
a review of any commitment letters from, or other agreements with,
the providers of any debt or equity financing to the bidder, which
must be legally binding with strictly limited conditions.
The extent of this due diligence exercise will depend on the
value of the transaction, the bidder’s financial position and
the financial adviser’s familiarity with the bidder.
The bidder will also be required to give various confirmations
to its financial adviser regarding any existing or new debt
facilities that it will use to finance the bid.
6.5 WHAT THRESHOLD/LEVEL OF ACCEPTANCES IS REQUIRED TO
DELIST A COMPANY?
Assuming that the bidder, or a controlling shareholder that is a
bidder, is interested in 50% or less of the voting rights in the
target before announcing the bid, the bidder must acquire or agree
to acquire, by virtue of its shareholdings and acceptances of the
bid, shares carrying at least 75% of the voting rights of the
target in order to cancel the listing.
6.6 IS ‘BUMPITRAGE’ A COMMON FEATURE IN PUBLIC
TAKEOVERS IN ISLE OF MAN?
Although the threat of so-called ‘bumpitrage’ (where an
activist shareholder buys a stake in the target following the
announcement of a bid with a view to forcing the bidder to improve
the terms of its offer) is perceived to be on the rise in Europe
generally, there have been no major instances of bumpitrage in the
context of an Isle of Man public M&A transaction to date.
That said, however, Isle of Man targets are as susceptible to
shareholder activism as companies in other jurisdictions. As noted
at question 1.1, schemes of arrangement have been the most common
structure for public-to-private transactions in recent years. The
procedure to implement an Isle of Man scheme of arrangement is
broadly the same as that for UK companies, so the tactics that
bumpitraging activists have developed in the context of UK takeover
schemes could easily be replicated for takeover schemes involving
Isle of Man companies. For this reason, on recent takeover schemes
involving Isle of Man companies, the parties have carefully
monitored movements in the shareholder base during the offer period
with a view to detecting potential activists as soon as
possible.
6.7 IS THERE ANY MINIMUM LEVEL OF CONSIDERATION THAT A
BUYER MUST PAY ON A TAKEOVER BID (EG, BY REFERENCE TO SHARES
ACQUIRED IN THE MARKET OR TO A VOLUME-WEIGHTED AVERAGE OVER A
PERIOD OF TIME)?
If the bidder acquires interests in shares within three months
before the offer period, or between the start of the offer period
and the announcement of the bid, the offer price must be at least
as high as the highest price paid for any such purchase.
In addition, if the bidder acquires an interest in shares at
above the offer price during the offer period, it must increase its
offer price to at least the highest price paid for any such
purchase.
6.8 IN PUBLIC TAKEOVERS, TO WHAT EXTENT ARE BIDDERS
PERMITTED TO INVOKE MAC CONDITIONS (WHETHER TARGET OR
MARKET-RELATED)?
The Takeover Code generally prevents bidders from invoking any
conditions unless the circumstances are of material significance to
the bidder in the context of the bid. After a bid has been
announced, bidders must use all reasonable efforts to ensure that
any conditions are satisfied.
Although MAC conditions are frequently included in announcements
and offer documents relating to public M&A transactions
involving Isle of Man targets, the reality is that the bar for a
bidder to invoke such a condition is very high. The bidder will
need to demonstrate that circumstances have arisen that are of very
considerable significance, striking at the heart of the purpose of
the transaction.
The Takeover Panel has clarified that, although this is a high
standard, the test does not require the bidder to demonstrate
frustration in the legal sense.
6.9 ARE SHAREHOLDER IRREVOCABLE UNDERTAKINGS (TO ACCEPT
THE TAKEOVER OFFER) CUSTOMARY IN ISLE OF MAN?
Yes, bidders may, and frequently do, seek irrevocable
undertakings from key shareholders and directors who are also
shareholders to accept the bid or, in the case of a scheme of
arrangement, to vote in favour of the relevant resolutions.
HOSTILE BIDS
7.1 ARE HOSTILE BIDS PERMITTED IN ISLE OF MAN IN PUBLIC
M&A TRANSACTIONS? IF SO, HOW ARE THEY TYPICALLY
IMPLEMENTED?
Yes, hostile bids are permitted.
A hostile bid will most likely be implemented using a
contractual offer, since contractual offers are proposed directly
by the bidder to the shareholders of the target. Schemes of
arrangement, on the other hand, are proposed to the shareholders by
the target itself. Because schemes of arrangement require the
cooperation of the target’s board, no hostile takeover of an
Isle of Man company has yet been implemented by way of a scheme of
arrangement.
7.2 MUST HOSTILE BIDS BE PUBLICISED?
The provisions of the Takeover Code that dictate the
circumstances in which an announcement is required do not
distinguish between recommended and hostile situations. Before
formally announcing a bid, the bidder must notify the target’s
board, and an announcement is required when the board is so
notified as to whether the board recommends the bid.
For this reason, when a bidder is contemplating a hostile bid,
it will often notify the board only moments before the announcement
is released, to give the target as little time as possible to
prepare a defence (see question 7.3).
7.3 WHAT DEFENCES ARE AVAILABLE TO A TARGET BOARD
AGAINST A HOSTILE BID?
Listed Isle of Man companies can take several steps even before
learning of a hostile bid to put them in the best position to
respond (especially in view of the short notice that will often be
given – see question 7.2).
First, they should maintain an up-to-date defence strategy. This
is especially important if the board believes that the company is
undervalued. A company should also monitor changes in its
shareholder base and ensure that any suspicious movements are
notified to the board immediately.
Second, a company might identify a potential ‘white
knight’ (ie, a friendly bidder that might be prepared to offer
a fair value in the event of a hostile bid).
Practically speaking, a company might have a spokesperson
appointed and key advisers on standby, as well as ensuring that it
can establish an internet microsite quickly if needed to publish
documents/announcements in connection with a possible hostile
bid.
The use of US-style ‘poison pills’ (also known as a
shareholder rights plan) by London-listed Isle of Man companies is
rare. This is partly a reflection of the Takeover Code restrictions
on frustrating action. But even if a bid is not imminent, so the
restrictions on frustrating action do not apply, the adoption of a
poison pill will usually require shareholder approval; and since UK
institutional investors have historically opposed anti-takeover
defences, it will be difficult to obtain such approval.
Undervalued companies may consider repurchasing shares as a
defensive measure designed to:
- concentrate the shareholder base;
- increase the price of the shares; and
- ultimately, make the company less attractive to an
opportunistic hostile bidder.
M&A TRENDS AND PREDICTIONS
8.1 HOW WOULD YOU DESCRIBE THE CURRENT M&A LANDSCAPE
AND PREVAILING TRENDS IN ISLE OF MAN? WHAT SIGNIFICANT DEALS TOOK
PLACE IN THE LAST 12 MONTHS?
The Isle of Man life insurance sector has continued to see a lot
of M&A activity in the last 12 months. We have also seen
significant interest in growth-stage technology businesses,
property holding companies, and non-life insurance businesses based
on the Isle of Man.
As in other jurisdictions, deal activity in the Isle of Man has
softened as a result of the uncertainty caused by global
macroeconomic factors. In particular, high interest rates have led
to a number of deals falling over due to an inability to bridge the
valuation gap between buyer and seller. That said, lucrative
opportunities still abound for investors with strong balance sheets
and the appetite to make investments during a period of
uncertainty.
Significant deals included:
- the sale by Zurich International Life Limited (Isle of Man
incorporated an authorised insurer) of its closed book of long-term
life insurance business to Monument International Life Insurance
Company Limited, part of the Monument Re Group; - the court-sanctioned scheme of transfer by Utmost Limited
(‘Utmost’) of its entire book of long-term insurance
business to Utmost International Isle of Man Limited (‘Utmost
International’) as part of the ongoing integration programme
pursuant to Utmost’s acquisition of Utmost International from
Quilter Plc in 2021; - the c. £1.2 billion business combination between Alvarium
Investments, Tiedemann Group and SPAC Cartesian Growth Corporation
(now trading on the NASDAQ as Alvarium Tiedemann Holdings,
Inc.); - the c. £1 billion acquisition by KKR of a 25% interest in
Northumbrian Water Group (one of the largest water supply and
sewerage utilities in the UK with an Isle of Man captive
insurer); - the c. £1 billion business combination between Lifezone
Metals Limited (a leading developer of cleaner metals for electric
vehicle batteries) and New York Stock Exchange (NYSE) listed
GoGreen Investments Corporation, in the first ever listing of an
Isle of Man company on the NYSE through a deSPAC business
combination; - the court-sanctioned scheme of transfer by Nordben Life and
Pension Insurance Co. Limited (a Guernsey insurer) of its entire
book of long-term insurance business to Monument International Life
Assurance Company Limited; - the c. £190 million recommended consortium offer by
Thunderball Investments Limited for London Stock Exchange listed
Lamprell Plc; and - the acquisition by international private equity firm Cinven of
a majority interest in International Financial Group Limited, the
owner of the RL360, Friends Provident International and Ardan
brands.
8.2 ARE ANY NEW DEVELOPMENTS ANTICIPATED IN THE NEXT 12
MONTHS, INCLUDING ANY PROPOSED LEGISLATIVE REFORMS? IN PARTICULAR,
ARE YOU ANTICIPATING GREATER LEVELS OF FOREIGN DIRECT INVESTMENT
SCRUTINY?
Sanctions regulations in the Isle of Man, which were published
in response to the geopolitical unrest in Eastern Europe and mirror
those published in the United Kingdom, are likely to remain in
force during the next 12 months. As a consequence, we anticipate a
continuation of the trend of enhanced due diligence and more
comprehensive warranties related to contracting parties’
compliance with applicable sanctions regulations.
On 1 April 2023, the Isle of Man Financial Services Authority
implemented a new, predominantly industry-funded, fee model under
which the cost of regulation is primarily incurred by certain
entities regulated by the Isle of Man Financial Services Authority
(‘Regulated Entities’). This development will affect those
looking to establish or acquire Regulated Entities. The new model
introduces, among other things, transaction fees payable in
relation to a change of control of a Regulated Entity.
The Competition Act 2021 received royal assent on 18 October
2021 and was announced in Tynwald (the Parliament of the Isle of
Man) the following day. The act will introduce a merger control
regime into Isle of Man law for the first time, and there will be a
public consultation regarding the applicable notification
thresholds before the relevant provisions become effective. Based
on statements that were made during the passage of the legislation,
we expect the notification threshold to be set at £20 million
of locally derived revenue for both the buyer and the target. At
the time of writing, the operative provisions of the act have not
come into effect.
M&A TIPS AND TRAPS
The best piece of advice that we can give is to engage with
experienced Isle of Man lawyers (who are often instructed in
conjunction with international counsel) as early as possible in the
process. Similarly, if a transaction is tax driven, the contracting
parties should facilitate engagement between tax advisers and Isle
of Man lawyers as early as possible as to ensure that any tax
requirements are reflected in the transaction documents.
Many Isle of Man companies will have a local registered agent,
which will be a regulated entity subject to comprehensive
anti-money laundering rules. The registered agent will usually be
responsible for maintaining the target’s register of members
and will need to complete its own know-your-customer (KYC) checks
on any new major shareholder before it will update the register. So
it always advisable for a buyer to ask to be introduced to the
target’s registered agent as soon as possible in the sale
process to ensure that it satisfies the registered agent’s KYC
requirements before completion.
Originally provided for Mondaq’s Comparative
Guide to Mergers & Acquisitions, 2023.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
