Financing a Cayman Islands merger take-private

By Peter Vas, Loeb Smith Attorneys

12 May 2021

903

A privatisation by way of a Cayman Islands statutory merger is effected by merging two constituent companies – namely, a newly incorporated Cayman Islands company (merger sub) and the relevant listed Cayman Islands company (target). Upon the merger becoming effective (the effective time), merger sub is struck off the register of companies, the rights and property of the constituent companies vest in target as the surviving company, and subject to any specific arrangements entered into by the relevant parties, target is liable for and subject to all mortgages, charges and security interests, and all other liabilities of the constituent companies.

Cayman peter vas loeb smith — **Peter Vas**
Partner
Loeb Smith Attorneys

Privatisations by way of a Cayman Islands statutory merger are often financed by loans. Unless only bridge financing is required, a term-loan facility is usually put in place and is supported by an extensive security package.

Security package

The security package will ultimately depend on the creditworthiness of the borrower group and other commercial considerations, but as a general rule it will include an equitable share mortgage over the shares of merger sub prior to the effective time (the merger sub share security), an equitable share mortgage over the shares of target from the effective time, security over the assets of merger sub prior to the effective time (the merger sub asset security), and security over the assets of target from the effective time (the target asset security).

It is worth noting that the merger sub share security sometimes contains an automatic discharge provision from the effective time, but certain lenders resist this in case the merger is subsequently unwound. It is also worth noting that many lenders are happy to rely on a debenture that is entered into as part of the merger sub asset security package for the purposes of the target asset security, although the security is typically drafted to make clear that it will attach to target’s assets from the effective time.

The consent of each secured creditor in a constituent company must be obtained, unless a Cayman court dispenses with that consent. It is commonplace for the lenders in a privatisation to include their consent in one of the finance documents to the extent that the security is put in place prior to the effective time.

The register of mortgages and charges of target at the effective time should include details of the security interests granted by merger sub prior to the effective time as target is, subject to any specific arrangements, liable to all such security interests.

Specific conditions precedent

Copies of the following merger specific conditions precedent will typically need to be delivered to the lenders:

(a) The executed merger documents (other than the plan of merger), which usually include the acquisition agreement, the company disclosure schedule and any other document designated as a “merger document”;

(b) The agreed form plan of merger, which is typically subject to any amendments recommended by the registrar of companies of the Cayman Islands (the registrar);

(c) The form of constitutional documents and statutory registers to be issued by the registered office service provider of target at the effective time;

(d) A merger costs certificate, which is usually satisfied by providing a funds flow statement;

(e) A merger conditions certificate with respect to the satisfaction of conditions under the merger agreement and certain solvency conditions;

(f) Corporate authorisations, which include board and shareholder resolutions of the constituent companies and resolutions of target’s special committee (if applicable);

(g) Section 233(9) documents, which include certain declarations and an undertaking from the directors of each constituent company, as well as a certificate of good standing in relation to each constituent company; and

(h) The secured creditor consent.

Specific conditions subsequent

Closing of the merger typically occurs within two business days of the utilisation date. Copies of the following merger specific conditions subsequent will typically need to be delivered to the lenders:

(a) The application letter to register the plan of merger stamped by the registrar;

(b) A certified copy of the plan of merger;

(c) A certificate of merger, which is prima facie evidence that the merger has completed;

(d) A certificate of good standing of target as the surviving company issued after the effective time;

(e) Certified copies of target’s updated constitutional documents and statutory registers; and

(f) Legal opinion with respect to the effectiveness of the merger.

Peter Vas is a partner at Loeb Smith Attorneys in Hong Kong