Due diligence, information and disclosure in M&A transactions in Guernsey

Carey Olsen - Tony Lane

Country snapshot

Trends and climate
What is the current state of the M&A market in your jurisdiction?

The M&A market is currently extremely active and is generally a seller's market, with a number of buyers looking to undertake transactions.

Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?

As Guernsey is a sophisticated international financial centre, its M&A market (which includes both international cross-border and domestic transactions) is exposed to the same economic and political factors as affect the level and type of M&A in larger onshore jurisdictions.

In general, private equity funds and buy-out firms have excess uninvested capital and this has driven a significant amount of local M&A activity – in particular, in the fund and trust administration sector. 

Are any sectors experiencing significant M&A activity?

The financial services industry represents a significant proportion of the local economy and has also been the subject of buy-outs and consolidations. Law firms have disposed of their administration businesses, while banks have either disposed of, wound down or are in the process of disposing of their fiduciary and corporate services arms. This trend has partly been driven by private equity interest in the sector, but also by commercial factors such as the increase in regulation and an increasing need to offer wider geographic capability to clients.  

Are there any proposals for legal reform in your jurisdiction?

The local merger control regime is expected to be revised following a consultation which is currently ongoing. Further, any amendments to the UK City Code on Takeovers and Mergers will apply in Guernsey.

Legal framework

Legislation
What legislation governs M&A in your jurisdiction?

Part VIII (Arrangements and Reconstructions) and Part XVIII (Takeovers) of the Companies (Guernsey) Law 2008 govern M&A in general.

Regulatory consents
A person seeking to acquire 15% or more of a company licensed by the Guernsey Financial Services Commission (GFSC) must obtain prior confirmation that the GFSC does not object to that acquisition under:

• the Protection of Investors (Bailiwick of Guernsey) Law 1987;
• the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law 2000;
• the Banking Supervision (Bailiwick of Guernsey) Law 1994;
• the Insurance Business (Bailiwick of Guernsey) 2002; and
• the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002.

Merger control
The Competition (Guernsey) Ordinance 2012 and related regulations impose a compulsory notification regime for acquisitions if certain thresholds for turnover arising in Guernsey or the Channel Islands are met.

UK City Code on Takeovers and Mergers
The UK City Code on Takeovers and Mergers applies in relation to certain Guernsey listed (or formerly listed) companies, pursuant to Part XVIIIA of the Companies (Guernsey) Law 2008. The code is implemented by the UK Takeover Panel and regulates takeovers and mergers of Guernsey companies that fall within its ambit. This includes Guernsey companies which have shares listed on a regulated market or multilateral trading facility in the United Kingdom or on the Channel Islands Securities Exchange.  

Regulation
How is the M&A market regulated?

Part VIII (Arrangements and Reconstructions) and Part XVIII (Takeovers) of the Companies (Guernsey) Law 2008 govern M&A in general.

Regulatory consents
A person seeking to acquire 15% or more of a company licensed by the Guernsey Financial Services Commission (GFSC) must obtain prior confirmation that the GFSC does not object to that acquisition under:

• the Protection of Investors (Bailiwick of Guernsey) Law 1987;
• the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law 2000;
• the Banking Supervision (Bailiwick of Guernsey) Law 1994;
• the Insurance Business (Bailiwick of Guernsey) 2002; and
• the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002.

Merger control
The Competition (Guernsey) Ordinance 2012 and related regulations impose a compulsory notification regime for acquisitions if certain thresholds for turnover arising in Guernsey or the Channel Islands are met.

UK City Code on Takeovers and Mergers
The UK City Code on Takeovers and Mergers applies in relation to certain Guernsey listed (or formerly listed) companies, pursuant to Part XVIIIA of the Companies (Guernsey) Law, 2008. The code is implemented by the UK Takeover Panel regulates takeovers and mergers of Guernsey companies that fall within its ambit. This includes Guernsey companies which have shares listed on a regulated market or multilateral trading facility in the United Kingdom or on the Channel Islands Securities Exchange. This includes being listed on the main board of the London Stock Exchange and on the AIM market.

A Guernsey company which has shares listed on other exchanges (eg, the New York Stock Exchange and NASDAQ) or which was listed on a regulated market or multilateral trading facility in the United Kingdom or the Channel Islands Securities Exchange within the past 10 years may also be subject to the code if the panel considers that the company's management and control is in the United Kingdom, Jersey, Guernsey or the Isle of Man.

Are there specific rules for particular sectors?

Regulatory consent is required for the acquisition of a controlling stake (15% or more) in a licensed financial services company. 

The merger control regime currently distinguishes between ‘financial institutions’, ‘credit institutions’, ‘insurance undertakings’ and other types of business, with different regulations applying for the purposes of calculating turnover and therefore determining whether a transaction is notifiable.

Types of acquisition
What are the different ways to acquire a company in your jurisdiction?

Private treaty
Acquisitions of unlisted companies are typically achieved by a transfer of shares pursuant to a negotiated share purchase agreement between the buyer and the selling shareholders.

Takeover offer
This is typically used in relation to listed companies and involves the bidder making an offer to the target's shareholders to acquire their shares in the target. If the bidder acquires at least 90% of the shares to which the offer relates, it may compulsorily acquire the remaining shares within a limited period on the same terms.

Scheme of arrangement
The target puts a proposal to its shareholders for their approval. This method can take various forms but will involve the bidder acquiring all of the target shares in exchange for the stated consideration. This method must be approved by a majority in number representing 75% in value of shareholders voting at the meeting. Once approved by the shareholders, the arrangement must be sanctioned by the Royal Court of Guernsey.

Amalgamation or statutory merger
Guernsey law also makes provision for the amalgamation of companies and for legal mergers, but these are rarely used for arm's-length M&A acquisitions.

Business transfer
The target’s business and assets (in whole or in part) may be acquired by way of a business purchase agreement between the buyer and the target. The buyer neither acquires the target nor its liabilities (except to the extent that it agrees to do so).

Preparation

Due diligence requirements
What due diligence is necessary for buyers?

Due diligence follows the format typical for other transactions, with legal, commercial and financial due diligence. In regard to legal due diligence, particular attention must be paid to local regulatory issues (if the target is licensed by the Guernsey Financial Services Commission). The buyer must establish details of the target's turnover arising in Guernsey and the Channel Islands in order to determine whether the acquisition is notifiable for competition law purposes.

Information
What information is available to buyers?

Most information must be obtained from the seller or the existing management.

Public records in Guernsey are limited, but include:

• details of the directors;
• the number of shares in issue at the end of the previous calendar year;
• copies of constitutional documents;
• copies of certain shareholder resolutions; and
• details of local litigation.

Public records in Guernsey do not include financial accounts or details of shareholders. The Companies (Guernsey) Law 2008 entitles members of the public to request a copy of the share register from the target, subject to certain conditions.

Additional information will be available in relation to listed companies, whether as a result of announcements or documents available on the company's website.

What information can and cannot be disclosed when dealing with a public company?

Guernsey rules do not restrict the disclosure of information to a potential bidder. However, a potential bidder should ensure that it does not receive price sensitive information before it is willing to be made an insider, as this would prevent it from buying shares in the market. Under the UK City Code on Takeovers and Mergers a target must ensure that information disclosed to one bidder is also provided to any competing bidder if requested.

Stakebuilding
How is stakebuilding regulated?

Insider dealing and market abuse are offences which may be committed by a bidder if it seeks to build a stake in the target while it is possession of price sensitive information. 

The UK City Code on Takeovers and Mergers contains a number of provisions in relation to stakebuilding. These provisions restrict:

• a person from acquiring shares, or recommending another person to do so, while in possession of price sensitive information;
• a bidder from acquiring shares if this would cause it to hold 30% or more of the target; and
• the purchase of shares on terms that are not made available under the general offer.

In relation to disclosure, if the UK code applies the bidder must disclose its own and any concert party's opening positions following the start of an offer period or an announcement which first identifies the bidder as such.

Bidders should be aware that building a stake in advance of a bid will make it more difficult to gain the right to acquire shares from minority shareholders that do not accept a takeover offer, as shares already under the control of the bidder will be ignored when assessing whether the bidder has obtained acceptance in relation to 90% of the shares. In a scheme of arrangement, shares held by the bidder or persons having a common interest with the bidder will be excluded from the vote.

Documentation

Preliminary agreements
What preliminary agreements are commonly drafted?

Typically, the parties will enter into heads of terms to record the non-binding terms of the deal at that stage. The heads of terms may also:

• grant exclusivity to the buyer;
• impose non-disclosure obligations on the buyer in relation to the due diligence information provided; and
• impose non-solicitation obligations in relation to staff, customers and suppliers.

The UK City Code on Takeovers and Mergers restricts a target's ability to enter into pre-deal commitments with a potential bidder which may reduce its ability to deal with or recommend a competing bid.

Principal documentation
What documents are required?

For an acquisition of a non-listed company, the typical documents would be:

• heads of terms or an exclusivity or non-disclosure agreement;
• a share purchase agreement or business purchase agreement;
• a tax covenant (which may be included in the share purchase agreement);
• a disclosure letter;
• stock transfer forms;
• resignation letters for directors; and
• board minutes of the target.

For an acquisition of a listed company by way of a recommended general offer, the typical documents would be:

• an indicative offer letter (to the board of the target);
• the announcement of intention to make an offer;
• the offer document (also containing recommendation from the board of the target);
• irrevocable undertakings; and
• an acceptance form.

For a scheme of arrangement, a scheme document (prepared by the target with some input from the bidder) must be prepared.

Which side normally prepares the first drafts?

For a sale by agreement, the buyer usually prepares the first draft of the acquisition documents, unless there is a competitive auction process, in which case the seller will prepare the first draft so that each bidder can comment. The seller will prepare the disclosure letter.

In a takeover offer, the bidder prepares the offer document.

In a scheme of arrangement, the target prepares the scheme document, with assistance from the bidder.

What are the substantive clauses that comprise an acquisition agreement?

An acquisition agreement comprises the following substantive clauses:

• agreement to sell/buy;
• consideration;
• conditions to completion;
• undertakings before completion;
• mechanics of completion;
• warranties/indemnities;
• limitations of liability;
• post-completion obligations;
• parent company guarantee (in respect of the seller);
• non-compete clause; and
• confidentiality clause.

What provisions are made for deal protection?

For a non-listed target the buyer can negotiate any protection and will usually seek full exclusivity.

In a recommended bid for a listed target, the terms of any agreement between the bidder and the target are heavily restricted by the UK City Code on Takeovers and Mergers. Any such agreement is generally prohibited, except to the extent that it deals with the following points:

• confidentiality undertakings, provided that these do not prevent the target from making announcements required by the UK code;
• a commitment not to solicit employees, customers or suppliers;
• a commitment to provide information or assistance for the purposes of obtaining any official authorisation or regulatory clearance;
• irrevocable commitments and letters of intent (eg, 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);
• any term which imposes obligations only on the bidder or its concert party, other than in the context of a reverse takeover (eg, a reverse break fee or a standstill obligation prohibiting the bidder from making market purchases of shares in the target); and
• any agreement relating to an existing employee incentive arrangement.

Under the UK code, the target's board of directors cannot agree to not solicit or recommend other offers. The UK code also prevents the target from agreeing to pay a break fee to the bidder, except in certain limited circumstances.

Closing documentation
What documents are normally executed at signing and closing?

At signing, the share purchase agreement and disclosure letter are normally executed. Other documents will be initialled as being in agreed form.

At completion, the following are normally executed:

• stock transfer forms;
• board minutes;
• resignation letters;
• appointment letters; and
• any necessary waivers or consents.

Are there formalities for the execution of documents by foreign companies?

Guernsey law does not impose its own formalities. The foreign company would need to execute documents in accordance with its local law.

Are digital signatures binding and enforceable?

In principle yes, but the parties should ensure that it can be demonstrated that the signature was attached under the requisite authority.

Foreign law and ownership

Foreign law
Can agreements provide for a foreign governing law?

Yes.

Foreign ownership
What provisions and/or restrictions are there for foreign ownership?

No provisions or restrictions apply.

Valuation and consideration

Valuation
How are companies valued?

How companies are valued in Guernsey M&A transactions is entirely dependent on the nature of the assets which the company owns or operates. The open market value of a company may be assessed by reference to a combination of any of the following:

• a multiple of profits;
• asset valuation;
• entry valuation;
• discounted cash flow; or
• industry rule of thumb.

Consideration
What types of consideration can be offered?

Generally, consideration is in cash, although the consideration can take any form, including shares in the buyer or loan notes.

If the UK City Code on Takeovers and Mergers applies, the consideration must be in cash for a mandatory offer, or be accompanied by a cash alternative and comply with minimum consideration requirements.

Strategy

General tips
What issues must be considered when preparing a company for sale?

The following preparatory actions will help to minimise issues in a proposed sale transaction:

• engage reputable valuation experts to conduct a valuation;
• consider the target market (ie, strategic or financial buyers);
• review the business structure;
• review statutory book documentation;
• review corporate governance processes;
• complete a thorough vendor due diligence process;
• have appropriate non-disclosure, confidentiality or exclusivity agreements on hand; and
• have a satisfactory form of share purchase agreement on hand.

What tips would you give when negotiating a deal?

Skilful negotiation can make all the difference to a deal, as follows:

• The success of a deal can often depend on keen negotiation skills.
• Preparation is key – research the asset, its structure and value, and know your counterparts.
• Price should not be discussed in isolation.
• Multi-issue negotiations can add value to a deal.
• Expert involvement in multi-issue negotiations is vital.
• Always have a best alternative to a negotiated agreement.

Hostile takeovers
Are hostile takeovers permitted and what are the possible strategies for the target?

Guernsey law has no rules preventing hostile takeovers. The board of the target must ensure that any action taken in response to a hostile takeover is in the best interests of the target, and not solely in the interests of themselves or particular shareholders.

When faced with a hostile bid, the target may be able to defend its position by various methods, including the white knight defence. There is generally no legal objection to a target's board seeking a third party to make an alternative offer for the target.

The UK City Code on Takeovers and Mergers (if applicable) prevents the target from taking frustrating action when defending itself, without the approval of the shareholders at a general meeting, including:

• issuing shares or granting options;
• selling treasury shares;
• selling or acquiring assets of a material amount;
• entering into contracts other than in the ordinary course of business; and
• creating structural defences (eg, poison pills) to render the target unattractive.

In addition to the UK code's provisions, the following must be considered:

Directors' duties – directors' fiduciary duties in Guernsey law are based on common law principles and have not been codified in statute. Directors must act in the best interests of the company at all times.
Market abuse – the offence of market abuse may be committed if the board:

• acts on information that is not generally available to the market and which may affect the price of the target's shares;
• behaves in a manner likely to create a false impression of the supply or demand for, or the price or value of, the target's shares;
• behaves in a manner generally regarded as distorting or likely to distort the market in the company's shares.

Insider dealing – if the directors are in the possession of price-sensitive information and seek to block a bid by acquiring shares or encouraging others to do so, the Company Securities (Insider Dealing) (Bailiwick of Guernsey) Law 1996 will be relevant. A director in breach of these obligations will commit the offence of insider dealing.
Investment fund restrictions – since most listed companies in Guernsey are regulated investment funds, the constraints arising from regulatory rules or the fund's own investor documents must also be considered.

Warranties and indemnities

Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?

Warranties and indemnities may typically cover:

• the share capital of target and group structure;
• the capacity of the seller;
• the financial accounts and record;
• changes since the accounting date;
• warranties relating to assets (eg, unencumbered title, condition and adequacy for the target's business);
• IP rights;
• employees;
• pensions;
• material contracts;
• insurance;
• litigation, disputes and investigations;
• environmental and health and safety issues;
• compliance with laws;
• anti-money laundering, know your client and anti-bribery compliance;
• insolvency; and
• change of control provisions.

Limitations and remedies
Are there limitations on warranties?

Limitations on warranties are a matter of commercial negotiation.

Warranties are usually qualified by way of specific matters set out in the disclosure letter, but these do not generally restrict negotiation of the following limitations on warranties:

• time periods by which a claim can be made;
• cap on liability;
• de minimis levels before claims can be made (individual and aggregate);
• provisions relating to how to conduct a dispute that may arise relating to a breach of warranty and a third-party claim; and
• a general obligation to mitigate loss suffered.

Other restrictions on warranties include:

• qualifying warranties within the knowledge of certain individuals;
• preventing double recovery;
• requiring the buyer to exhaust all rights against insurers and other relevant third parties;
• excluding seller liability for contingent claims (until they become actual); and
• limiting a buyer's right to recovery by way of a buyer's knowledge.

What are the remedies for a breach of warranty?

A breach of warranty is a breach of contract, giving the buyer a claim for damages. The parties may also agree that warranties are to be given on an indemnity basis, which affects the assessment and recoverability of damages. Warranties can be (but are not usually) given as representations, so that a breach gives rise to a claim in tort, which in turn gives rise to damages assessed on a tortious basis or, potentially, rescission.

Are there time limits or restrictions for bringing claims under warranties?

Limitation periods for the bringing of warranty claims are generally negotiated and will vary depending on whether the warranties relate to tax or other matters. The common law limitation period for breach of contract is six years from the date of breach.

Tax and fees

Considerations and rates
What are the tax considerations (including any applicable rates)?

Guernsey imposes no tax on capital gains, nor any transfer duties.

Fees
What fees are likely to be involved?

Fees will be payable to legal advisers, accountants and corporate finance advisers or brokers (if appointed).

Management and directors

Management buy-outs
What are the rules on management buy-outs?

No specific rules apply.

Directors’ duties
What duties do directors have in relation to M&A?

Directors of the target must continue to comply with their fiduciary duties to the company, including their duty to act in the best interests of the company. Directors must pay particular attention to these duties if there is more than one potential bidder or if the directors are involved with the purchaser (eg, with a management buyout).

While the decisions of English (and other) courts are not binding on the Guernsey courts – and are only of persuasive effect – it is suggested that the position of directors of Guernsey companies in receipt of a bid are in line with those of the directors of English companies in a similar situation. In this regard, the English Court of Appeal decision in Arbuthnott v Bonnyman ([2015] ALL ER (D) 218) is helpful. This decision reaffirms the commonly accepted view that directors of an English company in receipt of a bid are generally not subject to Revlon-type duties of the kind recognised by Delaware courts to take active steps to maximise value for shareholders. In other words, the primary role of the target directors is therefore not to frustrate a good-faith offer so that the offer (and any relevant competing offer) can be put to the shareholders.

Employees

Consultation and transfer
How are employees involved in the process?

There is no obligation to consult with employees, but the UK City Code on Takeovers and Mergers requires certain documents to be made available to an appropriate employee representative, including the offer announcement and offer document.

If no employee representative exists, the documents should be made available to employees. The details of the documents can be communicated to employees through the company’s usual means (eg, posting the information on the company's website). In addition, the UK code requires the offer document to contain information on the impact that the offer will have on employees.

What rules govern the transfer of employees to a buyer?

No specific rules apply – for example, there are no provisions similar to UK Transfer of Undertakings (Protection of Employment) Regulations 2006.

Pensions
What are the rules in relation to company pension rights in the event of an acquisition?

Guernsey has no rules in relation to the transfer of company pension rights in the event of an acquisition. Guernsey has no applicable legislation in this area and the position will depend on the terms of the pension scheme and the structure of the transaction.

Other relevant considerations

Competition
What legislation governs competition issues relating to M&A?

The competition law framework derives from the Competition (Guernsey) Ordinance 2012.

The specific regulations affecting M&A transactions are:

• the Competition (Prescribed Mergers and Acquisitions) (Guernsey) Regulations 2012; and
• the Competition (Calculation of Turnover) (Guernsey) Regulations 2012.

Anti-bribery
Are any anti-bribery provisions in force?

The Prevention of Corruption (Bailiwick of Guernsey) Law 2003 applies.

In addition, the UK Bribery Act 2010 has extraterritorial effect and may apply to certain persons or companies in Guernsey. 

Receivership/bankruptcy
What happens if the company being bought is in receivership or bankrupt?

Guernsey law has no receivership process, but insolvent companies may be placed into administration or liquidation. The shares of a company in liquidation may be transferred only with the consent of the liquidator. A company in administration may be sold. 

The assets of a Guernsey company which has been declared en désastre (a form of enforcement in the event of insolvency) vest in the sheriff (the Guernsey court-appointed insolvency official). Specific advice should be taken concerning individual situations in which such a company is the subject of an M&A transaction in Guernsey. 

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