The LLC and business combinations
The Bermuda limited liability company, or LLC, was introduced two years ago by the Bermuda Limited Liability Company Act 2016 (LLC Act) and is closely modelled on the equivalent Delaware legislation.
A hybrid entity, the LLC offers many of the benefits associated with a more traditional corporate vehicle with the added flexibility of features offered by partnerships.
Prior to the introduction of the LLC, entities were generally incorporated in Bermuda as companies limited by shares (companies) pursuant to the Bermuda Companies Act 1981, as amended (Companies Act).
Companies differ from the LLC as, while they offer a similar protection in the form of limited liability, they do not have the same level of flexibility afforded to an LLC, which derive from the partnership style aspects of the vehicle.
Instead of becoming “shareholders” and being issued “shares” as they would in the context of a Company, owners of an LLC are given an “LLC interest” and become “members”.
The LLC was introduced with the deliberate intent that it would respect the LLC members’ freedom of contract with greater flexibility to choose how the entity is both structured and governed; this applies from the perspective of the allocation of profits, losses and distributions among its members as well as in respect to voting rights and decision-making. In keeping with this, the LLC Act specifically provides that it “is the intent of this Act to give the maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements”. This flexibility makes the LLC a potentially attractive, yet little considered option to date when structuring mergers or amalgamations under Bermuda law (referred to herein as “business combinations”).
The basic, well-known, premise of business combination under Bermuda law is that two Companies may merge or amalgamate with either one surviving (merger) or both continuing as one (amalgamation). While there are many options for how to structure a business combination, a common structure where the transaction is more of an acquisition than a meeting of equals is known as a three-point merger. Using this structure, the acquiring entity enters into a plan of merger under which it agrees to acquire the target entity by way of merger with a Bermuda subsidiary (often referred to as the merger sub). The merger sub and target entity are merged leaving the surviving company as a subsidiary of the acquiring entity.
Where the target entity is a company limited by shares, much has been written on the fiduciary obligations of the board to act in the best interests of the target, including when agreeing to enter into a transaction, when agreeing to deal protection mechanisms (including break fees) as well as whether they are subsequently obliged to recommend a “superior” proposal.
Care must also be taken not to prefer one shareholder’s interests over another. In contrast, the LLC Act provides that whether, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by an LLC agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the LLC agreement; except that no such provisions shall permit fraud or dishonesty.
Surprise is also often expressed that, even where shares of a company limited by shares are otherwise non-voting, such shares carry the right to approve a merger. This is an absolute requirement and cannot be varied by the company’s byelaws or be way of a contractual arrangement, e.g. a shareholder’s agreement. In contrast, the LLC Act provides that each LLC interest carries the right to vote in respect of a merger unless otherwise provided in the LLC agreement.
Therefore, the LLC offers parties greater flexibility when agreeing to the terms of a merger as described above (or indeed any other business combination) and respects the parties’ intentions that members’ non-voting interests are just that — non-voting.
Of course, an LLC may not be for everyone. We consider that it may be most suited to a business combination involving private entities. The flexible nature of the LLC may make it less appealing to more structured and rigid listed entities that have additional regulatory requirements to meet and maintain, and a number of institutional investors whose interests need to be clearly protected.
• Matthew Ebbs-Brewer, Partner, and Josephine Noddings, Associate, are members of the Corporate Team at Appleby. A copy of this column is available on the firm’s web site at www.applebyglobal.com
• This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer
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