What due diligence protections should I seek in a Cayman Islands share purchase agreement to protect minority investors?

Hello,

Thank you for reaching out. I understand you are a minority investor in a Cayman Islands company that is being acquired and you have concerns about the protections in the share purchase agreement (SPA). It is wise to be diligent in this situation. Below is some general guidance on the key protections and drafting strategies you should consider to protect your interests.

Key Protections for Minority Investors
For a minority investor, the primary goal is to ensure full disclosure from the buyer, limit your personal liability after the sale, and secure clear remedies if issues arise. The main tools for this within the SPA are the warranties, the disclosure letter, and indemnities.

Seller Warranties: These are factual statements about the company you are selling. Customary warranties include confirmation that the sellers have the authority to enter the deal, they own the shares, and that the company's financial records are accurate. A breach of these warranties can lead to a claim for damages by the buyer.

The Disclosure Letter: This is a document where the sellers can make specific disclosures against the warranties. For example, if a warranty states there is no pending litigation, but there is a small, known claim, you would disclose it in this letter. A proper disclosure prevents the buyer from bringing a warranty claim for that specific issue later on.

Indemnities: These are promises to cover specific, identified risks. Unlike warranties, where the buyer must prove their loss, an indemnity provides a dollar-for-dollar recovery for a known potential liability, such as a specific tax issue or an ongoing legal dispute.

Drafting Strategies for Your Share Purchase Agreement
To protect your position, you should focus on the drafting of the following areas:

Several vs Joint and Several Liability: Push for several liability. This ensures you are only responsible for your pro-rata share of any potential claim, rather than being liable for the entire amount of a claim against all sellers.

Liability Caps and Time Limits: It is common for the SPA to set a cap on the total liability for warranty breaches and a time limit for bringing claims. As a seller, you want to negotiate the lowest possible cap and the shortest possible time frame.

Knowledge and Materiality Qualifiers: You can limit the scope of warranties by adding materiality and knowledge qualifiers. This means a warranty would only be breached if an inaccuracy is significant (material) or if the sellers were aware of it.

Escrow or Holdback: To provide the buyer with security for potential claims, a portion of the purchase price may be held in an escrow account for a set period. You should negotiate for the smallest-possible escrow amount and the shortest-possible duration.

Warranty and Indemnity (W&I) Insurance
A key tool in modern M&A transactions is Warranty and Indemnity (W&I) insurance. This insurance policy is designed to cover financial losses from breaches of warranties and indemnities.

Benefits for the Seller: W&I insurance can provide a clean exit by shifting the risk of warranty claims from you to the insurer. This can significantly reduce or even eliminate the need for a large escrow or holdback, allowing you to receive more of the sale proceeds at closing.

Benefits for the Buyer: The buyer gets the comfort of a reliable source of recovery (the insurance company) if they need to make a claim.

Proposing the use of W&I insurance can be a constructive way to bridge gaps in negotiation over liability caps and warranty scope.

This information provides a general overview of the key considerations. The specifics of your situation will depend on the details of the transaction and the negotiating leverage of the parties.

For a more detailed and personalized consultation on your specific circumstances, I would be happy to assist you further via WhatsApp. We can schedule a text-based consultation for a small fee to discuss your documents and develop a tailored strategy.

Best regards.