Fortunately, obtaining regulatory approvals need not be an excruciating process in every jurisdiction.
2015 has seen a dramatic increase in M&A activity. The flurry of consolidations of carriers in the health insurance industry and provider groups and hospitals in the healthcare sector stands out even by the standards of what has become one of the most active M&A markets IWN.
Although the reasons for consolidation in the healthcare space are varied, the perennial anthems of cost-cutting, improvements of quality, reduction of expenses and achieving ‘economies of scale’ are likely chief among them. Irrespective of the stated reasons, the end-result of this consolidation is that already massive insurers, led by the big-five U.S. national carriers United Healthcare, Anthem, Aetna, Humana, and Cigna and several of their large regional counterparts, are becoming much bigger.
Though a high degree of financial and operational certainty as to outcome can be achieved through agreed commercial terms, one condition precedent that will always be present in the transaction documents will be a requirement to obtain all regulatory approvals necessary to allow the merger to proceed. Accordingly, for these mergers to proceed to closing, the insurance regulators in each of the jurisdictions where the constituent carriers and their subsidiaries operate will have to give their blessing.
Indeed, regulatory approval will very often be the biggest ‘x-factor’ in a merger or other change-of-control transaction. This is because obtaining final sign-off from the regulators is not guaranteed. In the case of proposed mergers of the larger insurance carriers, antitrust concerns may arise, creating a double layer of regulatory concerns.
Where antitrust provisions are triggered, a preliminary investigation will need to be conducted by the relevant antitrust arbiter before local regulators are even able to consider such a merger. Such investigations can often add several months’ worth of delays to the merger timeline.
Applications for Local Regulatory Approvals
There will usually be statutory guidance on the documentation required to be provided to the regulator in connection with the preliminary application. The provision of such documentation will allow a regulator to consider an application for approval at first-instance. However, regulators are, by nature, often vested with a high degree of discretion to require additional information to be provided or conditions satisfied before ultimately granting approval.
Where a regulator exercises its statutory discretion to require additional documentation to be provided or conditions satisfied, this can often lead to lengthy delays. Unfortunately, even full compliance with such regulatory requests does not guarantee the success of the application.
Impact of Regulatory Non-Approval
Where regulatory approval cannot be obtained in a “secondary” jurisdiction (i.e. a jurisdiction involving a non-essential subsidiary of the target group), it may be possible to restructure the proposed merger or acquisition to carve-out that portion of the target structure. Undoubtedly, such a restructuring of a previously-agreed transaction due to regulatory denials will require amendments to the transaction agreements and, therefore, increase transaction expenses.
However, where it is possible to amend the transaction structure to exclude problematic regulated entities, this may allow the overarching transaction to be salvaged and a successful acquisition of at least the majority of the target structure to proceed.
However, where regulatory consents cannot be obtained in a “primary” jurisdiction (i.e. a jurisdiction where a sizeable portion of profits are generated) this may lead to the entire deal being scuttled. This may trigger the payment of so-called ‘breakup fees’ that are often negotiated in the transaction documents and lead to a significant payout by the suitor to the target.
Importance of Regulatory Considerations
Given the significant impact a denial can have on a transaction, it is never too soon for parties and their advisors to start thinking about regulatory considerations in advance of getting the deal done.
Fortunately, obtaining regulatory approvals need not be an excruciating process in every jurisdiction. The Cayman Islands is the world’s leading domicile for healthcare captives. Some 34% of all captives in the Cayman Islands are established for the purpose of providing hospital and medical malpractice liability insurance, with workers’ compensation insurance represented as the second-largest segment.
With statistics such as these, the headline-making mega-mergers in the health insurance space will invariably involve at least one captive structure licensed and regulated in the Cayman Islands.
Change of Control Applications in the Cayman Islands
The Insurance Law, 2010 of the Cayman Islands (the “Law”) governs the conduct of insurance business in the Cayman Islands and, accordingly, the regulatory requirements for a change of control in an insurance company licensed by the Cayman Islands Monetary Authority (“CIMA”). In terms of change of control provisions, the Law stipulates that CIMA’s approval must be obtained in advance where there is a material change in ownership (a “Change of Control”), i.e. when there is a proposed issuance of shares amounting to more than 10% of the captive’s share capital or a proposed transfer of shares amounting to more than 10% of the captive’s issued share capital. In the case of a proposed transfer of shares, the approval requirement will also be triggered if the shares proposed to be transferred amount to 10% or more of the total voting share capital – even if those shares do not represent 10% of the total issued share capital.
It should also be noted that the Change of Control provisions set out in the Law will apply irrespective of whether the proposed change of control is direct or indirect. For example, in the case of a proposed merger of two large U.S.-based health insurers (each with indirectly-owned Cayman Islands captive subsidiaries), a Change of Control application will be required to be made to CIMA despite the fact that direct legal ownership of the issued shares in the Cayman captives may not change as a result of the merger. Instead, the test for whether CIMA consent must be sought under the Law is whether the proposed transaction will result in a Change of Control in the ultimate beneficial ownership of shares in the Cayman Islands insurer. Applying this test, it is clear that our hypothetical merger in the above example will require CIMA’s approval to be obtained in advance of the proposed Change of Control.
It All Starts with a Structure Chart
The importance of providing CIMA with a detailed structure chart demonstrating the resulting impact of any proposed Change of Control in the group structure cannot be overstated. A good structure chart detailing the ownership interests at each level up the ownership chain is invaluable and will serve as the starting point for the initial consultation with CIMA. This initial consultation serves to inform CIMA as to the general parameters of the proposed transaction and allows them to provide fairly comprehensive guidance at the outset in terms of what documentation (and for which entities) will need to be provided in order to consider the Change of Control application.
Generally, CIMA will be interested in ensuring the fitness and propriety of any new owner(s). This will usually require the provision of financial statements and personal questionnaires for significant shareholders, directors and officers. As with any regulator, CIMA maintains a wide discretion to require additional information to be provided in connection with the Change of Control application. However, in our experience, the initial guidance provided by CIMA will not vary dramatically from the final documentation required to be provided in the absence of unforeseen developments or specific concerns as to the fitness or propriety of the new owners that may arise in the course of CIMA’s due diligence investigations.
The headline-making mega-mergers in the health insurance space will invariably involve at least one captive structure licensed and regulated in the Cayman Islands.
Abbreviated Procedure for Public Companies
In the case of a licensee whose shares (or the shares of its parent) are publicly traded on a recognised exchange, the Law provides for an exemption from the Change of Control provisions. However, it should be noted that this exemption is not automatic; a positive application for exemption must still be made to CIMA in advance of the Change of Control.
An exemption application will generally be short form and will not contain the comprehensive disclosures and diligence required for a full Change of Control application. The information included in an exemption application will usually include at least an overview of the proposed transaction, information on the new owner(s) (including financial statements for the past two years) and disclosure of any material impact the proposed transaction is expected to have on the licensee. The information required to be provided in connection with an exemption application is subject always to CIMA’s overriding discretion to request such other information as it may consider relevant. Accordingly, it is generally advisable to anticipate further queries that may arise from the materials provided and make appropriate disclosures accordingly at the outset.
Regulatory approvals determine the success or failure of an acquisition transaction. Undue delays in obtaining regulatory approvals can be a significant source of wasted transactional costs and stakeholder dissatisfaction. Due to the popularity of the Cayman Islands as a domicile for healthcare captives, subsidiaries licensed in the Cayman Islands will invariably be a part of the structure for any significant healthcare acquisition. When it comes to applying for regulatory consents for Cayman licensed insurers, having the right legal advice increases the likelihood of approvals being granted in a timely fashion, thereby saving significant deal costs (and maybe even the deal itself).