Does Cayman have a minority shareholder oppression remedy?
As in other commonwealth jurisdictions, Cayman Islands law provides for certain remedies to minority shareholders who are oppressed by decisions of the majority who control a company.
In the context of investment funds, the “minority” frequently includes shareholders who are a majority, in terms of their economic interest, but are minorities in the sense that they have no voting power to control decisions of the company.
Prior to March 1, 2009, Cayman Islands courts had few alternatives to assist oppressed minorities beyond the dire remedy of winding up the company, where a minority shareholder could establish that it was “just and equitable” to do so. Following amendments to the Cayman Islands Companies Law effective March 1, 2009, the court was empowered to make orders regarding the future conduct of the company’s affairs, to force a buyout of one’s shares and grant injunctive relief, among others, as alternatives to winding up.
While this is a recent development in Cayman Islands law, such alternative remedies are well established in many commonwealth jurisdictions and are typically referred to as the oppression remedy. Unlike the statutory language of other commonwealth jurisdictions, the Cayman Islands provision (set out below) does not appear to provide for a stand-alone remedy; rather it is integrated within the winding up provisions. Back in April 2009, we commented that this statutory language left some ambiguity and we posed the following two questions:
- i. Would courts use this new remedy to fashion creative solutions to corporate disputes?
- ii. Would the alternatives to winding up only be available where a winding up order could otherwise have been made and/or given that there was now the potential to seek less invasive relief, would courts relax the criteria where less invasive relief was sought?
- Almost five years on, we now consider whether these questions have been answered.
The 1948 English Companies Act permitted the Court to grant relief to a minority shareholder where, “…the affairs of the company are being conducted in a manner oppressive to some part of the members…”, but only if “…otherwise the facts would justify the making of a winding up order…”
What emerged from the early case law was that meeting the requirements for a just and equitable winding up were necessary, but by no means sufficient, criteria to justify the application of the oppression remedy as alternative relief.
Commenting on the effectiveness of the 1948 English Companies Act, Companies Law and Practice, S.W. Magnus, Butterworths 1978 stated as follows:
“Orders have so far been made… where the requirements for a successful petition are set out. Although the Courts have been reluctant to make orders under the section except by consent.” at page 234.
The net effect of the above wording and the case law interpreting it led to an anomalous result: a higher threshold was set for the less invasive relief of an oppression remedy than was required for winding up a company completely, since one had to first establish that a winding up was justified.
The ineffectiveness of this provision, requiring it to be established that the company could be wound up in order to obtain the alternative remedy, led to amendments to the English Companies Act in 1980, the language of which was consolidated (with minor amendments) into s. 459(1) of the English Companies Act 1985, which states as follows:
“Any member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
The above amendments effectively divorced the oppression remedy from the winding up remedy. An oppression remedy under the new act simply required conduct that was “unfairly prejudicial.” Providing this standard was met, the Court was given a wide discretion as to the appropriate remedy.
The Cayman Islands provision
The new Cayman Islands oppression remedy is contained in subsection 95(3), the preamble to which in the Companies (Amendment) Bill 2007 (which introduced subsection) described it as follows:
“Subsections (3) to (6) are equivalent to section 459 to 461 of the English Companies Act 1985.”
The wording of subsection 95(3) however did not appear consistent with the statement above.
Subsection 95(3) states as follows:
- “If the petition is presented by members of the company as contributories on the ground that is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding up order, namely –
- (a) an order regulating the conduct of the company’s affairs in the future;
- (b) an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;
- (c) an order authorizing civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or
- (d) an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.”
Unlike the English provisions, subsection 95(3) made no reference to conduct that was ‘unfairly prejudicial’ nor to any conduct that would merit relief as an ‘alternative to winding up’. Unlike the 1948 English Companies Act, this section contains no express provision requiring as a jurisdictional trigger that a petitioner first establish grounds to wind up the company in order to obtain the oppression remedy relief.
Against this background, it initially appeared unclear whether the “alternative to a winding up order” in subsection 95(3) of the Companies Law was only available to a petitioner who had otherwise met the criteria to obtain a winding up order.
Recent cases restricting the oppression remedy
In respect of the first question that we posed back in April 2009, very little case law has emerged where the courts have used subsection 95(3). One exception was the case of Wyser-Pratte Eurovalue Fund Limited [2010 (2) CILR 194]. In that case, the petitioner, a shareholder, sought to wind up the company on the just and equitable basis of loss of substratum.
This followed the Belmont Asset Based Lending Ltd. line of cases holding that,
“…it can be said that it is just and equitable to make a winding-up order in respect of an open-ended corporate mutual fund if the circumstances are such that it has become impractical, if not actually impossible, to carry on its investment business in accordance with the reasonable expectations of its participating shareholders, based upon representations contained in its offering document. If such a company, organized as an open-ended mutual fund, has ceased to be viable for whatever reason, the court will draw the inference that it is just and equitable for a winding-up order to be made.”
The petitioner also submitted that the wind-down plan being carried out by management was not a suitable alternative to a liquidation, that it could do nothing to change the plan as the petitioner held only 0.5 percent of the shares, and that it could not call an EGM and had no access to the register of shareholders.
The court accepted the petitioner’s arguments and held that a case had been made out for relief on the just and equitable basis. However, it made no immediate winding up order, adjourning the petition until after the projected wind-down end date as it said the petition had been “overtaken by events.”
These events were that the projected end date of the wind-down had been moved forward and the investment manager had agreed to waive its fee, which the Court said would likely accelerate the investment manager’s wind-down plan and make a compulsory winding up of little useful purpose.
The court then went on to make orders pursuant to subsection 95(3) as an alternative to the winding up to address unsatisfactory aspects of the wind-down plan, including an order that unaudited financial statements and NAV calculations be prepared and distributed to shareholders monthly and that two weeks before the day the next NAV calculation was due, the company make a distribution, by way of compulsory redemption of shares, of all available cash held by the company.
The court was doubtless persuaded by the fact that the vast majority of shareholders with an economic interest favored the investment manager’s wind-down plan over a liquidation.
Few, if any, other reported cases appear to have resorted to subsection 95(3). It was considered, but rejected as inappropriate in Re. Freerider [2010 (1) CILR 486] upheld by the Court of Appeal [2011 (2) CILR 103].
Does it need to be shown that the company could be wound up in order to obtain alternative relief?
The Court of Appeal decision in Camulos Partners Offshore Limited v Kathrein & Co [2010(1) CILR 303] took a restrictive construction of subsection 95(3), in what was arguably obiter. It stated as follows:
“In my view, for reasons which I have explained earlier in this judgment, the judge was wrong to hold (at para. 49) that the note to the Law Reform Commission’s draft bill – or in the introductory memorandum to the Companies (Amendment) Bill 2007 itself – could lead to the conclusion that “the legislative intention was to broaden the scope of the ‘just and equitable’ remedy to include considerations of unfairness found in s.459…of the UK Companies Act 1985 as amended.” The effect of the provisions now in s.95(3) of the Companies Law (2009 Revision) – and introduced by the 2007 Amendment Law – is not open to doubt. Those provisions provide new remedies as an alternative to winding up in a case where, in the words of s.92(e) of the 2009 Revisions, “the Court is of opinion that it is just and equitable that the company should be wound up.”
Effectively the court took the view that the “alternative to a winding up order” in s.95(3) implies that the alternative is only available if a winding up order could have been made. It suggests that the sole trigger for the “alternative” relief was to be found in s.92(e) (the just and equitable winding up section) rather than the presentation of the petition (as s.95(3) states). Arguably, it could mean the opposite – an alternative should be ordered because the alternative, and not the winding up, is just and equitable, which is precisely why the alternative should be ordered.
This restrictive interpretation was resoundingly affirmed by the Court of Appeal in ABC Company (SPC) v J & Company Limited [2012 (1) CILR 300]. The appellant was a Cayman Islands segregated portfolio company incorporated as an open-ended mutual fund. The petitioner was a shareholder whose investment was attributable to the assets contained in one of the segregated portfolios, the “German Fund.”
In accordance with the company’s articles of association and offering document, the company had suspended the calculation of NAV and consequently subscriptions and redemptions of shares in respect of the German Fund portfolio and 18 others. Following an announcement that the assets of the German Fund would be liquidated and paid out pro rata as liquidity allowed over the ensuing three years, the shareholder petitioned to wind up the company on the just and equitable ground because of the alleged loss of the company’s substratum.
The unusual aspect of this case was that only one portfolio of a segregated portfolio company had arguably ceased carrying on business. If that portfolio (the German Fund) were a separate company, it could be susceptible to a just and equitable winding up on the grounds that its substratum was lost. However, it was not a case where the entire company had ceased carrying on its business, but merely one part of it (the German Fund).
The company applied to strike the petition on the grounds that the petition had no reasonable prospect of success and/or was an abuse of process. Justice Jones considered whether the petition had any prospect of success as follows:
“In the absence of any authority directly in point, it seems to me that it is open to the court to conclude that it would be just and equitable to make a winding-up order on the basis that some, but not all, of the portfolios of an SPC have ceased to operate as viable entities in accordance with the reasonable expectations of the shareholders, that is to say the holders of the segregated portfolio shares in question. The holders of the shares issued in respect of the other portfolios will have no interest in what happens to the German Fund, except to make the point that its liquidation should be conducted in a way which has no adverse impact upon the business of their portfolios. This argument naturally leads to consideration of an alternative remedy under s.95(3). It seems to me that the provisions of paras. (a), (b) and (d), taken together, are broad enough to enable the court to achieve a result which is equivalent to making a winding-up order in respect of the portfolio in question. For example, the court could order the company to appoint a qualified insolvency practitioner having authority to wind up the German Fund in consultation with the relevant shareholders.”
Justice Jones had not concluded that s.95(3) relief was available in these circumstances, merely that the issue was arguable and the petition should not be struck. Put another way, if the relief sought was only to wind up the one portfolio (i.e., s.95(3) the alternative less invasive relief than a winding up order) perhaps the Court should only consider the status of that portfolio in determining whether it was just and equitable to grant the more limited relief. If the petitioner had succeeded on that basis, it would have affirmed that a court need not be persuaded that a full winding up is justified in order to trigger jurisdiction under s.95(3). The consideration of “just and equitable” would be whether it is “just and equitable” to grant the relief actually being ordered, as opposed to whether it was “just and equitable” to wind up the entire company.
This opened the door for the creative use of s.95(3) as an oppression remedy. Winding up the entire company might not have been “just and equitable” but winding up part of it might well have been.
The company appealed this decision and the Court of Appeal considered the issue of jurisdiction under s.95(3) in the following terms:
“In my view it must be accepted that, as the law stands in the Cayman Islands, s.95(3) of the Companies Law does not provide free-standing remedies. As this court pointed out in Camulos Partners Offshore Ltd. v. Kathrein & Co. (3) (2010 (1) CILR 303, at para. 38), the gateway to an order under s.95(3) is that the court is satisfied that, if no alternative remedy were available, it would be “just and equitable” to wind up the company. The judgment in Camulos Partners was delivered on March 18, 2010. The Companies Law (2010 Revision) was enacted on July 6, 2010, some 3½ months later. Since then, there has been a further amendment of the Law: the Companies (Amendment) Law 2011 (Law 16 of 2011) was enacted on April 22, 2011.
The legislature has had two opportunities to enact provisions which do confer the jurisdiction in respect of a free-standing remedy which, prior to the judgments of this court in Camulos Partners and In re Strategic Turnaround Partnership Ltd. (5), may have been thought to exist under s.95(3); but it has not chosen to do so. It must be accepted in this court that, although an order may be made under s.95(3) “as an alternative to a winding-up order,” there is no jurisdiction to make an order under that section in circumstances in which the court would, if the alternative were not available, refuse to make a winding-up order on the just and equitable ground.”
Absent establishing grounds to wind up the company (as a whole), the Court of Appeal held there was no reasonable prospect that jurisdiction could be triggered under s.95(3) to enable the Court to consider alternative relief (such as winding up one segregated portfolio of the company). The Court went on to conclude that the petition should be struck.
It is clear that no relief is available under s.95(3) if the grounds have not otherwise been made out to wind up the company.
The above conclusion does not appear to flow necessarily from the wording of subsection 95(3). That section provides that the Court has jurisdiction to grant alternative relief in response to the presentation of a petition to wind up a company on the just and equitable ground, not upon a conclusion that winding up would be justified, as was the express wording of the 1948 English Companies Act.
If a court concludes that it is just and equitable to wind up a company, why would it then do something else? It must have concluded that it would be more just and more equitable to do that something else. It is difficult to see how it can be just and equitable to wind up a company while simultaneously being not sufficiently just and equitable that it should be done. Clearly, alternative factual considerations and legal tests should apply as to when it is just and equitable to order the alternative relief.
A fundamental aspect of the body of case law considering when a court should grant an order to wind up a company takes into account the gravity of the remedy, and that the proven allegations must be proportionate to the remedy. The court took these matters into account in Re. Fortune Nest Corporation in the following passage of Justice Cresswell:
”I remind myself and expressly take into account the drastic character of the remedy. In doing so I have (without limitation) taken into account the following authorities
Lord Wilberforce said in Cumberland Holdings Ltd v Washington H Soul Pattinson and Co Ltd (1977) 13 ALR 561 at pp 566-7 “…to wind up a successful and prosperous company and one which is properly managed must clearly be an extreme step and must require a strong case to be made”
In Re Walter L Jacob and Co Ltd supra Nicholls LJ agreed, at p 354:
“that to wind up an active company compulsorily is a serious step, and he who asserts that it is just and equitable for the court to take that step must put forward and establish reasons which have a weight justifying the court taking that step.”
The body of case law developed to restrict the circumstances in which a company could be wound up were premised on the extreme nature of the remedy. As equitable considerations of proportionality, it is difficult to justify not easing those restrictions when the relief is less drastic. Proportionality must cut both ways. If the alternative remedy is less drastic, why are the facts required to justify the remedy not less drastic?
The requirement to show that it is “just and equitable” to wind up a company in order to obtain alternate relief also creates a disincentive to petitioners to seek alternate, and creative, relief to address complaints. Oppression cases have held that the relief should go no further than necessary to remedy the oppression; it is said to be “a scalpel rather than a broadsword.” The usual litigation incentives to seek proportionate relief, such as cost consequences, are removed when one must seek and establish grounds for winding up. Since a petitioner must first establish that the company should be wound up, why would they seek lesser, but potentially more appropriate and less invasive, relief?
As a result, a robust oppression remedy in the Cayman Islands might not be out, but it is certainly down – absent further amendments to the Companies Law. The position in Cayman now appears to be the same as that under the oppression remedy in the 1948 English Companies Act, which was found to be ineffective.