The first quarter of 2017 has been a busy one, both for the Cayman Islands Government and for the local judiciary. With the commencement of election year, the Legislative Assembly has a number of bills before it, which, given their importance to the financial services industry, will likely be the subject of lengthy debate in the lead-up to the dissolution of parliament. As the general election is scheduled for May 24, 2017, and the final sitting of the Legislative Assembly was under way at the time of writing, there is limited time to implement change and much progress is expected to be made. Meanwhile, the Grand Court has already released a number of interesting judgments that will provide helpful guidance to the finance industry in respect of disputes arising out of merger and acquisition deals, as well as concerning general matters of civil procedure across the Financial Services Division.
Through late 2016 and well into the New Year, the jurisdiction has seen the introduction of a raft of new legislation designed to modernize local law and, in certain instances, to ensure consistency and compliance with global transparency efforts.
Intellectual property protection
In late December 2016, a new suite of legislation was passed into law pursuant to which the Cayman Islands seeks to modernize its intellectual property protection regime. This new suite of legislation, all of which will likely come into force in the first half of 2017, will operate as follows:
- The Patents and Trade Marks (Amendment) Law 2016 continues to allow the extension of patents registered in the U.K. into the Cayman Islands, as has been the case under the Patents and Trade Marks Law 2011 for many years, but will have “stripped out” of it the provisions that relate to trade marks in order to pave the way for the new Trade Marks Law 2016.
- The Trade Marks Law 2016 makes provision for the direct registration of collective marks and certification marks, and establishes a new standalone trade mark registry in the Cayman Islands. In practice, it will allow a business wishing to protect its trade mark in the Cayman Islands to avoid the expense of first obtaining a U.K. trade mark (as has been the requirement up until now) by providing for a system of local registration.
- The Design Rights Registration Law 2016 will introduce a new law allowing owners of U.K. or EU registered designs and registered community designs the opportunity to extend their registered design rights to the Cayman Islands. Such applications will need to be made to the Registrar of Design Rights via a registered agent in the Cayman Islands and, once registered, the design right will have the same duration and attract the same rights and remedies otherwise available in respect of the design right in the U.K. or EU.
Companies and LLP legislation
Changes to the companies legislation was also pending in the Cayman Islands. As at March 2, 2017, the Legislative Assembly had passed the Companies Amendment No. 2 Bill 2016, the Companies Management Amendment No. 2 Bill 2016, and the Limited Liability Companies Amendment Bill 2016. While their commencement dates had not been announced at the time of writing, these three new pieces of law are expected to be in force by the end of the second quarter of 2017. Together, they will require Cayman Islands companies (other than certain listed or regulated companies) to establish and maintain beneficial ownership registers and for the information on those registers to be made accessible to certain enforcement and tax authorities through a centralized and electronic beneficial ownership platform.
Importantly, the platform will be searchable only by the competent authorities in the Cayman Islands and the information on it will otherwise remain private. The legislation, which has been requested by the U.K. of all British Overseas Territories, aims to bolster financial crime investigations and target corruption. The centralized platform will likely be implemented by June 30, 2017, in accordance with the Cayman Islands’ beneficial ownership information exchange agreement with the U.K.
It is also anticipated that two new financial services vehicles, a limited liability partnership and a foundation company, will be introduced into the jurisdiction by the Legislative Assembly during its present sitting. The Limited Liability Partnership Bill 2017 introduces a new business structure in the form of a partnership which has both separate legal personality and provides limited liability for its partners. The creation of an LLP will offer professional firms, such as lawyers and accountants, a flexible alternative to a company or general partnership structure.
The structure is designed to increase the attractiveness of the Cayman Islands to professional service providers, and to develop potential new lines of business for international clients to utilize Cayman Islands structures.
The Foundation Companies Bill 2016 functions as an amendment to the Companies Law (2016 Revision) (the “Companies Law”), and provides for foundation companies to be established as a new form of Cayman Islands company. A Cayman Islands foundation company will share many of its features with regular exempted Cayman Islands companies, save that a foundation company is prohibited from paying dividends or other distributions to its members. A foundation company may cease to have any members if its constitution so provides, and can thereby truly achieve “orphan” status. Consequently, foundation companies will likely have a number of uses, including as a special purpose vehicle in finance transactions, as an alternative to a trust, and as a vehicle for philanthropic objects. Once passed into law, it is anticipated that foundation companies will fit seamlessly into the local legal regime, and offer an attractive and flexible structuring tool for private clients with offshore interests, regardless of whether they are located in civil law countries or common law jurisdictions.
New judgments regarding dissenter shareholder litigation
The jurisdiction has recently seen a flurry of merger activity, in many instances as a result of listed entities engaging in “go private” deals involving companies incorporated in the jurisdiction. The statutory merger and consolidation process set out in Part XVI of the Companies Law can be used to effect such mergers. However, the operation of the law in these circumstances has recently triggered an increase in litigation before the Grand Court of the Cayman Islands.
The Companies Law contains a statutory appraisal regime, found in section 238, which, with some exceptions, permits shareholders involved in certain mergers or consolidations to dissent to the merger or consolidation and be entitled to payment of the “fair value” of their shares. In reliance on this statutory appraisal regime, the Grand Court can be called on to determine disputes regarding the valuation methodology by which ‘fair value’ of the shares is determined. The first decision in the Cayman Islands regarding this issue was that of Justice Andrew Jones, QC, in In The Matter Of Integra Group (Unreported, August 28, 2015, Jones J) (“Integra”), which analyzes the section and its operation in detail and is now considered to contain the primary guidance on section 238 appraisal actions in the Cayman Islands. In Integra, Justice Jones approved of the definition of the concept of “fair value” in that particular case as the value to the shareholder of his proportionate share (without any minority discount or premium for compulsory acquisition of the shares) of the business as a going concern, without taking into account any enhancement in value (or reduction in value) as a result of the merger.
The Grand Court has since added to the guidance of Justice Jones in two further judgments concerning section 238, which indicate how dissenting shareholder fair value petitions, and the related issues of interim payments and discovery, will likely be dealt with by the Grand Court. The two judgments are:
- Blackwell Partners LLC – Series A v Qihoo 360 Technology Co Ltd (unreported, January 26, 2017): In this case, Justice Charles Quin considered an application by three dissenting shareholders (who had exercised their appraisal rights in relation to a merger) for an interim payment pursuant to Order 29 of the Grand Court Rules. The company argued in response that the interim payment provisions did not apply as the proceedings were outside what was a “self-contained statutory code” in section 238, and the dissenting shareholders were not owed a debt or entitled to damages as otherwise required by Grand Court Rules Order 29 to trigger payment. The company argued that the dissenting shareholders were only entitled to be paid fair value for their shares as assessed by the Court in due course pursuant to the petition. Justice Quin disagreed with the company, finding that a fair value determination by the court in section 238 proceedings falls within the category of proceedings in respect of which an “interim payment” could be made under Order 29, rule 9. Justice Quin found that the dissenting shareholders would receive at least the amount of the company’s statutory fair value offer made under section 238, being the “substantial sum” of US$17 million, following the final determination of the fair value assessment by the court, and ordered an interim payment in this amount. The judgment therefore confirms that the Grand Court will be prepared to make orders for interim payments in the context of section 238 applications, particularly if the company has not already voluntarily made an interim payment in the amount of its statutory fair value offer.
- In Homeinns Hotel Group v Maso Capital Investments Limited & Ors (an unreported ruling delivered on August 12, 2016, but not released for publication until February 7, 2017), the company petitioned for a determination by the court of the fair value of the dissenting shareholders’ shares in another merger case. At an interlocutory stage, the “fundamental source of dispute” between the company and the dissenting shareholders was the process of discovery, pursuant to which the dissenting shareholders sought access to all documents relevant to the fair value assessment. Asked to give directions on this issue pending trial of the section 238 application, Justice Ingrid Mangatel found that, in assessing fair value for the purposes of section 238, the experts and the court are to have regard to all relevant documents and information that the company has readily to hand, not just publicly available information. The court also rejected the traditional “list of documents” approach (where there is a mutual exchange of documents in the parties’ possession custody or power) and accepted the dissenting shareholders’ submissions that it was more appropriate in such a case for specific categories of documents to be ordered at the directions stage, rather than being left to a subsequent specific discovery application.
Case law on access to court documents
The issue of access to information on the files of the Grand Court was recently considered by the Honourable Chief Justice Anthony Smellie, QC, in the context of liquidation proceedings. As the Chief Justice noted in his judgment concerning In the matter of the Sphinx Group of Companies (In Official Liquidation) unreported, January 30, 2017 (“SPhinX”), determining whether documents kept on file by the Grand Court should be kept confidential requires a close assessment of the particular circumstances in which access is sought, and the wider consequences of the publication of the information in question.
In SPhinX, the Scheme Supervisors (“Scheme Supervisors”) had applied for the sanction of the court to complete a confidential settlement agreement and, flowing from that, for orders that affidavit evidence sworn in support of the sanction application be sealed and kept confidential on the court file. It was the view of the Chief Justice that the fact that a settlement was pending in the SPhinX matter was highly relevant, noting that it was essential that the Scheme Supervisors were able, like any other commercial party, to compromise claims on confidential terms – and that this ability would be lost if the court was not prepared to seal papers filed in support of the sanction application that the liquidator was required by law to make. Flowing from this, it was also in the interests of justice for a sealing order to be made so as to protect the economic interests of the stakeholders in SPhinX. The judgment serves as confirmation that the court is required to balance the general rule as to publicity of information on court files against any requirements for confidentiality or privacy in the interests of justice that may arise in a particular case.