Back in April 2009, I wrote about the changes made to the Cayman Islands' Companies Law that created a form of "oppression remedy". Such a remedy is a feature of most common law jurisdictions. It allows company shareholders to apply to court to obtain relief in circumstances where their interests are being unfairly disregarded. That relief often involves orders that regulate the affairs of the company going forward to remedy the conduct or a manner by which minority shareholders' shares may be purchased – a kind of corporate divorce.
In the Cayman Islands, the "oppression remedy" can only be obtained as alternative relief in a petition to wind up a Cayman Islands company on the just and equitable ground. The 2007 amendments to the Companies Law contain those alternative powers, set out in subsection 95(3) of the Companies Law (2013 Revision). They include powers in the nature of injunctive relief and a general power to regulate the conduct of the company's affairs in the future.
An unusual feature of the Cayman Islands "oppression" provisions is that a party seeking relief from the court must first meet the test for winding up the company (i.e. ending it as a going concern) in order to have recourse to the alternative relief (Camulos v. Kathrein  1 CILR 303). Put another way, a party seeking the "oppression remedy" relief in Cayman does not have a free standing remedy.
This creates a strange anomaly. In order to justify relief less invasive than ending the company as a going concern, a party must show that the facts justify ending the company as a going concern. This needs to be done on the basis of over 100 years of precedents that looked only to the question of whether winding up, and only winding up, was justified.
My 2009 paper on this issue speculated as to whether using the winding up principles as a type of jurisdictional trigger for granting less invasive relief could lead to either,
i) the granting of alternative relief becoming rare in the Cayman Islands; or,
ii) the various tests established to (previously) justify winding up the company would relax in terms of the nature and severity of facts required to meet the test.
A recent decision of the Honourable Mr. Justice Jones, Q.C. of 6 March 2015, in the matter of Acorn International, Inc1 ("Acorn") considered and applied s.95(3).
Acorn was a Cayman Islands company listed on the NYSE that served as a holding company for a group of businesses conducting TV direct sales business in PRC. A petition was brought by a company representing the majority shareholders (the "Majority Shareholders") and a crosspetition was brought by companies representing the minority shareholders (the "Minority Shareholders").
A peculiar aspect of the Cayman oppression remedy was brought to light immediately in the decision as,
The oppression remedy was born to (among other reasons) provide a judicial mechanism to resolve shareholder battles without liquidating a company's assets and ending it as a going concern. Where a company has going concern value, the last thing that a disgruntled shareholder might want is to realise his shares by the destruction of that going concern value – cutting the corporate baby in half.
Yet case law interpreting s.95(3) suggests that a petitioner must seek the very thing he might not want (to wind up the company) in order to seek the thing that he actually wants (an alternative to winding up the company). This forces the petitioner to argue against (some of) the very relief that he seeks in the petition.
In Acorn, the court concluded that the Minority Shareholders effectively used their control of the Board of Directors to,
i) remove a representative of the Majority Shareholders from office; and
ii) to refuse to hold an EGM in the face of a threat by the Majority Shareholders to use such a meeting to change the Board of Directors and take it away from the effective control of the Minority Shareholders. The court concluded that,
The Majority Shareholders might not have been seeking to wind up the company (in oral argument) but as this decision states, they were necessarily seeking to do that in their petition, because it has to be brought by a winding up petition.
As stated above, recourse to s.95(3) can only be had if one can establish that it would otherwise be just and equitable to wind up the company. Put another way, but for s.95(3), would the court have wound up the company following established principles and case law? Arguably, the answer in Acorn should have been no. It is well established that a winding up might be justified on the basis of a justifiable loss of trust and confidence in a company's directors and that loss is justifiable where there is a proven lack of probity in the conduct of the company's affairs. However, it is also established that a winding up petition should be dismissed if the petitioner has an adequate alternative remedy (Camulos v. Kathrein  1 CILR 303).
The court in Acorn concluded that the directors acted in breach of their fiduciary duties. This would normally ground a cause of action by the company, or a derivative action by its shareholder, against its directors and (on the facts in Acorn) likely justify an injunction to prevent the ongoing breaches. In addition, to the extent that the actions of the directors amounted to a breach of Acorn's articles the Majority Shareholders might well have been in a position to enjoin the breach. As succinctly stated by Justice Henderson in Russell Alternative Investments Funds Plc et al v Laurus Offshore Fund, Ltd. et al2,
Since these alternatives appear to have been available, the petition might well have failed on the basis that adequate alternative remedies were available.
Ultimately, the relief granted in Acorn appears unassailably just by putting the control of the company back into the hands of the Majority Shareholders and (consistent with oppression remedy case law) the court went only so far as was necessary to remedy the oppression.
The law of the Cayman Islands in respect of the "oppression remedy" continues to evolve. As it stands now, it is said to be the case that the jurisdiction of the court to make orders pursuant to s.95(3) is only engaged if it can be shown that the court could otherwise make a winding up order. The difficulty with that state of affairs is that the body of law established to determine when a winding up order can be justified (as taken from English and other common law jurisdictions) has evolved in jurisdictions where stand-alone oppression remedies are available. Naturally, the barrier to entry is high since the result is ending the company as a going concern, and disproportionately high if the same test is being used to determine when a court can grant relief that is far short of ending a company as a going concern.
It might not be intellectually sustainable to use a test meant to determine that winding up only (and no alternative relief) is justified – and to use it to determine if alternative relief is justified. The temptation to incrementally relax the jurisdictional trigger might prove irresistible.
1 Acorn International, Inc. FSD 109 of 2014. Coram: Jones J
2 Ruling - Russell Alternative Investments Funds Plc et al v Laurus Offshore Fund, Ltd. et al Cause No.430 of 2008 18.09.08.
About the Author
Fraser Hughes (B.A., LL.B, J.D.) is a Litigation Partner with Conyers Dill & Pearman. He has particular expertise in fraud, accounting, insolvency and mutual fund-related litigation. Fraser has been involved in most of the significant hedge fund insolvency disputes in the Cayman Islands over the last seven years. Prior to joining Conyers in 2007, he was a distinguished member of the Ontario bar and has extensive trial experience, appearing as counsel in numerous high-profile insolvency and restructuring matters, including representing a key defendant in a civil conspiracy matter that turned into one of the longest civil trials in Canadian history.
Originally published in Cayman Finance Magazine, 2015-2016, Issue 2
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