An activist shareholder will typically identify an under-performing company or a company with other potential for increased shareholder value and then seek to bring about change, typically operational or strategic change, by putting pressure on the company's Board. This can be a very rewarding investment strategy.
Different types of investors will have different time horizons for change and exit strategies. Some hedge funds may be looking to secure short-term gains and exit. BlackRock, on the other hand, in their letter to CEOs, encourage companies to take a long-term approach to creating value1.
Other investors, such as CalPERS, the US public pension fund, may seek the adoption of what it views as corporate governance best practices among investee companies, such as diversity, independence, social and environmental responsibility and disclosure.
In the context of a Cayman Islands company2, it is vital that those who are considering the acquisition of a minority stake in a Cayman Islands company ("CayCo") consider the provisions of the company's constitutional documents, especially its articles of association ("Articles") to assess the scope for forcing change should diplomatic efforts not succeed in bringing about the desired results.
Getting a copy of the Articles
The memorandum of association and Articles of a CayCo are not publicly available from the Cayman Islands Companies Registry (the "Registry"), so a copy of the documents (and confirmation that they are the current registered versions) must come from the company itself. Where the company's shares are traded on a recognised stock exchange, the rules of the exchange will often require the constitutional documents to be available on the company's and/or the exchange's website.
Where a shareholder of a CayCo whose shares are unlisted finds itself without a copy of the constitutional documents, the Companies Law (the "Law") provides that a copy of the documents shall be forwarded to a member at its request, although the CayCo may charge a sum not exceeding one dollar for each copy.
Accessing other Information
Shareholder information rights with regard to the affairs of a CayCo are a matter for the Articles. A shareholder in a CayCo has no inherent or statutory right to receive information relating to the company's affairs3. Hence, financial statements are not otherwise available publicly or to shareholders unless the Articles so provide or the company's shares are listed on a stock exchange and the financial statements are available through the exchange.
Scope for Bringing about Change
The armoury of a minority shareholder to instigate change within a CayCo is limited, absent specific rights in the Articles, in the terms of issue of the shares held or in contractual rights in a shareholders agreement. Beyond sending letters to the Board (open or otherwise), tactics considered often include:
Requisitioning a Shareholder Meeting: A common tactic used by activist shareholders is to submit a requisition to the company which requisition calls on the directors to convene a general meeting of members to consider proposals suggested by the shareholder or to have a resolution added to the agenda of a forthcoming meeting. There is no statutory right in the Law which requires a company to act on such a request. Articles will often provide shareholder rights in that regard4, but the thresholds may vary from company to company, so the requirements of the CayCo concerned need to be checked to ensure that the rights exist and that the thresholds are suitable in the context of the company concerned.
Board Positions: Although directors of a CayCo owe their statutory and fiduciary duties to the CayCo as a whole (and not to a specific appointing shareholder) the appointment or proposal for appointment, of one or more directors to the Board of a CayCo is a key method by which shareholders can bring pressure for strategic change.
The Law contains no provisions regulating the appointment or removal of directors. Accordingly, the Articles must be examined to ascertain the method by which and the term for which directors may be appointed and/or how directors may be removed from office. Absent the scope for a requisition (see above) the avenues for seeking to have the election or removal of one or more directors put to shareholders at a general meeting may be limited.
Unless the Articles so provide, there is no requirement for any or all of the directors to be elected or re-elected at general meetings, nor is there a statutory requirement for a CayCo to hold an annual general meeting, although more widely held companies commonly do so.
Derivative action: As noted above, directors generally owe their duties to the company rather than to individual shareholders and thus the company is normally considered to be the proper claimant to bring a claim in respect of a loss suffered by the company arising from a breach of directors' duties. However, in some circumstances, the Court will permit a shareholder to bring a claim on behalf of the company in respect of a wrong done to the company (a so-called derivative claim). The most common exception to the general rule (that the company is the proper claimant) is where there has been a "fraud on the minority" and the alleged wrong-doers are in control of the company.
If a corporate action is proposed which a shareholder believes will be in breach of the directors' fiduciary duties owed to the company (such as, for example, a sale of a key asset at a significant discount to its fair value), a shareholder could petition the Cayman Islands Court for an injunction to restrain the action. However, the Court can be expected to regard the directors as being best placed to conduct the management of the company's affairs and will need to be persuaded that something untoward is going on. The Court will also apply a "balance of convenience" test in determining whether an injunction should be grated, weighing up the disadvantage to the shareholder(s) if the order is not made against the disadvantage to the company if it is. [The Court may also require cross-undertakings as to damages to be given by the claimant to cover claims that an injunction so granted is ultimately determined not to have been justified.]
Representative Action: A shareholder of a CayCo may bring an action before the Court on his own behalf and on behalf of other shareholders where the claimant is seeking to enforce a right or interest which is common to the shareholders.
Inspector: In extreme circumstances, an aggrieved shareholder may consider making an application to the Court under Section 64 of the Law, pursuant to which the Court may appoint an inspector to examine the affairs of a CayCo and report to the Court. In the case of a CayCo whose capital comprises shares and which is not a banking company, one or more shareholders holding not less than one-fifth of the shares in issue may apply for such an appointment.
Winding Up: An aggrieved shareholder may, usually as a last resort, apply to the Court for an order that the company be wound up on the ground that it is just and equitable to do so5. Once such a petition has been presented, the directors would need the consent of the Court before they could proceed with a sale of the company's assets. Clearly, a petitioning shareholder would need to be of the view that a liquidation would realise greater value for shareholders than would the continued business of the company. Although there is no limit to the circumstances in which the Court may consider it appropriate to make an order, given the seriousness of the remedy, an order will not be made lightly. Examples of when such an order has been made include: (i) when the "substratum" of the company is gone (essentially its intended purpose is no longer possible) and (ii) the company's Board cannot function, perhaps due to dead-lock.
The scope for bringing about change within a Cayman Islands company is therefore limited, absent a controlling stake, unless care has been taken to build minority rights into the constitutional documents of the company or contractually at the subscription stage.
1 April 2015 letter from Larry Fink, Chief Executive Officer of BlackRock to S&P 500 CEOs in the US and to the largest companies in EMEA and APAC in which BlackRock invests.
2 This paper addresses only Cayman exempted companies, which is the most common form of company for international business.
3 The Cayman Court may, at its discretion, make an order for pre-action discovery in appropriate cases, which could assist in this regard (perhaps in a derivative action (see below)), but such would be unlikely to be available in support of a nonspecific "fishing expedition".
4 Where no articles are adopted by a company limited by shares (or to the extent that such are not dis-applied by Articles that are adopted) the regulations set out in Table A of the Law apply. Table A regulations give no right for shareholders to requisition a general meeting nor any right for shareholders to require a resolution or business to be added to the agenda of a general meeting.
5 Although there is no facility in Cayman Islands law for a shareholder to bring an action based on the English law concept of unfairly prejudicial conduct, the range of remedies available to the Cayman Court in a just and equitable winding up application is similar to those available to an English Court in such an action (eg to regulate the company's affairs, to order or prevent an action, to order a share purchase by the company or other member(s)).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.