Over the past quarter, the judges of the Financial Services Division of the Grand Court of the Cayman Islands and the Cayman Islands Court of Appeal (CICA) have issued a number of significant and very detailed judgments analyzing a range of issues of importance to the local financial services industry. As discussed in more detail below, company directors and shareholders, professional trustees, liquidators and creditors, and potential litigation funders, now all have access to developing jurisprudence in their respective arenas, and further helpful guidance as to the interpretation of local laws.
Companies and shareholders
A very well-known and now widely used part of local legislation, section 238(8) of the Cayman Islands Companies Law entitles a shareholder who dissents from a merger or consolidation of a Cayman company under the statutory merger provisions contained in Part XVI of the Companies law to be paid "the fair value of his shares." Litigation centered on determining "fair value" has been a hot topic locally over the past 18 months, and the CICA has recently released a number of highly anticipated decisions concerning various interlocutory issues. The most important of the judgments, discussed in brief below, analyze the contentious issues of (1) interim payments to dissenting shareholders (referred to generally below as "dissenters"); (2) discovery of documents by dissenters; and (3) the application of a "minority discount" to the value of the dissenters' share price:
- Interim payments: In the matter of Trina Solar Limited, the Grand Court had at first instance refused an interlocutory application made by a group of dissenters for worldwide freezing orders over the assets of the company in question pending the outcome of statutory fair value appraisal proceedings. The dissenters had applied to the Grand Court because the company had agreed to transfer many of its assets in its subsidiaries to other companies in China, ostensibly to progress the company's post-merger restructuring. The dissenters argued that these actions would have the effect of significantly reducing the assets of the company so that it would ultimately be impossible for the company to satisfy any judgment of the Grand Court following the substantive trial. The dissenters took their case on to the CICA which, while finding that the dissenters had crossed the "jurisdictional threshold" so as to be entitled to ask for the grant of an injunction on the terms they had sought, the company's evidence had proved the transactions in question were not undertaken for less than proper consideration or on terms that were prejudicial to the company. Further, the fact that the company had made a provision for payment to the dissenters based on a realistic assessment of the company's liability to the dissenters was enough to avoid the need for an injunction. The provision did not need to be for the full amount claimed by the dissenters with reference to their expert advice, but a "reasonable and prudent provision" made after taking advice from legal and valuation advisers and with the company "forming a balanced and cautious view of the risks of the litigation." No injunction was granted.
- Minority discount: In its decision in the matter of Shanda Games Limited, the CICA has gone a step further and altered the landscape against which fair value of the Dissenters shares is to be properly assessed in the future. At first instance in Shanda, the Grand Court had determined that a minority discount should not apply in assessing the fair value of the shares of dissenters: a decision consistent with the position taken by the Courts in Delaware and Canada, where the equivalent merger appraisal regimes operate, and indeed with prior local authority such as the decision of Jones J in the matter of Integra Group. However, reversing the decision of the trial judge in Shanda, the CICA held that certain English authorities (which permit a minority discount to be applied in other contexts) should be applied in the context of a section 238 appraisal action. In essence, the CICA held that the legislative intent in enacting section 238 was that it should be construed alongside and according to the same principles as the provisions already contained in sections 86, 87 and 88 of the Companies Law (dealing with takeovers and squeeze-outs), because they are simply three ways of achieving the same commercial objective. As there are English authorities which hold that a minority discount could be applied in a takeover scheme of arrangement and in a statutory squeeze-out, it follows that when enacting section 238, the legislature cannot have intended that the situation should be different from that which already existed. The judgment therefore confirms that a minority discount should now apply here in Cayman too.
- Dissenter discovery: In the matter of Qunar Cayman Islands Limited the CICA considered, among other issues, the disputed question of whether the dissenters should give disclosure of their documents to the company in the course of the statutory fair value appraisal process. The Grand Court had decided in favor of the dissenters, who had resisted discovery on the basis that the dissenters' internal analyses of share price were not relevant and it was therefore not appropriate for dissenters to provide discovery of their documents. However, noting that the question of fair value is closely related to the question of what a willing buyer and a willing seller would exchange for the shares of the company, the CICA found that valuations conducted within the market generally are relevant. It followed that the analyses and valuations conducted by the dissenters were considered by the CICIA to be of utmost importance: the dissenters were not merely potential investors, but actual investors and therefore "active members of the market who are willing to put their money where their analysis is." The CICA confirmed that discovery is a mutual obligation, requiring equality and fairness, and section 238 litigation is not a "unique field in which one-sided disclosure" ought to be practiced. Discovery by the dissenters was therefore ordered.
Settlors and trustees
While not often generating issues of such complexity as those recently considered by the CICA and summarized above, it is nonetheless widely acknowledged that the administration of Cayman Islands trusts can also be a labor-intensive process requiring careful and considered decision-making processes. One of the questions that can crop up from time to time for professional trustees in this context is whether an individual settlor of a Cayman Islands trust has the mental capacity to exercise his or her legal rights or powers in respect of a Cayman Islands trust. It can be a question fraught with difficulties, and inevitably subject to great debate. However, in the recent decision of CI Trustees Ltd v RDK and GMB, the Grand Court considered this very issue and explained the relevant factors to be taken into account when considering the issue of capacity, in the course of determining whether or not the settlor of a Cayman Islands trust had capacity to exercise her power to amend the trust deed to change the sole beneficiary of the trust.
In that case, the settlor of the trust was a childless widow, and resident of a Spanish-speaking country in South America. The trustee of the trust had applied to the Grand Court for directions as to whether it should give effect to a power exercised by the settlor in writing before her death but not given effect by the trustee. Evidence was given in the course of the proceedings, from representatives of the trustee, to the effect that she was known to be "a very gullible and lonely person" who had "been taken advantage of in the past." The settlor had issued to the trustee two documents, a letter in July 2012 and a further written declaration in 2015, stating that she wished to amend the Trust Deed to remove the sole beneficiary of the Trust (referred to in the judgment as "RDK") and to replace her with the settlor's friend ("GMB"). While the trustee was satisfied that the settlor had written these documents, the trustee was concerned about the settlor's mental capacity to properly exercise her power of amendment. The settlor had appeared confused during telephone calls with representatives of the trustee and, on other occasions, had refused to speak with the trustee at all. Ultimately, the settlor died in August 2015, before the trustee had accepted any of her requested amendments to the trust deed.
In the substantive proceedings, the Grand Court was asked to consider whether the settlor had the capacity to exercise the power to amend at the time it was exercised. The Grand Court noted that the level of understanding required in these circumstances depends on the circumstances of each case and the particular transaction which it is to effect. Capacity is "not necessarily a black and white issue" and a testator or donor might suffer from conditions which deprive them of capacity under some circumstances, while in others, full capacity was enjoyed. In such cases, the crucial question is whether capacity existed at the time that the relevant instrument was executed and whether the testator's "mind and memory" were sufficiently sound to enable him or her to know and understand the business in which he or she was engaged at the time his or her will was execute.
In this case, the Grand Court found that any confusion on the part of the settlor at material times was "transitory in nature and attributable to a variety of factors which were individually and cumulatively more plausible than a complete loss of mental capacity." The medical evidence indicated that the settlor could be suffering from ailments that caused temporary confusion, and she preferred face-to-face meetings to telephone conversations and was not comfortable "speaking to strangers" even in the presence of a translator. Ultimately, the Grand Court determined that there was no solid basis for concluding that the settlor lacked capacity altogether in the requisite legal sense and at the time she executed the documents, and her mind and memory were sufficiently clear to enable her to know and understand the business in which she was engaged. The settlor therefore had capacity to instruct the trustee to amend the trust deed.
Greater clarity has also been given in the financial services industry in respect of the proper place of commercial litigation funding in the modern Cayman Islands justice system. In A Company v A Funder (unreported, Nov. 23, 2017), the plaintiff had applied to the court for a declaration that the third-party funding agreement it had entered into with the defendant was not illegal on the grounds of maintenance and champerty (historical common law doctrines recognized in Cayman, offenses against which potentially give rise to criminal liability). The Grand Court found that, as a matter of principle, a funding agreement will not be unlawful by reason of maintenance and champerty if it does not have a tendency to corrupt public justice. Whether or not an agreement had such a tendency would depend on a number of features, including the extent to which the funder controls the litigation, the prejudice likely to be suffered by a defendant if the claim fails, the extent to which the funded party is provided with information about, and is able to make informed decisions concerning the litigation, the amount of profit that the funder stands to make, and whether or not the funder is a professional funder and is regulated. In considering these matters, the Grand Court was generally concerned to ensure that circumstances did not arise whereby the non-party funder (who will have only a financial interest) was able to manipulate, and potentially abuse, the proceedings.
The Grand Court found that there are obvious benefits that may flow from allowing plaintiffs with genuine claims the opportunity to litigate them on terms which they consider to be commercially attractive and provide them with a better risk-reward ratio than if they were to fund the costs of litigation themselves. As the judge noted, "Cayman has a world-class court system and litigation culture and there is no reason why responsible, properly regulated commercial litigation funding undertaken in accordance with the principles I have set out should not have a place in this jurisdiction." The judgment may well result in an increase in the usage of such funding agreements, which may prove to be a positive development for the jurisdiction.
All in all, it is clear that detailed, well-reasoned, and eagerly-awaited judgments continue to flow from the local courts, contributing not only to the knowledge base of the financial services industry but the wider development and evolution of Cayman Islands jurisprudence.
This article was first published in Cayman Financial Review.
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.