Aquapoint LP v Fan: Privy Council Confirms Equitable Constraints Can Override Strict Contractual Rights in Cayman ELP Winding Up

BACKGROUND

Aquapoint LP (in Official Liquidation) (Aquapoint) is a Cayman Islands exempted limited partnership (ELP) established in 2017 to hold approximately 15% of the shares in Legend Biotech Corporation (Legend Cayman) in anticipation of a NASDAQ Initial Public Offering (IPO) in 2020.

Aquapoint’s general partner is GenScript Corporation (GenScript), a Delaware-incorporated company controlled by Dr Frank Zhang. The Respondent, Dr Xiaohu Fan, is a limited partner holding a 65.96% interest in Aquapoint (equivalent to approximately 10% of Legend Cayman’s share capital).

Dr Fan was involved in critical developments of ground-breaking cancer therapies whilst working for the GenScript Group. In 2014, GenScript Group formed a subsidiary company, “Legend Nanjing” to develop novel biological drugs. In 2016, Legend Nanjing entered into an agreement with Dr Fan to incentivise his contribution to the business which, among other things, provided Dr Fan with the right to have 10% of the shares in the company transferred into his ownership six months after its contemplated IPO, regardless of the effect on the overall share value if he decided to sell.

Shortly thereafter, Dr Zhang persuaded Dr Fan to relinquish his rights in Legend Nanjing and become a limited partner in Aquapoint instead, which would in turn hold shares in Legend Cayman.   Dr Fan agreed to enter into a limited partnership agreement (LPA) following assurances from Dr Zhang and Ms Wang (another limited partner holding a 32.98% interest in Aquapoint) that Dr Fan would be able to withdraw his 10% shareholding six months after the IPO (the Prior Assurances).

Following the six-month period after the IPO, Dr Fan sought to withdraw his shareholding, but GenScript refused consent, relying on its express right to do so under the LPA as general partner. The relevant clause provided that no limited partner could withdraw from the partnership save with the prior consent of the general partner and that consent could be withheld “for any reason (or no reason at all)” at GenScript’s absolute discretion.

Dr Fan subsequently presented a petition to wind up Aquapoint on the basis that it was just and equitable to do so.  Aquapoint (by GenScript, its general partner) in response argued that GenScript was simply exercising a power that had been expressly granted to it by the LPA, and that the Prior Assurances could not provide a basis to wind up the partnership.

The Grand Court at first instance found in Dr Fan’s favour and ordered that Aquapoint be wound up on the just and equitable basis.  Aquapoint appealed the decision to the CICA, which upheld the first instance ruling on almost all aspects. Aquapoint then appealed to the Privy Council.

THE COURT’S DECISION

The Privy Council dismissed the appeal and upheld the winding up order on the just and equitable ground, finding that as a result of the Prior Assurances, GenScript was restrained from exercising its power under the LPA to refuse consent to Dr Fan’s request to withdraw his shareholding.

In doing so, the Privy Council considered several key questions relating to the winding up of ELPs on the “just and equitable” ground, restated the role of equity in the just and equitable context and, provided a restatement of the applicable UK company law principles.

Jurisdiction

There has been confusion at first instance in the Cayman Islands as to the precise basis for the court’s jurisdiction to wind up an ELP on the “just and equitable” ground. No submissions were made to the Privy Council on this point in Aquapoint; it was simply common ground between the parties that the court did have jurisdiction (the parties having debated at first instance whether that jurisdiction arose under section 35(e) of the Partnership Act as applied by section 3 of the Exempted Limited Partnership Act (ELP Act), or under section 92(e) of the Companies Act as applied by section 36(3) of the ELP Act.)

This prompted the Privy Council to express its “present view” (absent submissions on the point) that the jurisdiction simply arises under section 36(3)(g) of the ELP Act itself, which expressly empowers the court, on the application of any partner, to make orders “for the winding up and dissolution” of an ELP where it is “just and equitable” to do so.

The applicable (company law) principles

Although the Privy Council noted that there are some key differences between ELPs on the one hand and limited partnerships and registered companies on the other, it held that it was appropriate on the facts of this case to apply the principles relating to the jurisdiction to wind up companies on the “just and equitable” ground. In doing so, the Court stated that, given the status of an ELP as a type of partnership, as opposed to a registered company, it appeared highly unlikely that the principles would be less generous to a petitioning partner in an ELP than to a petitioning shareholder of a company.

Equitable restraint on legal rights

Drawing heavily on the seminal English judgment in Ebrahimi v Westbourne Galleries Ltd,[1] the Privy Council confirmed that the “just and equitable” jurisdiction enables courts to subject the exercise of express legal rights (such as under a contract) to equitable considerations – considerations of a personal character between individuals – which may render it unjust or inequitable to insist on the exercise of such express legal rights.

Aquapoint claimed that that since the LPA contained detailed provisions (such as those requiring GenScript’s approval for withdrawal) and entire agreement clauses, it had “covered the field” and left no room for equitable considerations.

The Privy Council rejected this argument. Although the contractual terms were highly relevant, they were not determinative in the context of a “just and equitable” winding up. In this case, the Privy Council pointed to a critical factor being that Dr Fan had only entered into the LPA (and its restrictive clauses) on the basis of the Prior Assurances given to him by Dr Zhang and Ms Wang. The Privy Council also disagreed that, on the facts as established, GenScript could simply refuse consent under the LPA without regard to the Prior Assurances made to Dr Fan.

Critically, the Court held that even assuming that the LPA’s entire agreement clause could prevent Dr Fan from relying on the Prior Assurances as a matter of contract law, they did not oust the role of equity entirely, or, therefore, the court’s jurisdiction to make a winding up order on the “just and equitable” ground.

“Quasi-partnership” not essential

At first instance, four of the “classic” grounds for a just and equitable winding up were successfully relied upon by Dr Fan, including irretrievable breakdown in trust and confidence which arises in relationships that are personal, fiduciary, or quasi-partnerships. Whether or not there was a quasi-partnership in this case then became a key focus of argument before the Privy Council.

The Cayman courts have generally found that equitable considerations are engaged in certain categories of cases, including those involving companies that are found to be so-called “quasi-partnerships”: A quasi-partnership company is one in which the shareholders “possess rights, expectations and obligations which are not submerged in the company structure”; “where the legal, corporate and employment relationships do not tell the whole story, and… behind them there is a relationship of trust and confidence similar to that obtaining between partners, which makes it unjust or inequitable for the majority to insist on its strict legal rights”. [2]

The Privy Council clarified that although equitable considerations will often apply in cases involving “quasi-partnerships”, a finding of quasi-partnership is not essential for those considerations to apply. The Board warned against constraining the width and flexibility of equity by such rigid categorisations such as overly focusing on quasi-partnerships (which itself was neither a term of art nor a term of defined scope). Quasi-partnerships were, the Privy Council stressed, “an example, not a definition, of the circumstances in which equitable considerations may come into play.”

In this case, while Aquapoint was a passive investment vehicle that lacked the typical characteristics of a quasi-partnership (for instance, there was no agreement or understanding that any limited partner other than GenScript could participate in the conduct of the business), the Privy Council held that the relationship between Dr Fan, Dr Zhang, and Ms Wang nevertheless amounted to a personal relationship that brought equitable considerations into play.

KEY TAKEAWAYS

The facts in Aquapoint are unusual. With that in mind, the judgment provides a significant and noteworthy example of how equitable considerations can be applied in the context of carefully negotiated commercial agreements, with less constraint than may have been anticipated. Key points to note are:

1.  No need to look beyond the ELPA for the Cayman court’s just and equitable jurisdiction: see section 36(3)(g).
2. Equity may trump strict contractual terms in certain (limited) situations: The Privy Council did confirm that, in the vast majority of cases, the relevant agreement(s) and other applicable laws will indeed “cover the field” as GenScript had argued. However, there will still be a more limited number of cases where parties will have negotiated and entered into carefully-drafted (and often comprehensive) agreements, express contractual provisions and “entire agreement” clauses which can still be tempered by the court on the basis of equitable considerations.
3. Focus on personal character of relationships: Likewise, practitioners advising parties considering (or litigating) “just and equitable” winding up proceedings should carefully consider the history and personal nature of the relationships between the parties (and/or their principals). The “just and equitable” jurisdiction is a wide and flexible one and relationships need not necessarily fit into rigid categories such as quasi-partnerships in order to be found to be of a personal character which brings equitable rules into play.
4.  Vigilance for general partners (and contracting parties generally): In the ELP context, even where an LPA grants absolute discretions or rights, general partners should exercise those discretions or rights carefully, in good faith, and with due regard to any pre-contractual assurances made to limited partners – especially if such assurances formed the basis for the partnership arrangement in the first place.

[1] [1973] AC 360.
[2] See Re CVC/Opportunity Equity Partners Ltd [2002] CILR 77 (a decision of the Privy Council on appeal from the Cayman Islands Court of Appeal).