Directors: duties, disqualification and indemnities
In Antow Holdings Limited v. Best Nation Investments Limited, a case concerning a challenge to the transfer of shares, the Eastern Caribbean Court of Appeal conducted an extensive review of the duties which a director owes to a company under BVI law. In alignment with most common law jurisdictions, these include duties to act for a proper purpose and in the best interests of the company, and not to use their powers for a collateral purpose; and, in the BVI, a statutory duty to disclose conflicts of interest. The court held that where a director failed to consider the interests of the company at all, subjective honesty was no defence, and it was not open to the director to assert that the decision taken was in the best interests of the company. Moreover, a decision taken by a director in what he considered to be the best interests of the company would be liable to be set aside if it was entered into for an improper purpose.
Similar duties apply to directors of companies in the Isle of Man. FSA v. Irving & Otr was a case determined under the Company Officers (Disqualification) Act 2009. Though decided under a statutory regime, in considering whether certain directors should be disqualified, the judgment provides a comprehensive overview of the common law and equitable duties owed by a director to a company. In particular, in relation to the fiduciary duty to act bona fide in the interests of the company and with a proper purpose, the case makes clear that directors must ensure that they maintain independence in assessing whether any transaction would be for the benefit of the company and particularly not be bound by any third party obligations in relation to their decision-making.
Granting the disqualification order, Deemster Christie QC said, unsurprisingly, that a company must not purely be a vehicle for a dominant director to benefit himself.
Quite apart from the application of any general directors’ disqualification regime, directors of regulated entities are of course commonly subject to ‘fitness and propriety’ requirements under the regulatory laws. Such is the case in Mauritius, where in Rookny v. The Financial Services Commission of Mauritius, the Supreme Court expressed its views on what it means to be a ‘fit and proper person’ to hold a position as officer of a licensee of the Financial Services Commission of Mauritius. Following a disciplinary hearing, Mr Rookny had been disqualified for two years by the Enforcement Committee of the Financial Services Commission and that decision had been upheld by the regulator’s Financial Services Review Panel. The director took the matter to court by way of a judicial review, both on the grounds of the powers of the Review Panel and the lawfulness and reasonableness of its decision.
The application for judicial review was turned down. On the issue of ultra vires, the relevant section applied not only to a licensee entity but also to its officers, so the Review Panel was within its powers. It followed that in determining whether someone was ‘fit and proper’ the person’s ‘ability to perform the relevant functions properly, efficiently, honestly and fairly’ as well as ‘his reputation, character, financial integrity and reliability’ were relevant. In these circumstances the Supreme Court found that it was legitimate for the Enforcement Committee to have ‘regard to the sum total of the conduct of the applicant in arriving at the decision as to whether he was a fit and proper person to hold an office or position in a licensee of the [FSC].’
Similar considerations were discussed in the Royal Court of Guernsey in Y and the Chairman of the Guernsey Financial Services Commission and Her Majesty’s Procureur. The Bailiff noted that “if found not to be a fit and proper person, the consequence is that a prohibition order may be made. It is a form of protection for those using licensed fiduciaries, ensuring that those individuals who the Guernsey Financial Services Commission finds not to be fit and proper cannot perform functions that are prohibited by the order. Once found not to be a fit and proper person, the next stage would be whether or not there are steps that can be taken to rehabilitate the person so that he or she is once again regarded as a fit and proper person.”
Directors’ relationships with companies are of course also affected by their service contracts and the company’s constitutional documents. In some jurisdictions, including Cayman, it remains possible for these to contain indemnities in favour of directors (other than for fraud and wilful default). Such indemnities were before the Court in Goodman v. Cummings and Another. The liquidators of the insolvent fund Tangerine Investment Management assigned claims against the defendant, a previous director of the fund, for common law director duties and/or breach of fiduciary duty. The plaintiff claimed that Ms Cummings’ employer, the second defendant, was vicariously liable for any default on her part. In response, the defendants sought to rely on indemnities in the fund’s articles of association. The court concluded that those indemnities were incorporated into in the director’s contract of service despite there being no written terms. The court also considered whether the indemnities extended to former directors of the fund in addition to those presently in office. The court found in Ms. Cummings’ favour and she was entitled to her legal fees and expenses under the indemnity.
Shares and shareholder rights
In Bank of Nova Scotia v. Registrar of Corporate Affairs, the Eastern Caribbean Court of Appeal reviewed the law around what should happen to disabled bearer shares and whether they were permanently immobilised. The question arose following legislative changes in 2005 aimed at disabling (and ultimately in practice phasing out) bearer shares issued by BVI Companies, by requiring them to be held by registered custodians – a process known as ‘immobilisation’. The BVI Financial Services Commission argued that the transitional provisions had the effect of permanent immobilisation. The Court of Appeal rejected that contention: it held that it was not the intention of the legislature to expropriate the assets of shareholders holding disabled bearer shares and confirmed that a residual right to redeem the shares exists. The court read the statute in a manner which made it consistent with the BVI Constitution Order.
In the Cayman Islands, the court had to determine an array of issues following the issue of shares to groups of investors in a Cayman company which diluted existing shareholdings. In David Xiaoying Gao v. China Biologic Products Holdings Inc, the court accepted almost all of the defendant’s arguments revolving around the central premise that the plaintiff lacked standing to bring the proceedings.
In the main issue in the case, the court confirmed the general rule that minority shareholders do not (unless for example there are some special circumstances) have standing to pursue a personal action to set aside or restrain an improper allotment of shares which would dilute their voting power. Any such breach of fiduciary duty would be actionable by or derivatively on behalf of the company. Aside from a statutory right, there is no right for a minority to bring an action against the company for a director’s breach of duty in respect of an improperly allotted share issuance. The court therefore rejected the argument that the dilution of share voting rights constitutes a freestanding exception to the rule in Foss v. Harbottle. The court also rejected the plaintiff’s claim that, as beneficial owner of the shares, he possessed standing to assert a personal claim for breach of fiduciary duty and also rejected the submission that the right to pursue a claim is assignable independently of the shares themselves.
When the necessary conditions are met, shareholders are of course able to bring derivative actions on behalf of the company. In Top Jet Enterprises Limited v. Sino Jet Holding Limited and Jet Midwest, the Grand Court widened the scope of derivative claims brought on behalf of a Cayman company by aggrieved shareholders, by stating that such a derivative action can be brought not only against the company’s directors, but also against third parties where that third party is an “accessory to or closely associated with the conduct which gives rise to the fraud on the minority”.
The court also determined what happens in relation to derivative claims brought by shareholders of Cayman companies in foreign courts. Earlier in Paul Davis v. Scottish Re Group Limited, the Court of Appeals in New York had held that the plaintiff did not need to seek leave of the Grand Court of the Cayman Islands to commence the derivative action in New York, because this was a procedural requirement only and it could cause unnecessary delays or inefficiencies. In this later case, Jet Enterprises Limited started proceedings in Missouri, USA. Jet Midwest, the second defendant, challenged Jet Enterprises’ standing to commence the proceedings but before that issue was determined, the plaintiff made an application to the Cayman court. The plaintiff sought leave to continue the proceedings, if leave was required, in the US together with a declaration under Cayman law that it was entitled to bring a claim against Jet Midwest derivatively.
The Cayman Court said that it did not have jurisdiction to grant leave and any challenge to the plaintiff’s standing would need to be taken up with the US Court. Order 15 Rule 12A(2) of the Grand Court Rules, which requires a plaintiff to seek leave, does not apply to foreign proceedings. The court did say that in certain instances it would provide what it termed a “supervisory jurisdiction”.
Winding Up – Just & Equitable
There has also been plenty of action in respect of shareholders who have sought the court’s relief to wind up companies on just and equitable grounds in various jurisdictions. In the BVI, the question which arose in Delco Participations v. Green Elite was whether the substratum of Green Elite had failed in circumstances where it had sold its only asset. The Court of Appeal held that the winding up of Green Elite’s affairs was to be distinguished from its commercial purpose, with the result that a company that has entered into a wind down has no continuing commercial purpose. The court also rejected a contention that Delco should have pursued an alternative remedy in unfair prejudice on the basis that the cost and time involved in taking unfair prejudice proceedings made that remedy inappropriate.
Also in the BVI, in Yaojuan v. Kwok, the claimant brought unfair prejudice proceedings alleging exclusion from consultation or participation in the affairs of the company. She sought a share buy-out order whereby the defendant would sell her shares to her, but the court determined that this was a case in which a winding up order would be more appropriate: the underlying business was held through a subsidiary which was otherwise successful, and a winding up order would give both shareholders (and anybody else) an equal opportunity to bid to acquire the shares. The court was keen to ensure that the remedy ordered was a proportionate response to the proceedings and it was not appropriate to order an equal shareholder to sell its shares.
In the Cayman Islands and Bermuda, the court similarly had to consider the appropriateness of an alternative remedy to winding up the company. In Sturgeon Central Asia Balanced Fund, the petitioners argued that changes to the bye-laws by the management shareholder which excluded petitioning shareholders from voting to wind the fund up, demonstrated a lack of probity and led to a justified loss of confidence in the management’s conduct of the fund’s affairs. At first instance, the court found that there was no evidence of bad faith and dismissed the petition on this basis. The Court of Appeal referred to the observations of Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd that “to confine the application of the just and equitable causes to proved cases of mala fides would be to negative the generality of the words” and noted that the shareholders had been denied a fundamental right. Accordingly, the court allowed the appeal, holding that while lack of probity would be a strong factor in favour of a just and equitable winding-up, it was not a prerequisite.
In the Cayman Islands in Re Torchlight Fund, the petitioners sought the winding up of a limited partnership because of an alleged lack of probity by its general partner. However, during the course of the proceedings, the reasons shifted to a loss of confidence in the general partner due to corporate governance failings. The court found that the failings of Torchlight’s general partner were insufficient to justify winding up the partnership. Moreover, the court found that the petition had been brought to enable the petitioners to “obtain accelerated liquidity” and was, therefore, an abuse of the ‘just and equitable’ jurisdiction. The judgment contains useful guidance on what will constitute good grounds for a just and equitable winding up and emphasises the importance of demonstrating that the winding up is made for a proper purpose.
In the Matter of China Shanshui Cement Group was a case where there had been a long history of shareholder disputes and take-over battles amongst some of the shareholders. The petitioner alleged that the affairs of the company had been conducted with a lack of probity, such that the petitioner had lost faith in management and an investigation by independent insolvency practitioners was needed. In response, the company presented a strike-out summons and stated that the petitioner had presented misleading facts in relation to the petition, the alleged lack of information was “self-inflicted” and the petitioner had failed to comply with its previous undertaking to the court.
The court considered whether the petitioner had unreasonably failed to pursue alternative and less drastic remedies since the company asserted that the petition was being used for collateral purposes. The court reviewed an extensive number of authorities and concluded that it was plain that the petition was not presented with the purpose of advancing a class remedy. The existence of alternative remedies which the petitioner could have pursued was fatal to a winding up petition on the just and equitable ground and therefore on this ground alone should be struck out. It is clear that while the court will protect shareholders’ rights, it will not allow those rights to be the foundation for collateral purposes.
A similar issue arose in In Re eHi Car Services Limited, where a minority shareholder issued a winding up petition against eHi Car Services Limited, a NASDAQ-listed, Cayman incorporated company. The background to the case involved the company having two competing privatisation proposals before it. One was advanced by a consortium led by the chairman of the company, while the other was advanced by another shareholder supported by the petitioner. Upon acceptance of the consortium’s proposal, the petitioner presented a winding up petition seeking relief which would order a reconsideration of the proposal it supported together with an injunction that would prevent the consortium’s proposal being implemented. (In Cayman, there is no direct unfair prejudice petition, but on a petition to wind up, the court can grant alternative remedies. However the grounds to wind up must still be present). The court ultimately struck out the petition, finding that winding up the company would be wholly unsustainable in the context of this proceeding, since there were more suitable remedies available for the minority shareholders than a winding up proceeding. The petition was made as an attempt to further the petitioner’s own commercial interests to force the company to reconsider its proposal, rather than seeking to advance a class remedy on behalf of other shareholders.
Importantly, the decision now stands as authority for the principle that a minority shareholder may not pursue a winding up petition in order to delay or prevent a Board-approved privatisation offer. Dissenting shareholders are able to vote against resolutions proposing the privatisation at the EGM and even if the privatisation is to go ahead, may then exercise dissenting shareholder rights under section 238 of the Companies Law.
Merger disputes and appraisal actions
Moving to the rights of dissenting shareholders, the Cayman court has continued to be kept busy by litigation produced by shareholders seeking fair valuation of their shares.
The Cayman courts have continued to be kept busy by appraisal litigation, in which shareholders dissenting from a statutory merger seek judicial determinations of the fair value of their shares.
In the first quarter of the year, in Re Shanda Games Limited, the Cayman Islands Court of Appeal overruled the Grand Court and held that a minority discount should generally be applied when determining the fair value of shares held by a minority shareholder following its dissent from a merger. The Court of Appeal considered the approaches taken to the question of fair value in other jurisdictions and contexts and, relying particularly on certain English authorities concerning squeeze-out offers and schemes of arrangement, it concluded that the merger regime, as an additional possible means of buying out minority shareholders, could not have been intended to depart from the approach of the English courts in those other contexts. The company’s appeal was therefore allowed.
Later in the year, in light of the aforementioned appeal judgment in Re Shanda Games, the Grand Court in Re Zhaopin Limited considered it necessary to allow for the effect of a minority discount when setting the amount of the interim payment which the company would be ordered to make to the dissenters on account of fair value. The court accepted that it would be a hardship if the company were required to pay a larger amount by way of interim payment, than that which it contended was likely to be awarded at trial, and therefore applied a 15% discount to the interim payments ordered. This should, however, be viewed as a transitional ruling on this issue, since the interim payments in this case had been sought by reference to the price which the company asserted represented fair value prior to the Shanda appeal judgment, and thus without having applied any minority discount in its own assessment of fair value.
The Court of Appeal also decided in Re Qunar Limited that dissenting shareholders would be required to give discovery of documents relevant to determining fair value in the same way that a company does in such appraisal proceedings, overruling a line of authority to the contrary which had developed in the Grand Court. The Court of Appeal observed that orders for discovery from only one party were not known to exist in any other context in Cayman Islands litigation, and it could see no further reason why it should depart from the standard principle, that the provision of discovery from both parties should be ordered where necessary. Investors might well have documents which were just as important as a company’s own documents for determining fair value.
The dissenting shareholders in Re Qunar later applied to the Grand Court for special confidentiality protections in respect of certain documents. The court refused the dissenters’ request for such protections against the company, reminding the parties of the implied undertaking not to use discovered material for any other purpose, as well as the court’s inherent jurisdiction to require express undertakings where needed. Additionally, the court considered that the dissenters should discover documents created within the same time period for which the company was required to give discovery. It is therefore clear that the Grand Court will now approach the question of discovery on the footing that there must be equality in respect of the obligations imposed on both the company and the dissenters.
The other key issue before the court has been the use to which statements made in “management meetings” between experts and the management of the companies involved can be put in the experts’ opinions on fair value and at trial. In Re Kongzhong Corporation, the court followed an earlier decision in Re Nord Anglia, where it stated that a transcript of a management meeting could not be used like a deposition, as evidence of facts stated therein, in the absence of corresponding legal protections. The court decided that the admissibility of the transcript of such a meeting should be agreed between the parties, subject to any necessary clarification of the statements made therein, and failing such agreement, be determined by the court. The court considered that the unregulated use of transcripts could potentially prevent the parties discussing matters relating to the determination of fair value at ease and with complete transparency.
There has been a notable amount of activity around the rectification of share registers. In Cannonball Plus Fund v. Dutchess Private Equities Cayman Fund Ltd an application was made to rectify the register of members of a Cayman company in accordance with section 46 of the Companies Law. The defendant resisted the application, relying on the English case of Nilon, on the basis that the court only has jurisdiction to rectify the register when a party has an existing right to be on the register of members, rather than a shareholder with a right to be entered in the future. The court considered the Nilon case, but stated that the plaintiff had much more than a mere prospective claim and found for the plaintiff and ordered rectification.
Later in the year, the court gave judgment in In the matter of Project Panther Ltd v. Comerica Bank & Trust (As Personal Representative of the Estate of Mr Prince Rogers Nelson). Project Panther, a Cayman company, sought to rectify the register of members by the removal of Prince Rogers Nelson (better known as the famous musical artist, Prince) as a shareholder.
The parties had settled a dispute in Minnesota in the United States concerning whether Prince became a shareholder of Project Panther. The settlement included a term that the Prince Estate would co-operate with an application for the rectification of register of members of Project Panther in the Cayman Islands. The court was willing to grant the application since both parties agreed that Prince, in fact, never became a member of Project Panther and his name had been entered on the register of members without sufficient cause.
Appleby acted for the Appellant in the Antow case in BVI and for the dissenting shareholders in Qunar and Nord Anglia in Cayman.