The first part to this series ran in th May 2009 edition of The Journal.
This is the second of a two-part series on whether the new subsection 95(3) of The Companies (Amendment) Law, 2007, has created an effective minority shareholder’s oppression remedy in the Cayman Islands. Fraser Hughes from Conyers, Dill & Pearman discusses.
The first part examined the competing tensions that courts must navigate when implementing the oppression remedy, namely the tension between protecting minority shareholder rights and holding parties to their agreements, and the tension between achieving a just result in the individual case and opening the floodgates to turning the courts into the arbiter of inter-shareholder disputes that ought to be settled commercially.
The first part explored the wording of section 210 of the old English Companies Act and its ineffectiveness because of the requirements that,
- the oppressive conduct needed to be a course of conduct – isolated acts would be insufficient; and,
- the remedy was only available if the facts otherwise justified winding up the company.
The Move to Standalone Discretionary Relief
The lacunae of section 210 eventually led to changes in the English Companies Act in 1980, the language of which was consolidated (with minor amendments) into s. 459(1) of the English Companies Act, 1985, which states as follows:
“Any member of a company may apply to the court by petition for an order under this Part on the ground that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself) or that any actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.”
The above amendments effectively divorced the oppression remedy from the winding up remedy. An oppression remedy under the new act simply required conduct that was “unfairly prejudicial”. Providing this standard was met, the court was given a wide discretion as to the appropriate remedy.
Turning back to the tensions set out in Part 1 of this article, the decisions interpreting section 459 are clear that the oppression remedy ought not to be used as a tool to relieve parties of their bargains. At the same time, the exercise of rights (even though legal) will not escape equitable scrutiny.
Similarly, courts have drawn a line between conduct that justifies judicial scrutiny and “business judgement” on the basis that courts are not in a position to review business decisions – even though they may appear unwise, inefficient or careless. However, it need not be shown that conduct was designed to cause harm to a shareholder. Even if the majority’s motive was merely to enrich itself, the conduct is still capable of constituting oppression.
Cayman Islands’ Oppression Remedy
The “Memorandum of Objects and Reasons” preamble to The Companies (Amendment) Bill, 2007 describes the new Cayman Islands oppression remedy section as follows:
“Subsections (3) to (6) are equivalent to section 459 to 461 of the English Companies Act 1985.” at page 5.
The wording of subsection 95(3) does not appear entirely consistent with the above statement. It states as follows:
“If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding-up order, namely –
- an order regulating the conduct of the company’s affairs in the future;
- an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;
- an order authorizing civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or
- an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.”
Certain characteristics of the above wording are striking in the context of the English statutory history. First, it does not refer to “oppressive” conduct as was set out in the 1948 English Companies Act; nor does it refer to conduct that is “unfairly prejudicial” as was done in the post-1980 English Companies Act and is mirrored in many other commonwealth jurisdictions. Indeed, it makes no reference whatsoever to the type of conduct that merits relief as an “alternative to winding up”. Quaere the applicability of cases interpreting those English statutory provisions in the Cayman Islands.
It is unclear whether the alternative relief in subsection 95(3) of the Companies Law is only available to a petitioner who has otherwise met the criteria to justify a just and equitable winding up. The only jurisdictional trigger required by subsection 95(3) is the presentation of a petition by contributories to wind the company up on the just and equitable grounds. It was clear that the oppression remedy was only available in the 1948 English Companies Act if “… the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up…” It was equally clear that this requirement was removed in the post-1980 English Companies Act.
Put another way, if the petitioner’s facts fall short of justifying a just and equitable winding up, does the court still have the jurisdiction to make the alternative order under subsection 95(3)?
In addition, there does not appear to be a specific mechanism by which the alternative relief can be sought by a petitioner, as there is in most other commonwealth statutes. The only path appears to be via a petition to wind up the company on the ground that it is just and equitable to do so, likely seeking a 95(3) remedy as alternative relief.
The failure of subsection 95(3) to address these two points might suggest that a petitioner must indeed first demonstrate that a just and equitable winding up would otherwise be justified. However, its silence is equally capable of an interpretation that leaves the conduct that justifies the alternative remedies in the court’s absolute discretion. The preamble’s reference to the 1985 English Companies Act suggests that the latter might be the intent of subsection 95(3). If so, the Grand Court must consider how that discretion ought to be exercised. The post-1980 English cases and those of other commonwealth jurisdictions might be of assistance in determining the judicial exercise of that discretion, notwithstanding the absence of express guiding language. Ultimately, it will be up to the courts to determine the extent to which the oppression remedy has arrived in the Cayman Islands.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.