In a judgment delivered on 13th December, 2010, in the case of Culross Global SPC Limited v Strategic Turnaround Master Partnership Limited the Privy Council has provided important clarity on the correct approach to the construction of Fund documentation, and has thankfully laid to rest the heresy introduced by the Cayman Islands Court of Appeal as to what it had termed “the process of redemption”, writes Nigel Meeson, QC, partner and head of litigation in Conyers Dill & Pearman’s Cayman Islands office.
The issue with which the Privy Council was concerned was whether the Appellant (Culross) was a current creditor of the Fund (Strategic Turnaround) with standing to present a winding up petition against the Fund, or whether it was merely a prospective creditor lacking standing to bring a creditor’s petition.
The Court of Appeal had held that on the true construction of the Articles of Association and the Confidential Explanatory Memorandum, the Fund had validly suspended the payment of redemption proceeds after the Redemption Date, but before payment.
It would be unusual for a Fund to provide for a suspension of payment after redemption proceeds had become due, but if, on their proper construction, the Articles of a Fund provided for this then, as the Privy Council affirmed, the members were at liberty to make “any contract inter se which they pleased”.
If the Court of Appeal had limited itself to determining the question before it as one solely of construction, then this case would have attracted little interest. However, the Court of Appeal sought to engage in a metaphysical analysis of the “process of redemption”, which it said was not complete until payment had been made and the name of the member had been removed from the register. This was support for the manner in which they construed the Articles.
However the analysis was manifestly wrong for a number of reasons and was put to rest succinctly by the Privy Council, which said:
“the issue is not to be approached on the basis of any a priori view that, until payment of the redemption proceeds, a shareholder must or should necessarily remain a member of a company which is (as the Respondent was) due to make such payment upon or after a certain redemption date; and the fact that a person’s name continues to remain on a company’s register as member does not mean that it should have done so under the provisions of the Articles.”
The Privy Council made it clear that “Any power to withhold payment of the redemption proceeds must be authorized by or pursuant to the articles of association.”
They also said that “Bearing in mind the evident importance attached in the articles, and likely to be attached by investors to the Redemption Notice period and the Redemption Date, it would in the Board’s view require clear words before articles could or should be read as entitling the Respondent retrospectively to reverse or alter the effect of the passing of the Redemption Date pursuant to a valid Redemption Notice.”
Ultimately, the Privy Council disagreed with the Court of Appeal in relation to how the Articles were to be construed together with the CEM.
The Court of Appeal had treated the reference in the Articles to shares being issued “subject to these articles” and on “the terms referred to in the [CEM]” as expressly incorporating by reference the provision in the CEM which stated that the “Board of Directors may declare a suspension of … or the payment of redemption proceeds …”.
The Privy Council said that this analysis was incorrect because the CEM served various distinct purposes:
- to identify the commercial terms on which shares were available,
- to convey information about the Fund, the investment adviser, investment strategy, fees etc, and
- to describe the effect of the Fund’s Memorandum and Articles and certain other legal documents.
It was only in respect of the first purpose that the provisions of the CEM were incorporated into the Articles by the phrase “the terms referred to in the [CEM]”. The third purpose was merely descriptive and the legal relationship was actually defined by the Articles and not the description of the Articles in the CEM. The Privy Council said they could find no basis for the company to rely in its own favour upon its own misdescription of its own Articles.
In summary, the Privy Council has returned to orthodoxy. The right of redemption and the right to suspend redemption are governed by the Articles and depend upon the proper construction of those Articles. The so-called process of redemption is irrelevant. Whether terms contained in a confidential offering or explanatory memorandum are to be incorporated into the Articles is also a question of construction of the Articles. A mere reference in the Articles to a CEM or COM will not necessarily cause all of the provisions of that document to be incorporated if that is not the proper construction.
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.