We are often instructed by shareholders of Cayman companies who are dissatisfied with management. This may be due to failure to provide information, underperformance or, more seriously, suspicion of fraudulent conduct.
Some Cayman companies, including hedge funds, issue shares that are redeemable at the option of the shareholder. We outlined the options available to such shareholders in a separate article, available here. This article outlines the options open to holders of non-redeemable shares.
Contractual rights
Our starting point will typically be to review the company’s constitutional documents, which will include the articles of association, any offering memorandum, any shareholders agreement.
A shareholder has a statutory right to a copy of the company’s memorandum and articles of association, if it does not already have it. Aside from that, it has no statutory right to information about the company. There is limited information regarding Cayman companies that is publicly available, as outlined in our article here. That information does not include accounts. The information rights set out in the articles of association and other constitutional documents are therefore very important.
We will also check whether the constitutional documents contain a non petition clause, an arbitration clause or an exclusive jurisdiction clause in favour of a foreign court. Such provisions may restrict the actions that a shareholder may take in Cayman.
The constitutional documents will also set out the process for appointing and removing directors. While the power to call a shareholders’ meeting typically rests with directors, it may be possible for shareholders to requisition a meeting and propose resolutions, including resolutions to remove and appoint directors.
Appointment of Inspectors
The Companies Act provides that the Court may, on the application of shareholders holding not less than one-fifth of the shares, appoint inspectors to examine into and report on the affairs of the company. However, Parker J held in the matter of Avivo Group (2022) that an order for the appointment of inspectors should only be made if there is a strong likelihood, well founded on a solid and substantial basis, of some grave misconduct or mismanagement which related to the management of the company.
Just & equitable winding-up
A shareholder may also be able to ask the Cayman court to put the company into liquidation on the basis that it is “just and equitable” to do so.
The categories of cases when it will be “just and equitable” to wind a company up are not closed, and include deadlock (where the parties are unable to agree how the company should be managed), loss of confidence in management due to a lack of probity on their part, or where the company is a “quasi-partnership” (a company, most often a small 50/50 joint venture company, where the parties have legitimate expectations as to how it should be run which are not set out in the legal documents) and the shareholder’s legitimate expectations as to how it should be managed have been breached. There is also a growing body of case law where the Court has wound up companies on the just and equitable ground because there is a need for an investigation.
If the Court is satisfied that it is just and equitable for the company to be wound up then, as an alternative to appointing liquidators, the Court may make an order for alternative relief, including an order that one shareholder or the company must buy out another shareholder, or an order regulating the conduct of the company’s affairs (which could include an order reconstituting the board of directors or amending the Articles of Association).
Derivative claims
The company itself is the proper plaintiff in an action to seek redress for a wrong done to the company. However, with the Court’s permission, a shareholder may bring an action by way of a derivative claim in exceptional circumstances, principally if there has been a fraud on minority shareholders and the wrongdoers remain in control.
In certain circumstances it may be possible for shareholders to bring a claim against the company’s directors directly, however, these situations are rare. Every situation is different and taking specialist legal advice at an early stage will position unhappy shareholders as strongly as possible for their negotiations with the company. If you would like to discuss these issues, please contact Katie Pearson on katie@claritaslegal.com, Mark Burrows on mark@claritaslegal.com or Alexia Adda on alexia@claritaslegal.com.
